All agree to the answer, i.e., they agree that accumulation of capital was, is, and will remain the most significant problem of the third world (the south) countries. The third world countries cannot accumulate capital because of low-income levels, which in turn, leads to low saving and investments. But low saving and hence low investments are responsible for low income. A catch 22 problem for the third world countries that is badly in need of solutions. This paper shows that we could conclude a one-way Granger causalities running from savings to investment, and from disposable income to investment. This is true with one or more lagged values as independent variable. This means, we need undertake policies that foster savings to spur investment, and as a result, capital accumulation.Granger causalities, Iranian saving and investment and economic growth

Zangeneh, Hamid

English

Research Papers in Economics

  1 
DEPENDENCY, INTERDEPENDENCY, AND ECONOMIC DEVELOPMENT:  
A THIRD WORLD CATCH 22?
1
 
 
Hamid Zangeneh 
Widener University 
hxz0001@widener.edu 
 
I- INTRODUCTION 
Why cannot all countries succeed in economic growth and development? In the 
second half of the last century, tremendous efforts have been devoted to identifying 
sources of success by some countries, albeit by ebb and flow and by crisis management,
1
The neo-classical literature has advocated free trade and open markets
 
and causes of failure by countries. All these efforts have failed to lead to a universally 
acceptable, malleable, and understandable framework of analysis for all to use. 
2 on the 
basis of the belief that it leads to division of labor, specialization, expansion of output, 
and increase in collective economic welfare.
3  In this “lifting all boats”
4
The capitalist development theories, modeled on the neo-classical theory, and 
make a distinction among the developed and less developed countries.  Less developed 
countries (LDCs) are analyzed mostly based on the “dual society” or “dual economy” 
concept.
  theoretical 
context, there is no distinction made between the northern or southern countries.  They 
are all treated as the same and therefore the same rules apply to each and everyone. 
5 They maintain that LDCs lack certain characteristics necessary for capitalist 
economic development that are present in developed countries.
6  Also, there are some 
undesirable characteristics present in less developed countries that have contributed to 
their underdevelopment that are removed or mitigated in their significance in developed 
countries.  Therefore, LDCs need to add the desirable characteristics of the developed 
world while removing the undesirable ones if they want to follow in the footsteps of the 
wealthier and more prosperous capitalist countries  ─ i.e., they need to go through the 
modernization process.
7  That is, they need to move toward learning and acquiring 
modern economic, political, and social attitudes
8 and institution of free market,
9 free 
enterprise, entrepreneurial spirit, social and political mobility, work ethic, democracy, 
rule of law, civil liberties, and associated modes operandi.
10
Development literature
  
11  also includes a large number of neo-Marxian books, 
articles, and monographs that maintain, not only free trade and foreign direct investment 
have not always benefited the third world countries
12, in majority of cases, they probably 
have contributed to their poverty.
13 As a matter of fact, they argue that the capitalist 
system of trade and investments have been hurdles to third world economic development 
rather than the engine that pulled the west to economic prominence.
14  This is partly 
because profits (surplus) of international trade and investment are taken out rather than 
reinvested in the dependent (periphery) countries, which have retarded the economy of 
the periphery and stimulated the core countries.
15
                                                 
1 Versions of this paper were published in English in “Saving, Investment and Growth: A Causality Test, 
The Iranian Economic Review, 11 (16), 165-175 and in Persian in “Targeting Saving or Investment First: A 
Catch 22?” Political & Economic Ettela’at, No. 217-218, pp. 106-111, 2006.  
    The new theoretical construct, 
   2 
dependency theory, celebrated the demise or the death
16  of the orthodoxy and 
introduction of a new paradigm in development analysis.
17
The dependency and the world system theories have been unsuccessful in 
explaining the evolutionary or revolutionary dynamics of economic underdevelopment.  
That is they have not clarified whether it is a transitional or a permanent state.  But by 
arguing that the periphery (satellite) changes to accommodate the core (metropolis) but 
does not crack the glass ceiling of underdevelopment, they imply that it is a permanent 
state of affairs.  In order to break out of this rut, or the only way to break out of the 
underdevelopment rut, a country needs to become independent and sever the its 
relationship with the dominant imperialist forces in the core (metropolis) that have 
blocked its development  ─  that  is,  the  only  way  to  prosperity  i s to engage in an 
independent and autonomous development.
  
