Chapter

I Saving Behavior in Induatrial and Developing Countries

Author(s):
International Monetary Fund
Published Date:
September 1995
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Author(s)
Paul Masson, Tamim Bayoumi and Hossein Samiei 

Saving has always been an important issue in economics. It plays a central role in income determination, both in the short run through aggregate demand and in the long run through capital formation and wealth accumulation. The prospects for aggregate saving are a particularly relevant issue currently, as there are large potential future demands on world saving. In particular, the investment needs of transforming and newly industrializing economies may come at a time of significant government dissaving in many industrial countries, where aging populations are also likely to reduce private saving rates and raise government deficits in the coming decades. Understanding the determinants of saving is necessary in order to assess the resources that will be available to finance investment and the prospects for real interest rates.

Cross-country variations in saving rates are also of considerable interest. High-saving countries—for instance, Japan, Korea, and Singapore—have typically also experienced high growth rates, although the direction of causality is unclear. With limited capital mobility, increases in the stock of productive capital have to be financed mainly by higher national saving. When capital is mobile, differences in saving propensities may lead to large external imbalances, such as those of the United States and Japan.

There is already an extensive literature on saving behavior.1 This paper extends that literature by looking at a broad set of possible determinants of private saving and applying them to saving data for a large number of industrial and developing countries. Both time-series and cross-section information is used, as the explanatory power of potential variables differs widely in those two dimensions.

The plan of the paper is as follows. The first section discusses measurement issues and presents an overview of data on saving. The next section briefly surveys the various theories of saving and gives a selective survey of previous empirical work. Following sections present empirical results, in the form of panel and cross-section estimates, for both industrial and developing countries and use these estimates to project the effect of the more important explanatory variables. Finally, the paper offers some conclusions relating to policy issues.

The Evolution of National and Private Saving

Personal saving can be broadly defined to equal the increase in an individual’s net worth. Because saving is also equal to income minus consumption, this definition would imply that income should be measured to include capital gains and losses on assets (including those related to depreciation, so that net, not gross, saving would be used), while consumption should include only the services of durable goods, not their purchase. In addition, accumulation of rights to future pensions would be included in a person’s saving, whether or not that individual made related pension contributions. Such a broad definition would also include expenditures on research and development2 and on education as part of saving and investment, rather than consumption. However, such adjustments to the national accounts definition of saving are not attempted in this paper, which, in line with most empirical work on saving, uses gross saving data from the national accounts because of their widespread availability. Even on a national income accounts basis, however, data are not strictly comparable across countries, as the treatment of particular items often differs.3 In order to enhance comparability, data on private, not personal, saving are used, thus combining household and business saving.4

Charts 1-3 give a visual impression of gross national and private saving rates for selected industrial and developing countries since 1970. The ratio of private saving to GDP has remained relatively stable for the larger industrial countries, although there is a downward trend for Japan, the United States, and Italy. However, there is a much more pronounced decline in national saving rates for these countries over the past decade (except for Japan, where government saving has increased), as a result of an increase in government dissaving.5 The ranking of private saving rates in some countries, such as Japan and Italy, has tended to remain high, while, in other countries, such as the United States and the United Kingdom, it has tended to remain low. Still other countries—for instance, Sweden—have seen substantial fluctuations in their private saving rates. As documented by Dean and others (1990), gross and net saving rates exhibit similar trends.

Chart 1.National and Private Saving

(In percent of GDP)

Source: World Economic Outlook database.

Chart 2.Selected Industrial Countries: National and Private Saving

(In percent of GDP)
(In percent of GDP)

Source: World Economic Outlook database.

Chart 3.Selected Developing Countries: National and Private Saving

(In percent of GDP)

Source: World Economic Outlook database.

The data for developing countries suggest that, if anything, national saving rates may have seen a trend increase for developing countries taken together over the past 25 years—although it is not the case for the middle-income countries as a group.6 Trends in national and private saving are similar, although countries’ experiences vary considerably, both in terms of levels of saving and their variation over time, with, for instance, particularly dramatic declines in saving rates in Venezuela and Egypt. Conclusions concerning cross-country differences and the evolution of saving over time should be tempered by a recognition that the quality of data is imperfect. In particular, the national accounts data may not fully capture all economic activities, and saving rates could therefore be unreliable. It may also be the case that, for high-inflation countries, measures of saving have a severe upward bias because nominal interest rates (and, hence, income) are high to compensate for the decline in the real value of financial assets.

The Analytics of Saving

Theoretical Considerations

Saving is properly viewed as resulting from a choice between present and future consumption, and Irving Fisher is at the origin of a rigorous development of its analytics.7 A key element in the choice is the rate of time preference; if there are no constraints on shifting consumption intertemporally, optimal consumption for an individual in the absence of uncertainty will involve equating the rate of change of the marginal utility of consumption to the difference between the rate of time preference and the rate of interest. In this framework, consumption is independent of the timing of income; it depends instead on lifetime resources. Saving, by adding to financial assets, or dissaving, by running down assets or borrowing on future income, allows achievement of optimal consumption paths. Furthermore, the classical analysis of Fisher and others saw the interest rate as bringing about equality of saving and investment for the economy as a whole. Increased saving—for instance, owing to a decline in the rate of time preference—would lower real interest rates and stimulate investment.

Keynes changed the prevailing view about the role of saving in the economy by arguing that movements in income, as well as in interest rates, brought about ex post equality between saving and investment. The mechanism by which this process occurred depended on a close link between consumption and current income. Consumers were viewed not as intertemporally smoothing their consumption but rather as mechanistically spending a fraction of their increases in income.

The discovery of the long-run stability of the saving rate in the United States by Kuznets and the immediate postwar experience of a consumption boom as households ran down assets highlighted the inadequacies of the simple Keynesian view, and interest in intertemporal approaches to saving revived. The theoretical literature since then has mainly involved, on the one hand, drawing out the implications of the intertemporal model in the context of demographic changes, government deficits and taxes, and stochastic fluctuations in income and, on the other hand, explaining how the Keynesian link between current income and consumption can be justified formally through liquidity constraints and other rigidities that prevent full intertemporal smoothing.

In the first category are the permanent income hypothesis (PIH) models of Friedman (1957) and Hall (1978), which for simplicity assume an infinite horizon, and the life cycle hypothesis (LCH) models of Modigliani and Brumberg (1954) and Modigliani and Ando (1957), which attempt to model a finite lifetime with successive stages of schooling, increasing earnings, and retirement. The existence of bequests raises the possibility that finite lifetimes are consistent with an infinite horizon, in which case government deficit changes could be offset entirely by private saving behavior (Barro (1974)). Other intertemporal models (Yaari (1965), Blanchard (1985), and Buiter (1988)) combine the infinite horizon approach with a constant probability of death (but no bequests) and a positive birthrate, thereby introducing a (small) wedge in equilibrium between rates of interest and rates of time preference and implying that government deficits are not offset one-for-one by private saving. However, all of these intertemporal models suggest a high degree of offsetting of expected future taxes by private saving and a small correlation of consumption with current income. In these models, lifetime resources, including financial wealth, are the determinants of consumption, rather than current incomes.

The second strand in the literature, which puts Keynesian consumption functions-perhaps augmented by intertemporal factors-on a sounder theoretical footing, has concentrated on elucidating the reasons why consumption smoothing might not be possible. The literature on liquidity constraints has been surveyed by Hayashi (1985); Deaton (1991) presents a model in which individuals engage in short-run buffering but do not optimize over their lifecycle. Another reason why households might not plan consumption on a lifetime basis is uncertainty. Nagatani (1991) argues that uncertainty on the part of individuals about their future income prospects explains why income and consumption might be more closely associated than in the LCH models.

The two paradigms have important implications for the response of saving to various factors, including fiscal variables, interest rates, demographics, and income growth. These and other explanations of private saving behavior are discussed in what follows.

Outstanding Empirical Issues

Despite an extensive empirical literature, a number of issues remain unresolved. Although this paper will not attempt a comprehensive survey of that literature, it will nevertheless discuss the main hypotheses that have guided previous work and the tentative conclusions, if any, that have resulted. In this way, the empirical evidence presented in the following section can be placed in the appropriate context.

Does Consumption Follow Current Income or Fully Reflect Intertemporal Considerations?

A major theme of empirical work since the seminal article by Hall (1978) has been to test whether, in contradiction to the LCH and PIH models, variables (such as lagged income) help to predict consumption in addition to its lagged value. The evidence is mixed: Hall finds that income has no predictive power in addition to lagged consumption, while Flavin (1981) and others find that consumption is not sufficiently smooth but instead responds excessively to income. Carroll and Summers (1981) present evidence that consumption growth parallels income growth to a much greater extent than in fully intertemporal, optimizing models, although they support the idea (Deaton, 1991) that saving does buffer short-run income fluctuations and that some intertemporal smoothing does occur. Hence, the typical model of intertemporal consumption smoothing based on a representative agent not subject to borrowing and lending constraints does not appear to accord fully with the evidence. Hayashi (1985) and Flavin (1981) conclude that perhaps 20 percent of households in the United States are affected by liquidity constraints. Campbell and Mankiw (1989) find that roughly half of U.S. consumption can be attributed to forward-looking consumers, and half to those who consume a constant proportion of their income. Not surprisingly, liquidity constraints have also been found to exist in developing countries (see below).

