I Trends in National Saving
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International Monetary Fund
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English
Print Publication Date:
19 Mar 1990
Keywords:
OP; saving rate; rate; saving; investment; country; government saving; household saving; national saving; investment ratio; government dissaving; Private savings; Consumption; Income; Current account imbalances; Real interest rates; Middle East; Western Hemisphere; Asia and Pacific; Global; East Africa; domestic investment; saving ratio; investment rate; Current account balance; National income
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Abstract

During the 1970s, foreign saving made an important contribution to the financing of investment in developing countries. In recent years, however, not only has the total supply of saving declined in industrial countries but because of the debt crisis in the developing countries such saving has been retained within the industrial countries themselves and thereby the availability of external funds for developing countries has been curtailed. This reduced flow of foreign resources suggests that national saving in the developing countries must finance the bulk of the increase in domestic investment required to restore adequate levels of economic growth in these countries. National saving rates, however, have declined sharply along with foreign saving and domestic investment in many developing countries during the 1980s. Consequently, policies to raise both public and private saving and investment have become even more critical for the growth and adjustment efforts of developing economies.23

During the 1970s, foreign saving made an important contribution to the financing of investment in developing countries. In recent years, however, not only has the total supply of saving declined in industrial countries but because of the debt crisis in the developing countries such saving has been retained within the industrial countries themselves and thereby the availability of external funds for developing countries has been curtailed. This reduced flow of foreign resources suggests that national saving in the developing countries must finance the bulk of the increase in domestic investment required to restore adequate levels of economic growth in these countries. National saving rates, however, have declined sharply along with foreign saving and domestic investment in many developing countries during the 1980s. Consequently, policies to raise both public and private saving and investment have become even more critical for the growth and adjustment efforts of developing economies.23

This part of the paper provides a broad overview of the role of national saving and investment in developing countries. It addresses three specific questions. First, what has been the saving and investment experience of developing countries in recent years? Second, what are the principal determinants of saving in developing countries? And third, what are the effects of adjustment policies on national saving and investment? Answers to such questions have an obvious bearing on the design of adjustment strategies that aim at external viability, price stability, and sustained economic growth.

Before analyzing recent trends in saving rates in developing countries, it should be emphasized that any such analysis is severely constrained by data and measurement problems that go far beyond those experienced in the industrial countries. These problems are described in Appendix II. In particular, the data on gross national saving may be seriously understated, depreciation data are unreliable, and information on saving by sector (household, business, and government) is scarce.

National saving in developing countries is measured here by subtracting the current account deficit (foreign saving) from gross domestic investment. Gross domestic investment is defined broadly to include investment in plant and equipment, residential construction, and changes in stocks. The national saving rate is calculated by dividing saving by national income, defined as GNP plus net foreign transfers.

The national saving rate of the developing countries fell from an average of 27 percent in 1976–81 to 22½ percent in 1982–88 (Table 2). This aggregate result conceals a wide variety of experiences among country groups. Saving rates declined substantially in countries with debt-servicing difficulties. In these countries, sharply higher interest payments on external debt and adverse movements in their terms of trade in the early part of this decade reduced national income; the tendency to adjust consumption growth by less than the slowdown in income growth contributed to a drop in the saving rate of 5 percentage points between 1976–81 and 1982–88. By contrast, countries without debt-servicing problems were able to maintain saving rates at about 26 percent in both periods.

Table 2.

Developing Countries: National Saving and Domestic Investment Rates1 and Growth, 2 1976–88

article image
article image
Source: Fund staff estimates.

