The Temporal Causality Between Investment And Growth In Developing Economies

Abstract

This paper addresses the ongoing debate regarding the temporal causality between economic growth and investment. It examines the link between long-term economic growth and investment in 80 developing economies for the average period 1982-97 by employing the New Growth model in a Simultaneous Equation approach.  Findings reveal a strong positive one-way relationship between investment and subsequent growth.  This result supports the argument that investment is instrumental and precedes growth rather than the reverse.  Unlike the mainstream view regarding the “direct” trade--growth nexus, results show that trade openness becomes insignificant once investment enters the model.  Additionally, trade openness is found to positively and significantly affecting investment, and hence fostering growth via the investment variable.  Finally, risk is negatively associated with investment indicating that perhaps investors are less attracted to risky markets in developing economies.