Does Private Sector Saving Offset Government Dissaving?

The empirical literature on the private saving offset to government deficits (or dissaving) has generally concluded that the hypothesis of a full offset (Ricardian equivalence) is rejected by the data.8Bernheim (1987) summarizes existing evidence for industrial countries, which indicates that a unit government deficit increase would be associated with a decrease in consumption of 0.5 to 0.6, and he presents new empirical results tending to confirm this range. Similar results have been obtained for developing countries, and Corbo and Schmidt-Hebbel (1991), in a typical estimate, also find a roughly 50 percent offset on private saving of changes in government saving. Haque and Montiel (1989) overwhelmingly reject Ricardian equivalence for their sample of 16 developing countries. They also test for the reason for non-equivalence—either short horizons or the presence of liquidity constraints affecting at least some households—and find that the latter cause is the reason for rejection, as liquidity constraints affect a proportion of households ranging from 0.182 for Korea to 0.713 for Thailand.

An increase in the government deficit can be expected to have different effects on private saving depending on whether it is due to lower taxes or higher government spending. Increased government spending may lower the resources available to the private sector and hence have a negative effect on private saving, whether or not it affects the deficit. The composition of government spending may also be important. Public investment, to the extent that it is viewed as productive, would not be expected to require further taxes and thus should not generate a private saving response. Its coefficient in a saving equation should be smaller than the coefficient of government consumption. In contrast, investment that does not generate revenues for the government (and hence is considered equivalent to government consumption) would involve future taxes and thus might induce a larger private saving offset.

Does Higher Income Growth Lead to Higher Saving?

A different issue concerns the relationship between income growth and the level of saving. Modigliani (1966) argued that a higher growth rate (whether owing to population or productivity growth) would, with unchanged saving rates by age groups, raise aggregate saving because it would increase the aggregate income of those working relative to those not earning labor income (including retired persons living off their accumulated assets). It is in fact the case that saving seems to be positively correlated with income growth (Modigliani (1970)), as high-growth countries such as Japan and Korea have also had high saving rates. However, Tobin (1967) pointed out that unchanged individual saving rates are consistent in this context only with myopic expectations of future income. If workers correctly expect that their income will grow in the future, they should, according to the LCH model, want to consume more today. It is thus possible that individual saving rates for those in work will fall by a sufficient amount to offset the aggregate effects of higher growth, a hypothesis confirmed by calculations based on the length of working lives relative to retirement. Thus, the empirical positive correlation of saving with income growth is not on the face of it consistent with the LCH model, unless the higher income growth is expected to be at least partly transitory, Carroll and Weil (1994) confirm that lagged values of increases in income growth seem to explain higher saving rates; they argue that the usual consumption models employing either uncertainty or liquidity constraints are not sufficient to explain this result and advance instead the hypothesis of habit persistence. If growth leads to higher saving, for whatever reason, there could be important implications for countries whose growth has slowed, such as Japan. However, another explanation for the correlation may be that a high growth rate is a proxy for a high rate of return on capital, which may be inadequately reflected in domestic interest rates (especially if financial markets are not liberalized).

Do Higher Interest Rates Lead to Higher Saving?

The effect of interest rates on consumption is ambiguous theoretically, being subject to potentially offsetting substitution and income effects, positive income effects of a rise in rates reflecting the fact that the private sector is a net creditor in financial assets. It is true that human wealth (that is, discounted future labor income) for a typical individual is much larger than financial wealth, and human wealth varies inversely with the rate of interest-suggesting that the negative substitution effect should dominate. However, consumers may not plan their lifetime consumption but respond primarily to current income. The empirical importance of the income effect is enhanced by pension plans’ saving behavior: for defined benefit plans, higher interest rates increase the income available to pay pensions, allowing lower contributions (Bemheim and Shoven (1988)).

Empirical research has reported mixed results, paralleling the theoretical ambiguity surrounding the relationship between interest rates and consumption. For instance, using saving data for industrial countries, Bosworth (1993) finds a positive interest rate coefficient in time-series estimation for individual countries but a negative coefficient in panel (cross-country) estimation. For developing countries, Giovannini (1985) concludes that in most cases the real interest elasticity is zero, while Schmidt-Hebbel, Webb, and Corsetti (1992) also find no clear effects on saving. Ogaki, Ostry, and Reinhart (1995) find positive interest rate effects that vary with income but are still small.

Given that financial liberalization may have changed interest rate effects, it is not too surprising that results are not robust. The effect of liberalization on saving behavior can operate through at least two channels. First, financial development may provide outlets for financial saving, thereby raising saving rates (McKinnon (1973) and Shaw (1973)), a channel that has been emphasized in the development literature. The second aspect involves liberalization of consumer access to bank credit, as occurred in a number of industrial countries in the 1980s. Regulatory changes have allowed banks to lend more freely to individuals—for instance, for house purchase or for consumption—which may lead, at least initially, to a significant decline in saving. Financial liberalization may involve one or another of these aspects, or both of them.9

The first channel, the McKinnon-Shaw hypothesis, focuses on the opportunities available to savers: financial liberalization leads to increases in interest rates, which should stimulate financial saving, add to total saving, and thus boost investment. However, it is important to distinguish between financial saving and saving that takes other forms, for example, house purchase, and it is not obvious that financial liberalization will increase aggregate saving. Furthermore, although liberalization should involve a wider menu of financial assets, it could be associated with a decline in some interest rates, as improved possibilities for diversification (including purchase of foreign assets) may lower risk premiums. A proxy for financial development that has been used is the money-income ratio, but evidence for a positive correlation with aggregate saving is weak. In any case, financial liberalization generally affects the form that saving takes and also the efficiency of investment; as a result, it may lead to improved growth performance, even if it does not raise the level of saving (De Gregorio and Guidotti (1994)).

A second aspect of financial liberalization, one that has been more prevalent in industrial than developing countries, involves an increase in households’ access to credit. Without liberalization, some consumers may not be able to smooth their consumption intertemporally by going into debt. For instance, young consumers may want to borrow in anticipation of future increases in labor income but be unable to do so. Financial liberalization, either by easing regulations on borrowing or by stimulating greater competition among intermediaries, allows consumers more easily to use debt in order to smooth consumption and make their saving more sensitive to interest rates. Increased access to credit causes a temporary stimulus to consumption, as some previously credit-constrained households borrow in order to dissave, while the behavior of those who have already accumulated assets (for instance, the old) remains unaffected. Empirical evidence in countries that have liberalized access to consumer credit generally supports the above analysis (Jappelli and Pagano (1989), Bayoumi (1993), Lehmussaari (1990), and Ostry and Levy (1994)).

Does Saving Vary with a Country’s Income Level?

Differences in per capita income may possibly explain the wide range of saving rates in developing countries. At subsistence levels, the potential for significant saving is small. A rise in per capita income may therefore lead to higher saving rates. The size of this effect is likely to decline as per capita income rises and may even become negative for rich countries, where investment opportunities and growth are relatively lower. It seems to be a stylized fact that the process of development involves initially low saving rates, a period of high growth accompanied by high saving rates, and lower saving rates in more mature economies.

Ogaki, Ostry, and Reinhart (1995) show that the pattern of saving rates by average income tends to confirm that subsistence considerations are important for low-income countries, which also have low saving rates. They also find that the relationship between the two variables seems to be nonlinear, with the largest increases in saving occurring in the transition from low-to middle-income countries (see also Rebelo (1991)).

Is the Age Structure a Significant Influence on Saving?

An implication of the LCH model is that the age structure of the population is important. If a high proportion of the population is of working age—and especially if at peak earning years—the economy’s private saving rate should be high, as the workers are providing for their retirement. Conversely, when this cohort reaches retirement age and dissaves (or, at least, consumes a greater fraction of its income), the aggregate saving rate should decline. An extensive literature attempts to link demographic variables to saving behavior. Studies using cross-country data (either as cross sections or panels) have been more successful than time-series studies for individual countries in finding significant demographic effects, probably because the variation overtime of demographic variables is relatively small. In particular, Leff (1969), Modigliani (1970), Modigliani and Sterling (1983), Graham (1987), and Masson and Tryon (1990) have found that higher proportions of the young and elderly to those of working age-that is, higher dependency ratios-are associated with lower saving rates. These estimates, combined with the projections of population aging in coming decades, should produce quite large falls in private saving in many industrial countries, especially Japan.

