The critical importance of saving for the maintenance of strong and sustainable growth in the world economy, for external adjustment, and for the amelioration of the international debt problem is well recognized. Consequently, the declining trend in the saving rates of many countries, industrial as well as developing, has been a major source of concern. This decline has been associated with lower rates of capital accumulation and growth in the world economy. In addition, the substantial divergence of saving rates among countries has contributed to the emergence of large current account imbalances, especially among the major industrial countries. This study reviews and analyzes these broad developments and considers specific policy measures to foster saving.
Industrial Countries
Part Two of the paper deals with issues that are related primarily to national saving in industrial countries.1 Section I describes trends in national saving rates of industrial countries in recent years and briefly discusses the prospects over the medium term. (Issues related to the measurement of saving in industrial countries are considered in Appendix I.)
The discussion in Section I confirms that there have been marked differences among industrial countries in terms of the proportion of national income that is saved. Among the major countries, Japan has a relatively high saving rate, and the United States a low rate. All of the major industrial countries, however, have experienced a negative trend in their national saving rates since the early to mid-1970s. In several industrial countries (particularly the United States, Canada, Italy, and Belgium), the decline in the national saving rate is associated with government dissaving. Private saving rates have also declined in a number of industrial countries, although to a lesser extent than government saving. In the aggregate, national saving and domestic investment have been closely correlated over the longer term. Since the late 1970s, however, aggregate saving has fallen below investment, resulting in a deficit in the aggregate current account balance of the industrial countries. Medium-term projections indicate little change in saving and investment patterns over the next several years, except for a moderate strengthening of government financial positions.
Section II examines the determinants of saving in industrial countries. Private saving is analyzed within a general life-cycle framework, which holds that individuals borrow and save in order to smooth their consumption over time on the basis of their anticipated lifetime income. There is, however, strong evidence that private saving has reacted only partially to the decline in government saving, suggesting that individuals may have short planning horizons and may be subject to liquidity constraints. Factors that can be identified to have contributed to the decline in private saving in many industrial countries include the revaluation of the stock of wealth, improvements in the relative income position of the older groups in the population, certain shifts in relative prices, financial liberalization, and tax distortions. The rise in the average age of the population, which is under way in many industrial countries, does not seem to have yet had a significant negative influence on the saving rate, but this factor is expected to become more important over the longer run. In addition, changes in inflation and interest rates seem to have had relatively small effects on saving behavior.
Section III takes up the issue of the adequacy of saving in industrial countries. Saving promotes higher levels of output and consumption in the future at the expense of lower current consumption; the traditional view is that this trade-off is optimized on the basis of individual preferences with regard to the rate of time discount. Some recent models suggest that saving may also generate higher long-run growth, if technological advancement is endogenously determined. This discussion suggests that in none of the industrial countries is the level of saving unambiguously too high, in the sense that there seems to be no possibility of increasing consumption for both current and future generations. Indeed, it is argued that the current level of saving may be too low, principally because the market rate of return does not reflect the positive externalities associated with certain forms of capital formation, such as investment in human capital and in research and development.
Section IV considers the international distribution of saving and investment and its implications for macroeconomic policies. It is observed that, despite substantial liberalization of capital movements, there was a strong correlation between the changes in national saving and domestic investment during the 1960s and 1970s. The most likely—although not exclusive—reason for this development seems to be that fiscal policy was formulated to offset, at least partially, shifts in the net balance of private saving and investment during that period. There seems, however, to have been a weakening in this relationship in recent years, as government dissaving in some countries, together with further liberalization of international capital markets, has contributed to the emergence of large current account imbalances. The subsequent discussion argues that a current account imbalance would not pose a problem to the extent that it reflects individuals’ optimizing decisions with respect to investment and saving, made in the absence of significant distortions or market rigidities. However, in the presence of excessively large government dissaving, tax or other public sector distortions, and externalities to investment, a large current account imbalance would no longer be benign. The basic conclusion is that, while the current account balance is not an intrinsic policy target, it does contain useful information on whether a country’s policies are in need of attention.
The final section discusses policy options for the industrial countries with the aim of stimulating saving. The most direct option is to raise government saving through budgetary policies. It is argued that reductions in government consumption are likely to be more effective than tax increases for stimulating national saving. In addition, countries could take a number of measures to reduce the negative effects of tax structures on saving. On the whole, however, the effect of taxes on the saving rate is relatively small, although taxes have a powerful effect on the composition of investment. Some coordination of tax policy may be necessary so the externalities from investment will be reflected in the returns to saving used to finance that investment.
Developing Countries
Part Three focuses on issues relevant to national saving in the developing countries. This part is organized along lines similar to that for industrial countries, although, of course, the issues and the nature of the data are different in many respects. After a brief introduction, Section I reviews recent trends in saving and investment in several groups of developing countries. (Issues related to the measurement of saving in developing countries are discussed in Appendix II.) As with the industrial countries, national saving rates in most groups of developing countries have declined sharply, although there have also been some important differences in experience. The sharpest declines since 1982 have occurred in Africa and the Middle East, while the Asian and European countries have recorded little or no change in their national saving rates. The decline in saving rates has been particularly pronounced for countries experiencing debt-servicing difficulties. Another general observation is that the saving rate tends to be higher for low-inflation and/or high-income countries.
Section II examines the various determinants of saving in developing countries. (Econometric analysis of saving in developing countries is provided in Appendix III.) In addition to the factors discussed in Part Two, analysis of saving in developing countries must take account of structural differences between industrial and developing countries. In particular, saving in developing countries may be inhibited by the low levels of per capita income, short life expectancy, and uncertainty regarding the macroeconomic environment. At the same time, the importance of extended family arrangements may contribute positively to the desire to save in these countries. Although the limited empirical evidence suggests that interest rate policies have relatively small effects on saving rates, the maintenance of appropriate market-determined levels of interest rates contributes substantially to the efficiency with which financial savings can be mobilized for domestic investment. Factors that may have contributed to declining national saving rates include government dissaving, instability in the macroeconomic environment, losses incurred by public enterprises, financial repression, and adverse external shocks.
Section III examines the relationships among saving, investment, and growth. As was found for industrial countries, domestic investment is highly correlated with domestic saving. With the onset of the debt crisis in 1982, developing countries have had to rely mainly on domestic saving in order to increase investment. Consequently, declining saving rates have been associated with declining investment. Furthermore, although the direction of causation is difficult to establish, declines in saving and investment have tended to be associated with reduced growth rates in many countries.
Section IV discusses the effects of policy measures on national saving and investment. Fiscal, monetary, and exchange rate policies are all shown to have major implications for saving in developing countries. Fiscal restraint is especially important, since it raises national saving by both raising public saving and reducing the country’s dependence on foreign borrowing. Exchange rate devaluation and the unification of exchange markets also appear to be effective in stimulating national saving (and thereby strengthening the external position). Interest rates and financial reforms play a crucial role in effecting an efficient allocation of resources, including the mobilization of savings to finance domestic investment.