Abstract

This paper empirically examines the relationship among saving, investment and economic growth in Lesotho for the period 1970 to 2012, with a view to contributing to the body of literature on this topic and informing economic policy design in Lesotho. Using autoregressive distributed lag (ARDL) bounds testing approach to cointegration and vector error correction model (VECM) based Granger causality test; the paper finds the existence of cointegration among the variables and short-run causal flow from economic growth to saving. However, in the long-run, the paper provides evidence of Granger causality from saving to economic growth. Furthermore, the results indicate the existence of short-term and long-term Granger causality from saving to investment in addition to short-term and long-term causal flow from investment to economic growth. The findings not only suggest that saving precedes and drives short-term and long-term capital accumulation but also contributes to long-term economic growth in Lesotho. In addition, there is empirical evidence for investment-led growth. Therefore, increased capital accumulation is likely to contribute to enhancing sustainable economic growth.

Key words: Savings, investment, economic growth, ARDL bound testing, Lesotho, Granger causality.