Koskela and Viren (1989), however, question the robustness of the demographic effects identified by Graham (1987), and there remains a conflict between macroeconomic results (including across countries) and studies using microeconomic data for consumers by age cohort. Kennickell (1990) and Carroll and Summers (1991), for instance, argue that age-consumption profiles do not differ enough to explain why aggregate consumption should be very much affected by demographic factors. The discrepancy may, however, be explained by interactions between generations that are picked up by the macro-economic data but ignored by the microeconomic data studies: be quests may lower the saving of the young and, hence, aggregate saving, even if the elderly do not them selves dissave (Weil (1994)). Therefore, the though experiment of changing the age structure of the population while keeping age-specific saving profiles unchanged may not be legitimate. Nevertheless, it must be acknowledged that studies using macroeconomic data have also found diverse results.

A debate has also raged as to whether individual actually dissave in their later years, and, if not, whether the absence of dissaving by the elderly contradicts the LCH model.10 An alternative model, the dynastic model, postulates that individuals save to make be quests, in order to transfer wealth to their descendants. Interpretation of the data is complicated by various factors. One is that different cohorts may behave differently (or perceive the future differently), so that what is needed is longitudinal data for a given individual or household throughout its lifetime, not just age saving profiles at a given point in time. Another is that the motive for bequests is important. As death is uncertain, bequests may not be planned. Alternatively bequests may simply be part of a bargain made with children, in exchange for their taking care of their parents, and should properly be classified as purchases of services (Bernheim, Shleifer, and Summers (1985)) Hurd (1990) concludes from the evidence of longitudinal data for the United States that the elderly do dissave, a view also maintained for Japan by Hayashi (1992) and Horioka (1993). However, others have pointed to the size of inherited wealth as an a priori indication that life cycle considerations are not a very important factor in saving (for example, Kotlikoff (1988)).

Do Other Government Policies Affect Saving?

In addition to the possible offset of government deficit changes by changes in private saving, government policies can also be expected to affect private saving through tax distortions and through public pension and medical care policies.11 The first effect may operate through taxes, subsidies, or other incentives applied to the rate of return to saving. For instance, many countries tax income from saving differently than labor income. Moreover, they try to influence the composition of saving—for instance, by allowing contributions to retirement plans to be deducted from taxable income or exempting bank interest from tax. Detailed knowledge of each country’s tax code is required to assess whether this factor is important in explaining cross-country differences in saving rates (as opposed to differences in the form that saving takes—such as insurance contracts versus housing). Because a comprehensive source of such data is not available,12 this important issue is largely ignored in the discussion that follows.

Public pensions can lower private saving because they may substitute for private pension contributions. The effect on national saving depends on the way that public pensions are financed. Feldstein has argued that the introduction of a pay-as-you-go system would lower national saving because the pensions would be paid by those still unborn (or at least not yet working), who therefore could not adjust their saving behavior, and because their parents are presumed not to do so, contrary to Ricardian equivalence. The empirical literature (Feldstein (1974) and Munnell (1974)) is mixed concerning the importance of this factor for saving behavior. Given current demographic trends, there may be some doubt as to whether benefit levels will in fact be maintained because the burden on those working in the future may be viewed as too great. More generally, the extent that governments provide services, such as education, health care, and unemployment insurance, may also affect the need for private saving. This area has so far been little explored, partly because of the difficulty in making comprehensive structural comparisons across countries.

Does the Availability of Foreign Saving Affect National Saving?

In the absence of constraints on foreign borrowing, foreign saving is determined by the difference between national saving and investment. However, when foreign borrowing is rationed, as is often the case in developing countries, the direction of causality changes, and foreign saving becomes a potential determinant of national saving. An exogenous increase in foreign saving is likely to replace national saving at least partially by raising domestic consumption; nevertheless, by increasing the total saving available for investment, foreign saving can also promote growth. Some empirical evidence also supports such a negative relationship between national and foreign saving (Fry (1978) and (1980) and Giovannini (1985)), and between household and foreign saving (Schmidt-Hebbel, Webb, and Corsetti (1992)).

An important source of external saving in the case of the poorer developing countries has been foreign aid. Empirical evidence suggests that foreign aid tends to have a negative effect on national saving but increases overall saving (Hadjimichael and others (1995)). Recent studies indicate that, on average, about 40 percent of foreign aid goes into consumption (Levy (1988) and World Bank (1994a)), reflecting the tendency of foreign aid to flow to countries where per capita income is low and subsistence considerations dominate saving decisions.

Is There a Terms of Trade Effect on Saving?

Another aspect of saving behavior that has appeared in the literature is the possible relationship between the terms of trade and saving: the Harberger-Laursen-Metzler effect, through which an improvement in the terms of trade is supposed to lead to an increase in saving and an improvement of the trade balance. The modem literature integrates this effect into intertemporal models and stresses the distinction between transitory and permanent changes in the terms of trade. A transitory improvement, because it causes only a transitory change in income, should lead to higher saving rather than higher consumption, confirming the direction of the Harberger-Laursen-Metzler effect (Obstfeld (1982) and Svensson and Razin (1983)). Permanent shocks to the terms of trade would have ambiguous effects that should be small in magnitude. The empirical literature has tended to confirm a positive correlation between transitory terms of trade shocks and saving (for example, Ostry and Reinhart (1992)).

Empirical Results

In order to examine the outstanding empirical issues discussed above, saving rates for industrial and developing countries were regressed on a number of potential explanatory variables. The set of explanatory variables was limited to those that could be collected on a reasonably comparable basis for all countries. Although, because of differences in data availability, the regressions were initially done separately for the two groups of countries, a combined regression, also reported below, pooled the two groups by using common explanatory variables. The regressions focus on four principal explanatory factors as determinants of private saving: fiscal variables; demographics; GDP per capita and GDP growth; and interest rates, inflation, and changes in the terms of trade.

Industrial Countries

A panel data set comprising 21 industrial countries13 over the period 1971 to 1993 was used to regress the ratio of private saving to nominal GDP on the following variables: the general government budget surplus, general government current expenditure, general government investment, and private sector wealth14 (all measured as ratios of nominal GDP); growth rates of real output, consumer prices, and the terms of trade; the real short-term interest rate; GDP per capita relative to that in the United States (measured by using purchasing power parities); and the dependency ratio (the ratio of those under the age of 20 and over the age of 65 and to those aged 20-64).15

The advantage of panel data is that they provide variation both across countries and over time. Ideally, one would exploit both dimensions simultaneously, using a single specification across all countries. Unfortunately, the statistical assumptions required to make such an approach valid do not generally hold, a common problem with panel estimation. In what follows, the results from different approaches that give more or less weight to one or another aspect of the data are reported, and the similarities and differences found in the empirical results using alternative methods are discussed.

Table 1 provides information on some of the characteristics of the underlying data. It divides the total variance of each of the series into the part that can be ascribed to changes over time within countries (the time-series variation) and the part that can be ascribed to long-term differences across countries (the cross-sectional variation).16 Private saving, the dependent variable, contains significant amounts of variation in both dimensions, with cross-sectional differences explaining about two thirds of the total variance and changes over time the remaining third. The importance of the cross-sectional differences presumably reflects the persistence of differences in saving behavior across countries. For example, Japan and Italy had relatively high saving ratios throughout the sample period, while the United Kingdom and United States had relatively low ratios.

Table 1.Decomposition of Overall Variance into Cross-Sectional and Time-Series Variances for 21 Industrial Countries over 1971-93(In percent of total)
VariableAcross CountriesOver Time
Private saving/GDP65.634.4
General government budget surplus/GDP50.539.5
General government current expenditure/GDP67.332.7
General government investment/GDP62.137.9
GDP growth rate8.291.8
Real interest rate13.286.8
Wealth/GDP66.733.3
Inflation rate24.575.5
Percent change in terms of trade1.198.9
Per capita GDP relative to United States94.75.3
Dependency ratio62.337.7
Source: IMF staff estimates.

Cross-sectional differences are also more important than changes over time for the fiscal variables, the dependency ratio, the wealth ratio, and per capita GDP relative to the United States. By contrast, most of the variation in real short-term interest rates, output growth, inflation, and the change in the terms of trade is across time, presumably reflecting the greater importance of cyclical variation in these cases. However, all of the variables except the ratio of per capita GDPs and the change in the terms of trade have significant variation across both countries and time, indicating that useful information can be extracted in both dimensions.

In order to focus on the time-series information, a specification was run in which the constant terms were allowed to vary by country while the coefficients on the independent variables were made equal across all countries. Accordingly, these regressions are best seen as a way of using data across a large number of different economies to estimate the response of saving in a typical country with more precision than is possible by using individual country data. Although the constraint that all of the coefficients are equal across countries was rejected by the data, it was considered that the benefits from a greater number of observations outweighed the potential biases in the estimates for individual countries. Moreover, the large number of variables and countries involved in the analysis made it impractical to report the results of individual country regressions.

Table 2 reports the results from both a general specification including all the variables and a more restricted one. Most of the variables in the general specification are correctly signed and significant. Increases in the general government budget surplus (the fiscal position), government current and capital expenditure, per capita output relative to the United States, and the dependency ratio all lower private saving, while increases in the real interest rate, inflation (included as a proxy for measurement biases in national accounts measures of saving caused by the nominal component in interest payments17), and the terms of trade raise it. However, the coefficient on the growth in real GDP was small and insignificant, while that on wealth was significant but incorrectly signed.

