Policies of Savings and Investment

Policies to make sure that savers get reasonable rates of return on their savings have the potential to boost savings rate. Comparing systems of economic governance in that profits are diverted into the hands of political powerful through restrictions on entrepreneurship will tend over time to diminish savings as will economic policies that divert real returns to savings into the hands of financiers or government through inflation. Government discrepancies also have the potential to decrease the savings rate: unless investors and consumers are far-sighted enough to recognize that a government deficit now means a tax increase later, a government which spends more than it raises in revenue should borrow--and this amount borrowed isn't a contribution to total national savings since it isn't available to fund investment.

Some potential policies work to boost investment for a given amount of savings. Policies which welcome foreign investors' money have the potential to cut a decade or a generation off of the time to industrialize--if foreign funded capital is used wisely. Free-trade policies which allow businesses to freely earn and spend the foreign exchange they need to purchase new generations of equipment and machinery are an effective way of boosting investment. Policies which carry out heavy tariffs or need scarce import licenses in order to purchase foreign-made capital equipment are a sure sign that a country won't get its money's worth out of a given nominal savings share however will instead find that real investment remains low. Certainly many of the most successful developmental states have done the opposite. They have provided large subsidies to fund investment and expansion by businesses which have demonstrated their productivity and competence by successfully exporting and therefore competing on the world market.