18,19
 
 But they have not enumerated the process 
of development and sources of development capital and technology. What, then, is the 
real problem of the third world countries?  All agree to the answer, i.e., they agree that 
accumulation of capital was, is, and will remain the most significant problem of the third 
world (the south) countries.  The third world countries cannot accumulate capital because 
of low-income levels, which in turn, leads to low saving and investments. But low saving 
and hence low investments are responsible for low income.  A catch 22 problem for the 
third world countries that is badly in need of solutions. 
CAPITAL ACCUMULATION 
  Since capital accumulation and capital deepening are for the sake of higher 
economic growth, what we need to establish is the direction of causality between saving, 
investment, and economic growth. Therefore, the question to be answered is whether 
saving is the driving force behind economic growth or is it investment that drives 
economic growth and saving will follow economic growth? The answer determines the 
proper fiscal and monetary policies necessary for economic growth. If the determining 
factor is investment, we need fiscal and monetary policies to spur investment and, if it is 
saving that jump-starts the process, policies that include incentives to save are required.  
From previous studies we know that there are high correlations between saving 
and income as well as between saving and investment.
20 But there are fewer consensuses 
on causality among them. That is, which one(s) is (are) the determining factor(s). 
Traditionally we have assumed that risks and profits drive investment, investment drives 
growth, and growth, in turn, is the driving force behind saving.  But, it is maintained that 
without domestic saving,
21
 
 investment will not materialize.   
Empirical Results   
A -- The data 
All of the data are extracted from the International Monetary Fund’s International 
Financial Statistics electronic files.  As is the case, most macroeconomic data are non-
stationary.
22  However, in this case, using the Dickey-Fuller test
23
Name of the variable 
, the first differences 
are shown to be stationary at 1% level. 
D-F test statistic   critical value at 1% 
DRPI: change in real private investment  -5.675  -3.605 
DRS: change in real private saving  -6.509  -3.605 
DRYD: change in real income  -5.277  -3.621   3 
 
B -- The Granger Test 
  Econometric estimates of a relationship does not necessarily mean causality, it 
only implies dependence of one variable on a set of variables. In other contexts, there 
have been very lively discussions of causality, i.e., whether one variable, say DRPI, 
causes GDP to grow or GDP causes DRPI to grow.
24
GDPt = Σ αk DRPIt-k + Σ βj GDPt- k  + ε1t 
  That is whether we can detect a 
one way lead and lag relationship between the two variables.   The granger causality test 
purports to do just that.  It assumes that the information relevant for forecasting, say GDP 
is solely contained in DRPI and GDP.  It is important to remember that Granger causality 
measures precedent and not “causation,” as it is commonly understood. 
DRPIt = Σ γk DRPIt-k + Σ λj GDPt- k  + ε2t 
 
ε1t and ε2t are assumed to be independent and uncorrelated.  In the above specifications, 
GDP is assumed to depend on its own past values as well as those of DRPI.  Similarly 
DRPI is assumed to depend on its own past values as well as those of GDP.  For the 
existence of unidirectional causality from DRPI to GDP, we need to observe that αk to be 
statistically significant (i.e., Σ αk ≠ 0) and in the DRPI equation, λj need to be statistically 
significant (i.e., Σ γk ≠ 0). 
C – Granger Test Results 
  There are three causality hypotheses that we intend to test. In table 2 below, we 
present the test results for each of the Hypotheses using Eviews 4. 
 
 
Table 2 
  Null Hypothesis  # of obs.  F-Statistic  P-value 
1-a  DRPI does not Granger cause DRS  40  0.52570  0.47298 
1-b  DRS does not Granger cause DRPI  40  7.85685  0.00801 
2-a  DRPI does not Granger cause DRYD  40  0.85727  0.36050 
2-b  DRYD does not Granger cause DRPI   40  6.05189  0.01868 
 
  It appears that we would reject 1-b and 2-b and conclude one-way granger 
causalities running from savings to investment, and from disposable income to 
investment. This is true with one or more lagged values as independent variable. This 
means, we need undertake policies that foster savings to spur investment, and as a result, 
capital accumulation.   
 