Table 2.Private Saving-GDP Ratio: 1971-93 Panel Estimates for 21 Industrial Countries with Separate Country Constant Terms(Absolute initios in parentheses)
General ModelRestricted ModelInstrumental Variables
Explanatory variables
General government budget surplus/GDP-0.51-0.52-0.53
(8.5)(8.8)(4.8)
General government current expenditure/GDP-0.42
(10.5)
-0.40-0.42
(10.3)(7.2)
General government investment/GDP-0.52
(4.9)
GDP growth rate-0.04
(0.8)
Real interest rate0.220.170.24
(4.5)(3.5)(2.8)
Wealth/GDP0.016
(3.9)
Inflation rate0.180.130.17
(4.6)(3.5)(3.1)
Percent change in terms of trade0.050.050.05
(3.0)(3.2)(3.2)
Per capita GDP relative to United States-0.07-0.04-0.05
(2.1)(1.3)(1-3)
Dependency ratio-0.13-0.15-0.14
(4.5)(5.4)(4.4)
Fit statistics
Adjusted R20.230.250.25
S.E.R.2.362.402.41
Number of observations483483483
Source: IMF staff estimates.

The results from excluding the growth in real output and the wealth ratio are shown in Table 2 under the “Restricted Model” column. The implied effects from the remaining variables appear reasonable.18 About one half of all changes in the fiscal position caused by tax changes are estimated to be offset by changes in private saving; if the fiscal position changes are caused by changes in government expenditure, the offset on private saving is much less (about 10 percent, the difference between the two coefficients). A 6 percentage point increase in the real interest rate raises the private saving ratio by 1 percent of GDP, a result that would also come from a rise in the terms of trade or a fall in per capita income relative to the United States of 20 percent. Finally, a 7 percentage point increase in the dependency ratio lowers private saving by 1 percent of GDP, an effect that, although within the (wide) range of existing estimates, is somewhat lower than the typical value found in cross-country studies.

One potential problem with these results is that saving may be determined simultaneously with some of the other variables, in particular the real interest rate and Fiscal variables, causing the estimated coefficients to be biased downward. Accordingly, the restricted regression was reestimated using instrumental variables to test for biases in the coefficients on the fiscal deficit, government current expenditure, and the real interest rate.19 As indicated in the third column of Table 2, the coefficient on the real interest rate rises by over one third of its original value, from 0.17 to 0.24, indicating that the original coefficient may indeed have been biased downward. The size and significance of the other estimated coefficients, by contrast, are similar to those found in the regression without instruments.

The R2 statistics indicate that these regressions explain about one fourth of the variation in the private saving ratio over time.20 To summarize, the results indicate that the relevant economic variables are generally correctly signed and have significant effects on the level of private saving, but that a reasonably large amount of the variance of saving over time remains unexplained, at least when the coefficients on the explanatory variables are assumed equal across countries.

The same variables were included in a cross-sectional equation in which private saving ratios averaged over time were regressed on average values of the explanatory variables; there are thus 21 observations, one for each country. As can be seen in Table 3, only three variables (the fiscal position, output growth, and the dependency ratio) were found to be significant in the general regression. The small number of significant variables presumably reflects two factors: the much smaller number of observations and, hence, limited degrees of freedom; and the inclusion of variables whose main explanatory power appears likely to be in variation over time, either because there is little variation across countries (the change in the terms of trade) or because of problems of data comparability.

Table 3.Private Saving-GDP Ratio: Average 1971-93 Cross-Sectional Estimates for 21 Industrial Countries(Absolute t-ratios in parentheses)
General ModelRestricted Model
Explanatory variables
General government budget surplus/GDP-0.80-0.71
(3.7)(4.6)
General government current cxpenditure/GDP-0.02
(0.2)
General government investment/GDP0.22
(0.4)
GDP growth rate2.292.77
(2.1)(3.87)
Real interest rate-0.03
(0.1)
Wealth/GDP-0.00
(0.2)
Inflation rate-0.34
(1.07)
Percent change in terms of trade-0.52
(0.5)
Per capita GDP relative to United States-0.08-0.06
(1.5)(1.7)
Dependency ratio-0.25-0.28
(2.4)(3.8)
Fit statistics
Adjusted R20.650.74
S.E.R.2.422.06
Number of observations2121
Source: IMF staff estimates.

The second column of Table 3 reports the results from a restricted regression using only the fiscal position, growth in output, per capita GDP relative to the United States, and the dependency ratio. A comparison of the results in Tables 2 and 3 indicates that the impact of these variables on saving is estimated to be noticeably greater in the cross-sectional regression than in the time-series results. The most dramatic difference is in the case of real growth, which has a coefficient of over 2 in the cross-sectional regression. If, as seems reasonable, the time-series regressions measure the sensitivity of saving to changes over the economic cycle while the cross-sectional regressions measure the impact of long-term differences in behavior, saving may be more sensitive to long-term differences in fiscal positions, output growth, and demographic changes than to shorter-term movements in these variables.

Finally, the restricted version of the cross-sectional regressions was reestimated over three sub-sample periods, the 1970s, the 1980s, and 1990-93, in order to investigate whether the estimated coefficients were robust to alternative time periods, and whether they showed any pattern over time. These results, reported in Table 4, show that the underlying pattern found over the full sample period also holds over all three subsamples. At the same time, there does appear to be some diminution in the coefficients on the fiscal position and the growth in output over time, possibly owing to rising international capital mobility. As access to international capital markets has expanded over time, the linkages between national saving, investment, and growth, and between government and private saving, may have been reduced. The corollary may be an increase in the sensitivity of domestic saving to international influences, as domestic and world financial markets have become more integrated.

Table 4.Private Saving-GDP Ratio: Cross-Sectional Estimates for 21 Industrial Countries Across Subperiods(Absolute t-ratios in parentheses)
1970s1980s1990-93
Explanatory variables
General government budget surplus/GDP-0.88-0.61-0.20
(3.7)(4.0)(0.9)
GDP growth rate1.912.881.30
(2.3)(3.5)(3.0)
Per capita GDP relative to United States-0.05-0.11-0.08
(0.8)(2.7)(1.6)
Dependency ratio-0.31-0.29-0.27
(2.8)(3.3)(2.5)
Fit statistics
Adjusted R20.580.650.49
S.E.R.3.282.452.75
Number of observations212121
Source: IMF staff estimates.

Developing Countries

In estimating saving functions for developing countries, further considerations should be taken into account. First, because most developing countries face constraints on their external borrowing, foreign saving—to the extent that it is exogenous—is likely to be a determinant of domestic saving. The current account surplus (equal to minus foreign saving) was therefore included as an extra explanatory variable in the regressions.21 Second, broad money as a ratio to GDP was included in the initial estimation as a proxy for financial development; however, this variable was not significant and hence was omitted from the regressions reported below. Third, for the period 1970-93, data on private saving and the interest rate were not available for a sufficiently large set of countries; therefore, two sets of regressions were run. For the 1970-93 period, national as opposed to private saving was used as the dependent variable, and the interest rate and fiscal variables were excluded from the regression. In this case, the wealth variable was altered to include both private and public wealth. For the 1982-93 period, a specification similar to that for the industrial countries was estimated, with the private saving ratio used as the dependent variable. Thus, the Ricardian equivalence hypothesis was tested only for the shorter sample. Finally, in all regressions a quadratic function of per capita income was included to test the hypothesis that the saving ratio may increase at the initial stages of development but decrease at later stages. This hypothesis would require the coefficients of per capita income and per capita income squared to be positive and negative, respectively.

Some differences relative to the industrial country data should also be noted. Because of the lack of reliable independent data, national saving was calculated as domestic investment plus the current account surplus. This means that foreign transfers are included as part of national saving. Private saving (for the 1982-93 period) was then calculated as national saving minus the central government fiscal surplus and minus central government expenditure on capital goods.22 Nominal private and public wealth were, respectively, derived as the cumulative sum of nominal private and public savings. Data sources are given in the appendix. The sample includes 64 developing countries for the 1970-93 regressions and 40 countries for the 1982-93 regressions.

Separate estimations were carried out for the entire set of countries, as well as for countries classified as high-income, middle-income, and low-income groups based on 1990 per capita incomes (see the appendix for a list of countries in each group). All panel estimations allowed for the presence of fixed country effects, that is, separate country intercepts. The inclusion of time dummies did not significantly influence the estimated coefficients, and these are excluded in the results reported below. Cross-section regressions were of poor fit and are not reported here.

Table 5 reports the contributions made by the cross-country and over time variances to the total variance of each of the variables, for all the countries together and for the three subgroups. Private and, to a lesser degree, national saving rates show more variability across countries than overtime. Apart from the ratios of fiscal position and wealth to GDP, the explanatory power of other variables differs widely in those two dimensions. As is true for industrial countries, most of the variance in GDP growth, the real interest rate, the percent change in the terms of trade, and inflation is over time, while, for per capita income, the dependency ratio, and the ratio of central government expenditure to GDP, the reverse is true. The relative variances are similar across different income groups.

