Saving and investment have lost much of their luster in the development literature since the 1950s, when Sir Arthur Lewis declared that saving was “the central problem in the theory of economic development” (1954, p. 155). Their place in the literature needs to be reconsidered, and defining economic development as growth plus improvement in income distribution is a good starting point. It would be unsatisfactory, indeed, to insist that a country was developing if its per capita growth rate were 5 percent per year while the poorest 20 percent of the population were becoming relatively poorer. It would be equally unsatisfactory to insist that a country was developing if its per capita growth rate were negative regardless of what was happening to the relative position of the poor. Saving promotes growth, and that establishes it as a causal factor in development. Thus, saving need not be the “central problem” in development, but as the “engine of growth” it must be a major factor.

6.1 Growth in domestic saving as an indicator of development

One purpose of this chapter is to call attention to the distinction between domestic saving and total saving and to argue that neglect of this distinction is responsible for confusion with respect to the relationship between saving and development. Total saving is the wrong variable of focus.