                                                 
Endnotes 
 
1  Samir Amin enumerated  OPEC, former USSR, industrialized nations, environmental 
concerns, degradation of mores as the potential villains responsible for capitalist 
system’s “crisis” advocated by one or another groups.  Samir Amin, et. al., Dynamics 
of Global Crisis, Monthly Review Press, 1982. p. 9.  However, today, we need to add 
terrorism and individual freedom and liberties as a new culprit. Samir Amin and his   4 
                                                                                                                                                 
collaborators, however, believed that the “world capitalist system” itself is crisis prone 
and to be the cause of “crisis” in the capitalist system.   
2  See, for example, D. Dollar, “Outward-Oriented Developing Economies Really Do 
Grow More Rapidly: Evidence from 95 LDCs, 1976-1985,” Economic Development 
and Cultural Change  40 (1992): 523-44. For positive impacts of openness on 
development see, Zaki Eusufzai, “Openness, Economic Growth, and Development: 
Some Further Results,” Economic Development and Cultural Change 79 (1996): 333-
338.  For opposing views on openness and growth, see, Tariq Banuri, Economic 
Liberalization, No Panacea: The Experiences of Latin America and Asia, Oxford, New 
York: Oxford University Press, 1991.  Even though he concedes that openness 
contributes to growth, he contends that it comes at the cost of higher poverty rates and 
worsened income distribution.  Evidence of positive influence of openness on growth 
for the former Eastern Bloc countries could be found in Lucian Cernat and Radu 
Vranceanu, “Globalization and Development: New Evidence From Central and Eastern 
Europe,” Comparative Economic Studies, XLIV, no. 4 (Winter 2002), 119-136. 
3 The neo-classical theory does not, however, predicts which side is the beneficiary or 
which side benefits more from this extra output.  This has been the subject of many 
books and articles on terms of trade.   Developing nations have maintained that 
worsening of terms of trade (relative prices of primary products that they export to 
those of manufactured products that they need to import) has siphoned most, if not all 
of the benefits of international trade and investment to the developed world.  This 
claim was supported by the United Nation’s study on the subject.  See Raul Prebish, 
The Economic Development of Latin America and Its Principal Problems, United 
Nations Commission for Latin America, New York, 1950.   There are those who 
contend that even though there is a correlation between openness and growth, the 
causality is from growth to openness and not vice versa.  On this point see, Dani 
Rodrik, The New Global Economy and Developing Countries: Making Openness Work, 
Overseas Development Council, Washington D. C., 1999. 
4 Andrew Berg and Anne Krueger, “Lifting All Boats,” Finance and Development, pp. 
16-19, September 2002. 
5 In a dual economy, there are two separate and disconnected modern and traditional 
sectors that operate independently without much interaction.  Therefore, in order for 
development to take place, the traditional sector must be transformed to emulate the 
modern sector, which is itself built in the image of its own global counterparts. In this 
process, by creating forward and backward links, the modern technology and 
operational methods are defused throughout the economy and thence economic growth 
and progress will take root.  Here, one must be cognizant of the ownership and their 
conflicts.  It is very possible that the capitalists who own the modern sector and those 
who own and operate the traditional sector of the economy to be two completely 
separate and antagonistic groups. Traditionalist might not see their interests served by 
this transformation.  That is, even though the capitalists desire for modernization of the 
traditional sector is self-evident, the traditional sector’s owners might see this as a 
serious encroachment on their wealth and prerogatives. 
6 “[I]t is the European civilization that through centuries of geographical, political, and 
intellectual expansion has provided the matrix for economic growth… The intellectual   5 
                                                                                                                                                 