Table 5.Decomposition of Overall Variance into Cross-Sectional and Time-Series Variances for Developing Countries(In percent of total)
VariableAll CountriesHigh-Income CountriesMiddle-Income CountriesLow-Income Countries
Across countriesOver timeAcross countriesOver timeAcross countriesOver timeAcross countriesOver time
National saving rate158.541.553.047.051.648.456.243.8
GDP growth rate110.589.513.186.95.194.99.390.7
Percent change in terms of trade12.697.43.996.12.098.01.798.3
Per capita income189.810.274.325.773.926.170.929.1
Total wealth/GDP158.341.756.044.041.758.369.330.7
Dependency ratio181.718.372.927.159.540.589.810.2
Indflation rate114.285.820.979.110.389.721.678.4
Current account surplus/GDP126.173.918.181.913.986.138.161.9
Private saving rate277.222.862.537.570.129.984.615.4
Central government budget surplus/GDP253.646.421.378.754.445.656.443.6
Central government current expenditure/GDP290.59.585.414.691.09.082.917.1
Central government capital expenditure/GDP272.527.567.932.176.723.368.231.8
Real interest rate236.763.320.479.645.154.924.975.1
Source: IMF staff estimates.

Table 6 presents the results of estimating the model for the four groups for the period 1970-93 by using the national saving ratio as the dependent variable, while Table 7 reports the preferred specifications. For the group of all developing countries (column 1 of Tables 6 and 7), the included variables are all significant at 5 percent with the right sign, except for the inflation rate, which does not have a significant coefficient. The estimated coefficient of the dependency ratio indicates that a 1 percentage point rise in this variable leads to a fall of just over 0.1 percent in the national saving rate.23 Foreign saving is a significant determinant of domestic saving.24 and the coefficient of the current account surplus indicates that an increase in foreign saving equal to 1 percent of GDP reduces the national saving rate (and increases the consumption-GDP ratio) by about 0.4 percent. Finally, the results support the hypothesis of a quadratic relationship between the national saving rate and per capita income; however, the estimated coefficients suggest that the turnaround is mild and occurs at relatively high levels of per capita income (84 percent of the U.S. level).

Table 6.National Saving-GDP Ratio: 1970-93 Panel Estimates for 64 Developing Countries with Separate Country Constant Terms(Absolute t-ratios in parentheses)
All CountriesHigh-Income CountriesMiddle-Income CountriesLow-Income Countries
Explanatory variables
GDP growth rate0.1250.1760.1030.100
(4.28)(5.00)(2.06)(1.69)
Percent change in terms of trade0.0320.0450.0590.006
(3.70)(3.95)(4.12)(0.38)
Per capita income0.8430.6132.776-0.687
(9.17)(7.40)(6.23)(0.45)
Per capita income squared-0.005-0.003-0.0050.078
(5.88)(4.43)(4.08)(0.62)
Total wealth/GDP-0.008-0.0190.018-0.009
(2.56)(6.01)(2.73)(1.28)
Dependency ratio-0.114-0.144-0.022-0.309
(6.83)(8.34)(0.77)(4.56)
Inflation rate-0.000-0.0000.000-0.000
(0.50)(0.72)(0.38)(0.04)
Current account surplus/GDP0.4140.5210.1120.562
(14.18)(13.81)(2.18)(9.44)
Fit statistics
Adjusted R20.2640.5850.2030.233
S.E.R.5.934.105.776.82
Number of observations1,536504504528
Source: IMF staff estimates.
Table 7.National Saving-GDP Ratio: 1970-93 Preferred Panel Estimates for 64 Developing Countries with Separate Country Constant Terms(Absolute t-ratios in parentheses)
All CountriesHigh-Income CountriesMiddle-Income CountriesLow-Income Countries
Explanatory variables
GDP growth rate0.1260.1800.1020.108
(4.34)(5.14)(2.04)(1.87)
Percent change in terms of trade0.0320.0450.058
(3.70)(3.95)(4.10)
Per capita income0.8490.6202.824
(9.31)(7.53)(6.41)
Per capita income squared-0.005-0.004-0.056
(5.97)(4.52)(4.33)
Total wealth/GDP-0.008-0.0190.021
(2.53)(5.97)(3.44)
Dependency ratio-0.114-0.142-0.316
(6.82)(8.32)(5.88)
Inflation rate
Current account surplus/GDP0.4140.5200.1190.598
(14.19)(13.80)(2.35)(10.80)
Fit statistics
Adjusted R20.2650.5850.2050.234
S.E.R.5.934.105.776.81
Number of observations1,536504504528
Source: IMF staff estimates.

The estimation results vary considerably across country groups (columns 2-4 of Tables 6 and 7), with the fit being the best for the high-income group. GDP growth turns out to be significant in all the subgroups (at the 10 percent level for the low-income countries), while per capita income, the percent change in the terms of trade, and wealth are not significant in the case of the low-income countries. These results may indicate that, for these countries, subsistence considerations do not allow higher incomes to lead to higher saving rates. Demographic factors are significant for all but the middle-income countries.

Tables 8 and 9 report the results for the private saving rate over the period 1982-93, with the fiscal surplus, central government current expenditure, central government capital expenditure, and the real interest rate also included as regressors. The coefficient of the ratio of the fiscal position to GDP indicates a 0.63 percent offset of government dissaving by increased private saving for all developing countries. The Ricardian equivalence hypothesis of a full offset is rejected for all but the high-income countries. The fiscal balance used here includes only the central government, implying that private saving includes the noncentral government fiscal balance. If central and noncentral government saving ratios are negatively correlated, the estimated coefficient of the fiscal position will be biased upward. When the fiscal deficit is reduced by cuts in central government investment, rather than by increases in taxes, there is a smaller offset on private saving (except in the case of the middle-income countries). However, government current expenditure does not have such a differentiated effect.

Table 8.Private Saving-GDP Ratio: 1982-93 Panel Estimates for 40 Developing Countries with Separate Country Constant Terms(Absolute t-ratios in parentheses)
All CountriesHigh-Income CountriesMiddle-Income CountriesLow-Income Countries
Explanatory variables
Central government budget surplus/GDP-0.626-0.931-0.434-0.629
(9.40)(8.74)(3.38)(5.38)
Central government current expenditure/GDP0.007-0.0540.0450.097
(0.11)(0.57)(0.29)(0.70)
Central government capital expenditure/GDP-0.233-0.392-0.089-0.302
(2.69)(2.99)(0.46)(2.14)
GDP growth rate0.1420.1810.0900.081
(3.59)(3.26)(1.17)(1.18)
Percent change in terms of trade0.007-0.0260.0230.020
(0.63)(1.33)(1.11)(1.47)
Per capita income0.8230.9813.7975.343
(3.65)(3.32)(3.41)(2.17)
Per capita income squared-0.008-0.010-0.110-0.480
(2.67)(2.73)(3.15)(2.24)
Private wealth/GDP0.0070.004-0.0030.023
(1.14)(0.38)(0.25)(1.78)
Dependency ratio-0.198-0.250-0.097-0.196
(6.33)(6.03)(1-29)(3.25)
Inflation rate-0.049-0.076-0.0090.166
(1.60)(2.81)(0.09)(1.22)
Current account surplus/GDP0.4630.7090.2530.578
(11.19)(11.94)(3.47)(6.58)
Real interest rate-0.021-0.032-0.0140.233
(0.63)(1.02)(0.13)(1.64)
Fit statistics
Adjusted R20.3060.6260.1170.455
S.E.R.3.362.524.142.62
Number of observations480168156156
Source: IMF staff estimates.
Table 9.Private Saving-GDP Ratio: 1982-93 Preferred Panel Estimates for 40 Developing Countries with Separate Country Constant Terms(Absolute t-ratios in parentheses)
All CountriesHigh-Income CountriesMiddle-Income CountriesLow-Income Countries
Explanatory variables
Central government budget surplus/GDP-0.659-0.940-0.349-0.673
(11.43)(11.19)(3.90)(6.99)
Central government current expenditure/GDP
Central government capital expenditure/GDP-0.298-0.408-0.397
(3.91)(4.80)(3.11)
GDP growth rate0.1560.197
(3.97)(3.75)
Percent change in terms of trade
Per capita income0.8701.0863.8815.504
(3.98)(4.19)(4.28)(2.54)
Per capita income squared-0.009-0.011-0.117-0.520
(2.82)(3.31)(3.93)(2.64)
Private wealth/GDP
Dependency ratio-0.181-0.241-0.159
(6.04)(6.29)(2.79)
Inflation rate-0.056
(3.15)
Current account surplus/GDP0.4690.6970.2680.572
(11.39)(11.96)(3.86)(6.49)
Real interest rate
Fit statistics
Adjusted R20.3020.6270.1360.423
S.E.R.3.372.524.102.69
Number of observations480168156156
Source: IMF staff estimates.

