Firm Productivity as an Engine of Saving

This technical note considers whether low savings in Latin America and the Caribbean may result from low productivity rather than vice versa. Economies with low TFP growth tend to be economies in which returns to investments are low, with low saving rates as well. In that sense, low TFP growth, by providing weaker incentives to save, could be another determinant of the low saving rates observed in the region. Moreover, firms need to invest, which in turn requires that they can access financial markets. If instead, firms are constrained because of financial frictions, some entrepreneurs may have to run small firms and save in order to fund their projects, slowing down aggregate productivity growth. This note further examines the distribution of private savings in the economy and the behavior of firm saving to explore whether financial frictions distort price signals and incentives to save.