revolution with the introduction of science, the moral revolution with t he 
secularization of Christo-Judaic religions, the geographical revolution with th the 
formation of national states, all occurred within the context of European civilization, 
not in Asia, Africa, or the Americas.” Simon Kuznets, “The Present Underdeveloped 
Countries and Past Growth Patterns,” in T. Morgan and G. Betz, eds., Economic 
Development (Belmont, California: Wadsworth, 1970), p. 16. 
7 Of course, advocates of modernization theories do not let its adverse effects on the 
distribution of income explained by Baran and statistically verified by Irama Adleman 
and Cynthia Morris (A-M) affect their views.  A-M tested the for 60 LDCs 
8  “Economic growth depends on attitudes to work, to wealth, to thrift…. There have been 
attempts to explain why these attitudes vary from one community to another.  On can 
look to differences in religion…or …in the accident of history.”  Arthur Lewis, The 
Theory of Economic Growth, (Homewood, Illinois, Irwin, 1955) p. 14. 
9   Charles P. Kindleberger, Economic Development (NY: MacGraw-Hill, 1965), p. 15. 
10 Manning Nash, “Approaches to the Study of Economic Growth,” Journal of Social 
Studies, vol. 19, no. 1, 1963. 
11 Paul Baran, The Political Economy of Growth (New York: Monthly Review Press, 
1957; New York: Penguin, 1973), page 402; Arghiri Emmanuel, Unequal Exchange 
(NY: Modern Reader, 1972); André Gunder Frank, Capitalism and Underdevelopment 
in Latin America (NY: Modern Reader, 1969); “Development and Underdevelopment,” 
in James Crockroft, ed., Dependence and Underdevelopment, (NY: Anchor, 1972), pp. 
19-46; Immanuel Wallerstein, The Modern World System (NY: Academic Press, 1974); 
Samir Amin, Dynamics of Global Crisis (NY: Monthly Review Press, 1982). 
12 The use of the “third world” is probably defunct at this point in time that the “second 
world” no longer exists.  However, we use the term to refer to countries that are not in 
the upper echelon of economic advancement. 
13  This is exactly the opposite of what Marx had predicted.  According to Marx, 
capitalists (imperialists), in search of new markets and resources, would penetrate these 
underdeveloped economies and transform them into industrialized capitalist 
economies, which, in turn, would lead to socialism.   
14“It is in the underdeveloped world that the central, overriding fact of our epoch 
becomes manifest to the naked eye: the capitalists system once a mighty engine of 
economic development, has turned into a no less formidable hurdle to economic 
advancement.”  Paul Baran, Opt. Cit., p. 402. 
15  One, therefore, needs to distinguish between the “Marxist” and “neo-Marist” who 
divides the countries into two groups; the “center” and the “periphery.”  The capitalists 
in the periphery are dependent capitalist (comprador bourgeoisie) and therefore, they 
do not behave in the same manner as the dynamic capitalists in the center.  This 
distinction is crucial to the understanding of underdevelopment theories and their 
logical conclusions. 
16See, for example, Duddley Seers, “The Birth, Life and Death of Development 
Economics,” Development and Change, 10, 1979, p. 712; Deepak Lal, The poverty of 
“Development Economics” (London: Institute of Economic Affairs, 1983), p. 109. 
17Interestingly enough, Samir Amin, et. al., opt. cit., argue that it is only possible to 
analyze individual states within the context of the “world capitalist system” and   6 
                                                                                                                                                 
compartmentalization of political, social, and economic aspects of the analysis are not 
feasible.  Therefore, one needs to analyze a country as a part, and within the context of 
the political economy of the “world capitalist system.”  
18 There are several points that one needs to be cognizant of.  One, it is suggesting, in 
contradiction to Marxist arguments, that the transnational bourgeoisie is not interested 
in their development, which would be illogical because the transnational bourgeoisie 
must be interested in their enrichment so they could extract a larger surplus value from 
them.  Second, it reduces the class conflict to a conflict between domestic and 
international bourgeoisie and disregards the contradiction internal class conflict.  
Therefore, presenting the domestic bourgeoisie as the savior and the progressive 
elements that would lead the country to the Promised Land.   
19 Samir Amin, Delinking: Toward a Polycentric World (London: Zed Books, 1990). 
20 See Matin Feldstein and Phillippe Bacchetta, “National Saving and International 
Investment,” in B. Douglas and John Shoven, eds., National Saving and Economic 
Performance, Chicago, University of Chicago Press, 1991. 
21There is some evidence that international movement of capital is limited despite the low 
barriers against its movement. Therefore, high correlation between saving and 
investment must be that of domestic saving and investment. Martin Feldstein, “Tax 
Policy and International Capital Flows,” Weltwirtschaltliches Archive 130 (4), pp. 675-
97, 1994. 
22A time series is said to be stationary if its mean, variance, and autocovariances at 
various lags remain the same regardless of the time they are measured.  A shock to the 
system gradually diminishes and over time it falls back to its mean value.     
23 See R. S. Pindyck and Daniel L. Rubinfeld, Econometeric Models and Economic 
Forcasts, 4
th ed., Irwin-McGraw-Hill, pp.507, 1998. 
24 See for example, R. W. Hafer, “The Role of Fiscal Policy in the St. Louis Equation,” 
Review, Federal Reserve Bank of St. Louis,” pp. 17-22, January 1982. 

Saving, Investment and Growth: A Causality Test

Abstract

Similar works

Full text

Available Versions

Research Papers in Economics