The real interest rate is not significant at the 5 percent level for any of the groups. This result, which is in line with most earlier studies, may reflect the importance of liquidity constraints and subsistence considerations in many developing countries, but the poor quality of the data may also be significant. The results for the 1982-93 period also show the importance of growth (although not for middle- and low-income countries), per capita income, and foreign saving in the determination of private saving. The results also suggest that the effect of the terms of trade is insignificant, probably because of the smaller degree of variation in this variable during the shorter period, which excludes the two major oil price increases.

Results from the Combined Panel

The industrial country and the shorter developing country data sets were combined to produce an unbalanced panel involving a total of 61 countries: 21 industrial countries with 23 years of data (1971-93); and 40 developing countries with 12 years of data (1982-93). The private saving ratio was then regressed upon those series available in both panels.25 The data were treated identically across all countries, except in the case of the current account, which was set to zero for the industrial countries because the availability of foreign saving was not considered to be an exogenous determinant of saving in these economies. As the constant terms were allowed to vary by country, this effectively eliminated the current account from the estimation for industrial countries.

Table 10 reports the results from a general specification and from a more restricted version, in which a number of the explanatory variables have been eliminated. All of the coefficients in the restricted model are correctly signed and significant. The fiscal offset is 0.64, indicating that slightly over half of any change in the fiscal balance is offset by changes in private saving. Rises in the ratio of government expenditure to GDP that do not affect the fiscal position (because they also involve higher taxes) are found to lower the corresponding private saving ratio by about one third. Both output growth and per capita income relative to the United States are found to have significant impacts on saving, with the quadratic term implying that rises in relative per capita income boost saving when the ratio is below about 60 percent of the value in the United States, and lower it after this point. The real interest rate has a significant but relatively small impact on saving, while, at -0.16, the coefficient on the dependency ratio is very similar to that found in the earlier time-series regressions. The equation explains 30 percent of the variance of saving in the combined panel.26

Table 10.Private Saving-GDP Ratio: Results from the Combined Industrial and Developing Country Panel(Absolute t-ratios in parentheses)
General ModelRestricted Model
Explanatory variables
Government budget surplus/GDP-0.62
-0.64
(13.7)(14.8)
Government current expenditure/GDP-0.32
(11.1)-0.32
Government investment/GDP-0.26(115)
(4.2)
GDP growth rate0.100.11
(3.4)(3.9)
Real interest rate0.030.03
(1.2)(2.0)
Wealth/GDP0.01
(2.7)
Inflation rate-0.01
(0.3)
Percent change in the terms of trade0.01
(1.3)
Per capita GDP relative to United States0.550.51
(5.0)(5.0)
Square of per capita GDP relative to United States-0.005-0.004
(5.3)(5.1)
Current account surplus/GDP (developing countries only)0.440.44
(12.5)(12.7)
Dependency ratio-0.15-0.16
(7.2)(8.0)
Fit statistics
Adjusted R20.310.30
S.E.R.2.962.97
Number of observations963963
Source: IMF staff estimates.Note: Estimated using 1971-93 data for 21 industrial countries and 1982-93 data for 40 developing countries.

Uniting the combined panel results with the results obtained separately for industrial and developing countries permits some conclusions to be drawn. First, the fiscal position induces an offset in private saving, but only a partial one, estimated to be about three fifths. Therefore, fiscal consolidation has an appreciable positive impact on national saving. Moreover, given the typical negative coefficient on government spending, fiscal consolidation that takes the form of spending reduction rather than tax increases induces less of a private saving offset. Second, higher output growth is generally associated with higher saving rates. Third, the real interest rate generally seems to have a positive effect on private saving. Fourth, the dependency ratio is generally significant, with the expected negative sign. Finally, per capita income has an effect on saving that depends on its level: it is initially positive but turns negative at higher levels. These conclusions seem relatively insensitive to changes in specification, time period, and the countries included in the sample.

Other hypotheses discussed in the preceding section fare less well. Wealth effects seem to be either insignificant or perverse. Inflation, which was expected to increase measured saving because of the omission of real capital losses on nominal assets, is generally insignificant. There is strung evidence that the current account matters for developing countries’ private saving, although, given the identity linking the two variables, the evidence should be treated with caution. Moreover, the current account variable was not considered a legitimate regressor for industrial countries, which do not typically face exogenous financing constraints. As for the terms of trade, there is generally a positive coefficient on this variable, but it is only significant when a sufficiently long data period is used.

The Implications for Saving of Projections for Selected Variables

The estimated equations can be used to examine the prospects for saving in the future by focusing over the longer term on slow-moving variables that are easier to forecast. In particular, the results for both industrial and developing countries suggest that saving is significantly influenced by demographic factors, economic growth, relative per capita income, and government fiscal positions. Another important factor in evaluating the prospects for world saving is the change in the relative size of the countries concerned; if high-saving countries both continue to grow faster than other countries and maintain their high saving, world saving will rise.

Population projections from the United Nations (UN) were used to investigate the impact of changes in the dependency ratio. The fraction of the elderly in the population is relatively predictable for industrial countries as it is mainly influenced by the behavior of birthrates many years before, rather than by changes in life expectancy. While a gradual increase in life expectancy is normal, large changes are unlikely in the absence of major wars, epidemics, or medical discoveries, as the effect of improved public health in extending life has been largely exploited (although its full effect in increasing the proportion of those over the age of 75 has not yet been observed). Projections for the number of elderly in the population for developing countries are somewhat more uncertain, both because of the heterogeneity of the countries concerned and because life expectancy is considerably lower at present than in industrial countries. Moreover, when the dependency ratio also includes the young, as it does in the regression equations reported above, the projections are much more sensitive to future fertility rates, which are also uncertain.

Charts 4 and 5 give the UN projections for industrial and developing countries, respectively. The extent to which they diverge is striking, with industrial countries showing a marked increase in dependency ratios and developing countries exhibiting a trend decline, at least until 2025. Given the coefficient estimated in the combined panel regression and the projected relative sizes of the two country groups, these divergent trends would imply that saving rates could be expected to fall by percent of GDP in 2025 relative to 1995 in industrial countries but rise by 4 percent of GDP in developing countries and by ⅔ of 1 percent worldwide (Table 11).27 It is interesting also to note differences across countries. Japan’s population is expected to undergo a larger increase in its dependency ratio than other industrial countries (Chart 4, top panel), which will produce a larger fall in its saving rate.

Chart 4.Industrial Countries: Dependency Ratios

(In percent)

Source: United Nations, World Population Prospects, 1992.

Chart 5.Developing Countries: Dependency Ratios

(In percent)

Source: United Nations, World Population Prospects, 1992.

Table 11.Sensitivity of Projections to Selected Factors(Changes in percentage points of GDP)
Changes in Saving Rate Relative to 1995
200020052010201520202025
Effect of projected changes in dependency ratio on private saving
Industrial countries-0.01-0.05-0.26-0.64-0.98-1.37
Developing countries0.841.872.963.844.174.16
World0.120.340.580.760.800.68
Effect of projected relative per capita income and growth rate changes on private saving
Industrial countries-0.50-0.95-1.27-1.53-1.76-1.96
Developing countries0.761.642.663.784.966.07
World-038-0.62-0.62-0.41-0.010.51
Composition effect of changing GDP shares on aggregate private saving
Industrial countries0.100.140.140.120.090.05
Developingcountries0.541.041.511.942.272.64
World0.541.121.732.373.023.63
Source: IMF staff estimates.

These projections are subject to a number of uncertainties. It may not be appropriate to measure the dependency ratio in the same way for the two sets of countries. The effective retirement age is probably lower for developing countries, as mortality rates are higher and life expectancy is lower. The proportion of the aged is increasing in developing countries in the projection period, but this trend will be offset by a decline in the number of young (see bottom panel of Chart 5). Using a broader definition of the elderly would produce a smaller decline or an increase in the developing country dependency ratio. Moreover, if the impact of the old on saving is larger than that of the young, as some researchers have found, the net effect of the demographic trends could be a fall of the projected saving rate in developing countries.28

Per capita GDP for each country was projected by combining the average growth rate over the period 1997-2000 in the World Economic Outlook’s medium-term projections, with the assumption that growth rates will converge as per capita income rises toward U.S. levels. Rather than a forecast, this is intended merely to understand the effects of a continuation of current trends.Chart 6 plots the resulting values for per capita income by subgroup, relative to the United States, It can be seen that a continuation of faster growth in developing countries permits a catch-up in per capita income, from an average of 12 percent of the U.S. level for developing countries in 1995 to 35 percent in 2025.29 The panel regressions for private saving attribute an effect to relative per capita income that is nonlinear: for low- and middle-income countries, an increase in relative per capita income tends to raise saving; for those countries closer to the U.S. level (in particular, those that are within about 60 percent of it, including most industrial countries), the effect is negative. Growth also has a small but significant direct effect on the panel regression for saving. The growth coefficient of 0.11 implies that the projected saving rates will be higher, the higher is projected GDP growth. The assumed slowdown in GDP growth relative to 1995 in itself would lower saving rates in the future by a small amount (only about 0.1 percent of GDP). The net effect of projected GDP on world saving, which depends on both the per capita income distribution across countries and the direct growth rate effect, would be to raise saving by half a percentage point in 2025, with a rise in developing countries more than offsetting a decline in industrial countries (Table 11).