In percent of national income. National saving is calculated as gross domestic investment plus current account balance. National income is GNP plus net foreign transfers

Percent change in real GDP

The data also reveal different patterns among countries with dissimilar records on inflation and at various levels of development. Generally, countries that managed to keep average annual inflation rates below 10 percent after 1982 displayed higher saving rates than those countries that did not—by as much as 9–10 percentage points.24 Table 2 suggests that the saving rate also varied directly with the country’s level of development, as measured by the level of per capita national income: the higher the per capita income level, the higher the saving ratio. The saving rate of the high-income group (with per capita income exceeding US$1, 000) was larger than that of the low-income group by as much as 6–7 percentage points.25

All regional groups of developing countries, except Asia and Europe, experienced lower ratios of saving to national income after 1982, with Africa and the Western Hemisphere recording the lowest saving rates. Countries in Africa and the Middle East recorded by far the sharpest decline in the saving ratio: the growth rate of consumption in these countries declined by much less than that of national income in the 1980s. The Asian and European countries were able to prevent a fall in the saving ratio by holding the growth rate of consumption broadly in line with that of national income. Since the Asian and European countries exhibited by far the highest rates of growth of national income among developing countries, the increase in their saving rates was compatible with a significant rise in real consumption per capita.

The disaggregation of saving into public and private components is not readily available for many developing countries. However, a recent study by Blejer and Ize (1989) does provide such disaggregated data for a group of six large Latin American countries (Brazil, Mexico, Argentina, Venezuela, Colombia, and Chile). National saving in these countries fell from an average of 17 percent of income in 1980–81 to 15½ percent in 1982–87, reflecting a decline in the ratios of both public and private saving (Table 3). The saving rate of the public sector declined sharply from 6 percent in 1980 to ½ of 1 percent in 1982 before rising to 4 percent in 1984, as these countries embarked on adjustment programs that involved considerable fiscal restraint. The private saving rate was somewhat more stable: it rose from 12 percent in 1980 to 14 percent in 1981 and fell back to 12 percent in 1982, then fluctuated around an average of 12½ percent without any significant trend. Thus, at least for this particular group of countries, recent changes in the national saving rate appear to reflect primarily changes in the saving performance of the public sector.

Table 3.

Macroeconomic Balance of the Six Largest Latin American Countries, 1980–871

(As a percentage of GDP)

article image
Source: Mario I. Blejer and Alain Ize, “Adjustment Uncertainty, Confidence, and Growth: Latin America After the Debt Crisis,” IMF Working Paper, No. 89/105 (Washington: International Monetary Fund, December 28, 1989).

Brazil, Mexico, Argentina, Venezuela, Colombia, and Chile.

The decline in the saving rate of the developing countries was accompanied by a drop in the ratio of domestic investment to national income, from 27 percent in 1976–81 to 24 percent in 1982–88 (Table 2). In countries with debtservicing difficulties, the investment ratio fell by 7 percentage points to 20 percent, whereas countries without debt-servicing problems were able to preserve their investment ratio at 28 percent. The decline in the investment ratio of countries in the low-inflation group (1½ percentage points) was much less than that in the high-inflation group (nearly 6 percentage points). The high-income countries as a group maintained a consistently higher investment ratio than the low-income group during the post-debt-crisis period. By region, the investment ratios fell in all country groups except Asia; from 1976–81 to 1982–88, these ratios fell by 6–7 percentage points in Africa and the Western Hemisphere and by 2–4 percentage points in Europe and the Middle East. Countries in Asia were able to maintain their average investment ratio at 28 percent. It can be noted that the public investment ratios fell sharply after 1981 in the six Latin American countries listed in Table 3; the ratio of private investment to income fell by 5 percentage points between 1980 and 1983, before rising by 1½ percentage points over the following four-year period.

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Cover The Role of National Saving in the World Economy
The Role of National Saving in the World Economy
Recent Trends and Prospects: Occa Paper No.67
ISBN:
9781557751348
ISSN:
0251-6365
Publication Date:
19 Mar 1990
Publisher:
International Monetary Fund
DOI:
https://doi.org/10.5089/9781557751348.084
Pages:
66

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  • Zeldes, Stephen P. “Optimal Consumption with Stochastic Income: Deviations from Certainty Equivalence,” Quarterly Journal of Economics, Vol. 104 (May 1989), pp. 275–98.

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