2.1 BACKGROUND OF THE STUDY
One of the most complex and empirically unsettled subjects in economics is the explanation of the process of economic growth. As the creation of wealth is of critical importance for the welfare of the most people around the world, current disarray in growth economies is not only a topic of analytical process but also of practical importance. One of the controversies in growth analysis is the relative role of capital accumulation and productivity growth. As we interpret the evidence, discussed in this study, part of the controversy on the role of capital accumulation in the growth process is due to the time span of the analysis. In fact, the empirical importance of various growth determinants we want to explain; long run growth, say growth over half a century or a century as different from growth dynamics over one or two decades. (Sanchez 2007). New evidence is showing that growth fluctuations at frequencies of a decade or so are very important part of the growth story for most countries except probably high per capita income economies. Growth is an irregular and volatile process in which the same country may experience over period of several decades, various shifts in growth regimes that can entail growth take-off booms, stagnation and growth collapses. The description of a steady growth around a well defined and stable trend is not a good description of the actual growth experience for most economies in the world, certainly not for developing countries. In this context, savings and investment become important variables whose determinant and dynamics that we want to understand for affecting positively the rate of economic growth. A growth boom can be driven by positive terms of trade shock, the discovery of natural resources or the adoption of pro-growth economic policies. To support and consolidate growth beyond a boom phase, investment is a critical vehicle to create productive capacities and probably generate knowledge spill over and technologies. At the same time, ensuring an adequate level of national saving is important as foreign savings can be volatile and lead to sudden stops that force costly macroeconomic adjustment and eventually growth crisis.
The relation between saving and investment involves an analytically important and critical policy issue of great relevance. First, the discrepancies between intended saving and desired investment creates macroeconomic fluctuations and growth cycles in a world of less than perfect price and wage flexibility. Second, the causality between saving, investment and growth can run in various directions, depending on how the economic theorist views the working of the economic system at macro level. Third, in a world of capital mobility, we want to know how close the relationship between domestic saving and domestic investment is. (Analytical and Policy Issues, January, 2007) Economists study economic growth across countries for at least three reasons. First, understanding the sources of varied patterns of growth is important. This is because persistent disparities in aggregate growth rates across countries have, over the years led to large differences in welfare. Secondly, there has emerged a rigorous broad-based body of a theoretical hypothesis on economic growth that is ambitious in scale and scope. Thirdly, the first wave of new empirical growth analyses, by making strong and controversial chains have provoked yet newer ways of analyzing the growth process, 1998 (Olomola 2002). Economic growth is caused by improvements in the quantity and quality of the factors of production a country has available i.e. land, labour, capital and entrepreneurship. Conversely, economic decline may occur if a quantity and quality of any of the factors of production falls. Often, the concern about economic growth focuses on the desire to improve a country’s standard of living and the level of goods and services that...