Chart 6.Per Capita Income Relative to the United States

Source: IMF staff estimates.

The projections for population (Chart 7) and for per capita income also imply evolving shares of world GDP. These weights are needed to assess the actual flow of saving resulting from the predicted saving ratios. These calculations are done country by country and then aggregated. To indicate the importance of this factor-the composition effect each country’s saving ratio was kept at its 1990-93 average, but the GDP weights were modified in the manner described. The results are shown in Table 11. It can be seen that the composition effect tends on balance to raise world saving because the high-saving countries grow faster than the others. The amount of the increase, about 3.6 percent of GDP, is substantial.

Chart 7.Population Growth

(Five-year percent changes)

Source: United Nations, World Population Prospects.

These positive developments for world saving come mainly from a rise in saving in the developing countries, as unfavorable demographics and rising per capita income relative to the United States would imply a large decline in saving in industrial countries. It is important to recognize, however, how much the results for developing countries depend on one country, China, which currently has a very high real growth rate (about 10 percent) and a high national saving rate (about 35 percent of GDP). Even though the illustrative calculations assume some decline in China’s growth rate, a continuation of relatively rapid growth for several decades could well prove to be optimistic. Moreover, there may be cultural or political factors not captured in the regression coefficients that could lead to a decline in China’s saving. If China were excluded from the set of countries for purposes of the calculation, the demographic effects in Table 11 would be little changed; however, the effect on developing country saving of relative per capita income and growth rate changes would fall to less than 3 percent from the 6.07 percent indicated in the table, while the composition effect would show an increase of only about half a percentage point, not 2.64 percent.

A final factor that is relevant for both private and national saving is the evolution of taxes and government spending. As there is only a partial offset on private saving of government dissaving, a reduction in the fiscal deficit through tax increases would raise national saving by an amount equal to 40 percent of that reduction.30 A reduction in the deficit owing to spending cuts would induce a private saving offset of only 0.3 and, hence, increase national saving by more, namely, 70 percent of the deficit reduction Table 12 gives the implied effects on national saving of eliminating government deficits by either tax increases or spending cuts. If deficits were to be reduced to zero by tax increases, national saving rates relative to 1990-93 would increase by about 1.2 percent of GDP in both industrial countries and developing countries, while a similar reduction through spending cuts would increase national saving by about 2.2 percent of GDP.

Table 12.National Saving Rates Implied by Assumption of Different Fiscal Policies(In percent of GDP)
Memorandum ItemDeficit-Reduction Scenarios
1990-93 actualBy tax increasesBy spending reduction
Industrial countries
Fiscal deficit3.20.00.0
National saving19.720.821.9
Developing countries
Fiscal deficit3.30.00.0
National saving26.828.029.0
World
Fiscal deficit3.30.00.0
National saving21.522.723.7
Source: IMF staff estimates.

It should be emphasized that these calculations are not intended as a forecast of what will happen but are rather a way to examine the sensitivity of projections to various factors. Demographic factors and growth are both projected to depress saving in the industrial countries. However, the positive effects on developing countries offset this downward tendency. Finally, government deficits will be important determinants of saving.

Concluding Remarks

Several conclusions emerge clearly from the regressions, despite some heterogeneity in the results between industrial and developing countries, and, within the latter, among different income groups. First, there seems to be a substantial offset of changes in the government fiscal position from private saving—of the order of 30-60 percent—depending on whether those changes are due to government spending or tax changes, respectively. While this offset is large, it is considerably below unity, implying that changes in the government’s fiscal position can have a significant impact on national saving. Thus, prospects for world saving depend importantly on decisions with respect to fiscal policies.

Another conclusion that can be drawn from both country groups’ estimates is that demographic effects are an important determinant of private saving rates. The size of the effect of the dependency ratio on private saving is somewhat lower than in most previous studies that found a significant saving impact from demographic variables. Nevertheless, the results suggest that the projected aging of the population in most industrial countries will generate significant downward pressure on private saving rates over the next three decades. Developing countries show an opposite trend in the overall dependency ratio, despite an increase in those over the age of 65, owing to a decline in the proportion of those under the age of 20. Provided that these two age groups have the same effect on aggregate saving, the net effect on world saving would be a small positive figure.

The results identify a number of channels through which growth influences saving. A direct positive association between GDP growth and private saving emerges from most of the specifications, although it is unclear whether there is a causal effect in either direction or a joint response to a third factor. There is also a suggestive result concerning the level of per capita income (relative to the United States) and saving. For developing countries, the level of this variable has a generally significant positive effect, but the square of the level has a negative effect, implying that beyond a certain point higher income has a negative effect on the private saving rate. The industrial country panel estimates, which suggest a negative level effect (the squared term was not significant), are consistent with this finding, as are the results of the combined panel. Given the distribution of per capita incomes, a continuation of growth trends has positive and negative effects through this channel, but the positive effects on world saving dominate. Finally, a composition effect of the changes in the relative sizes of the countries concerned can also affect the aggregate rate of saving. If countries with high saving rates continued to grow faster, their increasing share of world output could induce an upward trend to world saving of several percentage points. However, such a favorable outcome is very sensitive to assumptions concerning one country, China.

The real interest rate seems to have a positive, and significant, coefficient for industrial countries and for the combined panel. Though there clearly are measurement problems related to the choice of the appropriate interest rate and measure of inflation-and this may in particular affect the results for developing countries, which did not show a significant coefficient—it appears that a shift to increased investment, to the extent that it raised interest rates, could induce higher global saving through this channel.

Changes in the terms of trade were also found to have a significantly positive effect on saving, both for industrial and developing countries. Clearly, the deterioration in many countries’ terms of trade owing to the oil price shocks of 1973 and 1979 had large effects in reducing their saving rates, and, conversely, the improvement in oil exporters’ terms of trade increased their saving, at least for a time. However, the effect is transitory, and, because terms of trade changes balance out at the world level, there is no presumption that this variable will durably affect world saving. An additional external factor that negatively affects private saving in developing countries is the level of foreign saving. As in the case of the government fiscal position, however, the offset is only partial. Thus, greater availability of foreign saving should help contribute to higher investment in these countries.

Clearly, many interrelated factors combine to generate observed saving behavior. With respect to the future, two factors stand out as being of particular importance. First, aging populations in the industrial countries appear likely to put downward pressure on their saving rates over the next few decades. Even if this decline in industrial country saving is offset by increases in saving in the developing world, which is by no means certain, this trend in industrial countries implies significant changes in the location and structure of world saving. Second, the simplest and most direct way in which governments can boost national and worldwide saving is by reducing their fiscal deficits.

Appendix Measurement Issues

The main reason for using private, not household, saving is related to the adequacy of the data. As the government sector is usually fairly clearly delineated, private spending and saving can be calculated residually. Measuring the household sector is more difficult because it requires a further split, whose dividing line is less clear. In particular, this measurement requires a judgment about whether to include unincorporated businesses in the household or the business sector. Especially in countries at early stages of economic development and where agriculture is important, it may be impossible to separate such unincorporated businesses from the household sector. Their treatment differs across countries, with the result that household sector data are not comparable. Another reason for using private saving is that, even for incorporated businesses, decisions to make transfers in the form of dividends or to acquire assets or debt will reflect the interests of shareholders. Conversely, households may adjust their saving behavior in response to changes in corporate saving behavior. Such offsetting changes are likely to make household and business saving more difficult to explain than total private saving, although cyclical variations in corporate profits may make private income more variable than household income.

No attempt is made to adjust private saving as measured by the national accounts to approximate better the change in private net worth. Various adjustments have been made by others, but the conclusion of that work has generally been that the evolution of saving is not affected in a major way (for example, Bosworth (1993) and Dean and others (1990)),31 and that the ranking of countries as low or high savers is generally independent of these adjustments (for example, Horioka (1993)).32 However, it must be recognized that national accounts measures of saving are subject to substantial error, even relative to what they purport to measure (Elmeskov, Shafer, and Tease (1991)).

A number of other adjustments have been made by various authors. Net saving, instead of gross saving, has been calculated by subtraction of the depreciation of the capital stock; however, capital consumption is poorly measured and not comparable across countries (Blades and Sturm (1982)). The two saving series in any case show similar trends. Purchases of consumer durables have for some countries been included in saving, and their services in consumption, but this is difficult to do across a range of countries because of lack of data. In order to adjust properly for capital gains and losses on assets, including the capital loss on unindexed government debt owing to inflation, detailed information is needed about asset holdings; furthermore, saving that includes such adjustment is much more variable than the unadjusted data, suggesting that it would also be more difficult to explain.33 Other possible adjustments would be to include education and research and development expenditure in investment (and saving) rather than in current spending.

Industrial Country Data

Most of the data come from the World Economic Outlook database, supplemented in some cases by OECD sources.

Private saving: World Economic Outlook database except for Portugal, which was derived from the OECD Analytical Database.

General government fiscal surplus: either the World Economic Outlook database or OECD Analytical Database, depending on the availability of historical numbers. In some cases, central government numbers were used to infer historical general government values.

General government current expenditures: calculated as total general government expenditures (World Economic Outlook database) less general government investment.

General government investment: most series from the World Economic Outlook database. However, in some cases, the OECD Analytical Database was used. This is most important in the case of the United States, whose national accounts define all government spending as consumption. The OECD source was used in this case as it measures government investment in the United States in a manner compatible with the conventions used in other countries.

Real GDP: World Economic Outlook database.

Inflation (rate of change of consumer price index): World Economic Outlook database.

Real interest rate: short-term rate minus current inflation (from the World Economic Outlook database).

Private wealth: calculated as the sum of the beginning-of-period capital stock (from the OECD Analytical Database where available), otherwise cumulated investment, government debt, and net foreign assets. Some of the historical values for net foreign assets were calculated by cumulating current account values backward from the earliest available net foreign asset figures.

The terms of trade: calculated as the ratio of unit values from total exports and total imports, using series from the World Economic Outlook database.

Per capita income: calculated by using purchasing power parity exchange rates from the World Economic Outlook database.

Dependency ratio: calculated from data in the United Nations’ World Population Prospects, 1992.

Developing Country Data

The data source for the developing countries is the World Economic Outlook database except for the interest rate, where the IMF’s International Financial Statistics has been used in the case of some countries to extend the data. These include China, Myanmar, Israel, Paraguay, Bhutan, Oman, and Liberia. Ft Uruguay, the data are entirely from International Financial Statistics.

The regressions on national saving include 64 developing countries. The countries in each group (ranked by per capita income) are as follows:

High-income countries: Singapore, Hong Kong, Cyprus, Israel, Oman, Malta, Korea, Venezuela, Malaysia, Gabon, Mauritius, Uruguay, Mexico, Chile, Algeria, Brazil, Argentina, Costa Rica, Turkey, Colombia, and Thailand.

Middle-income countries: Fiji, Tunisia, Panama, Jamaica, Ecuador, Islamic Republic of Iran, Paraguary, Pern, Morocco, Egypt, Guatemala, Sri Lanka, Indonesia, Philippines, Lesotho, Ghana, El Salvador, Cameroon, Pakistan, Nigeria, and Zimbabwe.

Low-income countries: Honduras, Bhutan, China, Mauritania, Benin, Nepal, Kenya, Central African Republic, India, Bangladesh, The Gambia, Liberia, La People’s Democratic Republic, Mozambique, Rwanda, Burundi, Niger, Mali, Burkina Faso, Malawi, Myanma and Chad.

The regression results reported for private saving include the following 40 countries: Cyprus, Oman, Malta, Korea, Venezuela, Malaysia, Gabon, Mauritius, Uruguay, Chile, Algeria, Costa Rica, Turkey, Colombh Panama, Jamaica, Ecuador, Islamic Republic of Iran, Paraguay, Morocco, Egypt, Indonesia, Lesotho, El Salvador, Cameroon, Nigeria, Zimbabwe, Honduras, China, Benin, Nepal, Kenya, Central African Republic India, Bangladesh, The Gambia, Rwanda, Burundi Mali, and Burkina Faso.

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Aghevli and others (1990) provide a literature survey and discuss the evolution of saving in industrial and developing countries. See also the survey in Deaton (1992).

The wages and salaries of those involved in doing research and development are typically excluded from investment in the national accounts.

Measurement issues are discussed in the appendix.

This is also the choice of Lipsey and Kravis (1987), who compare different measures of saving. Auerbach and Hassett (1991. p. 93), among others, find evidence that households “pierce the corporate veil” and lake fully into account business saving when making their consumption decisions.

Maddison (1992) compares II territorial entities (8 countries now classified as industrial, plus India, Korea, and Taiwan Province of China) since 1870. His data suggest that national saving rates after World War II were unusually high from an historical perspective, and that the recent declines have to be interpreted in that context.

The aggregation uses weights that change with movements in relative GDPs, which are converted to a common currency via exchange rates based on purchasing power parity. As fast-growing countries typically have had higher saving rates, the aggregate saving rate can show an upward trend because high-saving countries are becoming more important, even if saving rates in individual countries are unchanged.

See, for instance, The Theory of Interest (Fisher (1930)), where optimal consumption in a two-period context is derived. Ramsey (1928) calculates optimal national saving behavior on the basis of an infinite horizon.

See, however, Evans (1988). Seater (1993) concludes that the evidence supports the hypothesis, although he recognizes that different government behavior could imply non-Ricardian equivalence in the future.

Financial liberalization in a given country may also expand the international diversification possibilities of other countries, making their saving more responsive to foreign interest rates

See Modigliani (1988) and Kotlikoff (1988), among others.

The literature on this subject is surveyed by Smith (1990).

A preliminary attempt to assemble such information (though not an a strictly comparable basis) for the seven largest industrial countries is presented in Poterba (1994).

The 23 industrial countries, excluding Iceland and Luxembourg, See appendix for data resources.

The private wealth variable includes the stock of government debi. To the extern that individuals are Ricardian, however, this debt should not be included in private wealth. Results when the slock of government debt was included in the specification as a separate variable were very similar to the main case and are not reported.

Separating the overall dependency ratio into dependency ratios for the young and the old gave coefficients thai were not significantly different.

See Kessler, Perelman, and Pestieau (1993) for a more detailed description of this approach. Briefly, the varialion over lime is calculated by summing the individual variances across countries, on the assumption that each country has a different mean. The cross-sectional variation is calculated as the variance across these country means multiplied by the number of time periods. The two measures sum to the total variation.

Similar results were found by using an alternative proxy for the inflation bias in the national accounts measures of saving, namely, the product of the inflation rate and the general government debt ratio. This alternative proxy was used because it is a measure of the increase in private saving required to keep the real value of claims on the government unchanged.

Regressions including time dummies for each year produced broadly similar results.

The instrumental variables chosen for each country were time dummies, the first lags of the fiscal surplus, the ratio of government current spending to GDP, and the real interest rate, as well as contemporaneous values of the change in the terms of trade, inflation, per capita GDP relative to the United States, and the dependency ratio. Contemporaneous values were used for these latter variables as they were regarded as exogenous to the simultaneity issues being investigated.

When the impact of differing country intercepts is included, over 70 percent of the total variation in saving is explained.

Because the current account includes net private and official transfers, it excludes foreign aid as a measure of foreign saving. In any event, data on foreign aid were not available on a balance of payments basis and the estimations reported below thus do not test for the effect of foreign aid on national saving.

Data on central rather than general government were used as the latter were not available for many countries.

As was done for the industrial countries, youth and elderly dependency ratios were first included separately and then combined into a single variable, as the coefficient on the elderly dependency ratio was not well determined (perhaps reflecting the very small proportion of the population in this age group).

However, this may partly result from data problems, as national saving is calculated as the sum of domestic investment and the current account deficit. Therefore, the estimated coefficient of the current account surplus will be biased if that variable is itself influenced by national saving or if–as is quite likely–it contains measurement errors that also affect the calculation of national saving.

Available scries include the government balance, government current and investment expenditures, and wealth (all as a ratio to GDP), the growth in real output, the real short-term interest rale, inflation, the change in the terms of trade, per capita GDP relative to the United States and its square, the current account surplus as a ratio to GDP, and the dependency ratio.

As noted above, this result understates the explanatory power because it ignores the contribution of separate country intercepts.

Individual country effects are aggregated by using GDP weights (because total saving is derived from saving rates in that way); however, the aggregation in Charts 4 and 5 is based on population weights.

See World Bank (1994b) for a discussion of problems arising from aging populations. World Bank projections show an increase in the proportion of those over the age of 60 in the populations in both industrial and developing countries. By 2030, that proportion is expected to be 31 percent for the former and about 15 percent for the latter, excluding Eastern Europe and the former Soviet Union (World Bank (1994b, Table A2))

The rankings of what are initially low- and middle-income countries change as a result of faster growth in the former group, in particular, China.

Using the combined panel’s coefficient estimate on the fiscal position of -0.6.

However, the inflation adjustment to saving changes a decline in U.S. saving into an increase when comparing the 1980s with the 1970s.

However, Lipsey and Kravis (1987) find that adjustment for consumer durables eliminates a good part of the measured saving rate difference between the United States and an average of 11 other industrial countries.

For instance, measured saving rates in most countries showed little movement after the substantial loss of wealth caused by the 1987 stock market crash, and, in Japan, private saving was little affected by the tremendous rise in wealth (and subsequent fall) resulting from the property price bubble in the late 1980s.

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