Appendix III Domestic Savings, Foreign Savings, and Investment
- Donald Mathieson, Eliot Kalter, Maxwell Watson, and G. Kincaid
- Published Date:
- February 1986
This appendix examines the relative sizes of domestic and foreign savings and their contributions to the financing of domestic investment during 1967–84. The exercise covers the groups of industrial countries and the capital-importing developing countries. The capital-importing developing countries are further divided into market borrowers, including the major borrowers, and official borrowers. Because consistent data on domestic savings, foreign savings, fiscal imbalances, and investment are not available for all countries over the period 1967–84, this analysis is based on a sample composed of 18 industrial countries and 50 developing countries.38
There are a number of insights concerning the international pattern of savings and investment flows which are evident in developments during 1967–84. First, while individual industrial countries have at times experienced large capital inflows or outflows, the capital account imbalances for the group as a whole have varied between surpluses or deficits equivalent to less than I percent of their combined incomes or 3 percent of domestic savings. However, during 1983–84, some industrial countries experienced relatively large current account deficits (e.g., the U.S. deficit equaled $93 billion in 1984) and surpluses (e.g., Japan had a surplus of $36 billion in 1984), which made these countries significant users of foreign savings or suppliers of domestic savings to the rest of the world.
Second, although the major developing country groups received foreign capital inflows throughout the period, the size of these inflows relative to domestic savings or GDP varied sharply over time and across groups. For the market borrowers and major borrowers, the average ratio of foreign capital inflows to GDP increased by nearly one-half between 1967–72 and 1973–82, but then declined during 1983–84 to an average value below that of the late 1960s and early 1970s. As a result, foreign savings were equivalent to 8 percent of the groups’ domestic savings in the late 1960s, over 12 percent in the late 1970s, and less than 7 percent during 1983–84, In contrast, since 1967 foreign savings have represented an important component of total funds available to finance investment for official borrowers. The ratio of capital inflows to GDP averaged over 6 percent during this period and these inflows equaled, on average, nearly 51 percent of domestic savings.
Third, while the ratios of domestic savings to income have shown considerable variability during 1967–84, the industrial countries, market borrowers, and major borrowers showed little net change in their savings ratios over the entire period. In contrast, the ratio of domestic savings to GDP for official borrowers declined significantly.
Fourth, a significant part of the variation in domestic savings ratios has been associated with changes in the fiscal positions of central governments. For the market borrowers and major borrowers, this was in part evident in both the decline in domestic savings ratios as fiscal deficits grew during 1980–82 and the recovery of savings during 1983–84 as fiscal deficits declined.
Finally, the behavior of the ratios of investment to income has varied sharply across country groups. The investment ratios for the market borrowers and major borrowers first rose significantly between 1967 and 1975. By 1983 and 1984, however, they had declined to levels not very different from those prevailing in the late 1960s. In contrast, the investment ratios for the industrial countries and the official borrowers have been somewhat more stable.
Domestic and Foreign Savings
Since the late 1960s, foreign capital flows have often played an important role in financing investment and fiscal imbalances in both developed and developing countries. Naturally, the roles of foreign and domestic savings can be compared only if the two concepts are defined on a comparable basis. Since the usual measures of domestic savings—gross national or gross domestic savings—are broadly defined, net foreign savings (which could involve dissavings) must also be measured in a similar manner. A broad measure of a country’s use of foreign savings is given by its current account deficit, which represents the real transfer of resources that is financed by the rest of the world’s net accumulation of the country’s liabilities.39,40
While total domestic savings is typically measured as gross domestic product (GDP) less the sum of private and public sector consumption, its behavior can often be most usefully examined in terms of the differences between private and public sector savings. There are, however, no consistent data on overall fiscal deficits for all countries covering the period from 1967 to 1984. Even where fiscal data are available for this period, they generally represent the position of only the central government and do not incorporate the imbalances of local or provincial governments, or state enterprises. The scope of this problem varies from country to country and is often especially significant for countries with large state enterprise systems. Nevertheless, a rough division between domestic savings of the private and public sectors can be obtained by defining public sector use of total savings to equal the fiscal imbalance of the central governments.
Although foreign savings often reached significant levels for many countries during 1967–84, domestic savings was the most important and stable source of financing for domestic investment for all country groups. Industrial countries had the most stable ratios of domestic savings to GDP during 1967–84: their ratio remained within the range of 20 percent to 24 percent during that period (Chart 12).41 This group’s savings ratio declined from 24 percent in 1973 to 20 percent in 1982, before recovering somewhat during 1983 and 1984. As a result, the savings ratio for the industrial countries in 1984 was only about 1 percentage point below that prevailing in the late 1960s.
Chart 12.Gross Domestic Savings, 1967–84
Sources: World Bank; and Fund staff estimates.
Savings ratios of capital-importing developing countries exhibited more diverse behavior. The average ratio of domestic savings to GDP for the market borrowers and the major borrowers rose sharply during the 1970s and then declined significantly in the early 1980s. For the market borrowers, the domestic savings ratio rose from 22 percent in 1967 to approximately 26 percent during 1976–80 but then fell back to roughly 24 percent in 1983 and 1984. The major borrowers had a domestic savings ratio of 22 percent in the late 1960s that rose to approximately 25 percent by 1977 but declined to 23 percent in 1984. It is too early to tell whether these recent declines in the domestic savings ratios of the market borrowers and the major borrowers represent a new trend or merely a temporary downturn from the past upward trend.
These variations in domestic savings rates for the groups of market borrowers and major borrowers have at times been strongly influenced by changes in central government fiscal imbalances and thus by the level of public sector savings. As indicated in Chart 13, the fiscal deficits of the central governments of the market borrowers and major borrowers increased sharply relative to GDP between 1980 and 1982. reaching roughly 5 percent of GDP in 1982. During 1983 and 1984, however, net dissaving by the central government declined to 3 percent of GDP for the market borrowers and 2 percent for the major borrowers.
Chart 13.Fiscal Imbalances, 1967–841
Sources: World Bank; and Fund staff estimates.
1 A deficit is indicated by a negative value.
The domestic savings ratio of the official borrowers deteriorated sharply between 1967 and 1984. Their domestic savings ratio was 16 percent of GDP in 1967, and it reached a peak of 19 percent in 1969. However, since 1969, the domestic savings ratio has declined nearly continuously, reaching a level between 9 and 10 percent in 1981. Since 1981, there has been little movement in the ratio. The deterioration in the domestic savings performance of these countries reflected both relatively large fiscal imbalances and adverse domestic and external developments which reduced private savings. Although the size of these fiscal deficits relative to GDP declined in the late 1970s, they still averaged nearly 5’/2 percent of GDP in 1984. This lower level of domestic savings was, to a considerable degree, offset by larger foreign capital inflows (principally from official sources).
The capital flows recorded by industrial countries have been considerably larger in absolute terms than capital flows of developing countries. Nevertheless, the importance of foreign savings—as indicated by their size relative to GDP—generally has been much greater for developing countries than for industrial countries. In Chart 14, the ratio of the external current account balance42 (with sign reversed) to GDP is used to measure the relative scale of foreign capital inflows. A positive value of this ratio represents a net inflow of foreign savings, whereas a negative value represents a placement of domestic savings in foreign markets.
Chart 14.Foreign Capital Flows, 1967–841
Sources: World Bank; and Fund staff estimates.
1 Foreign capital inflows are measured by the size of the current account deficit (with sign reversed). A larger, positive value in this chart implies a larger current account deficit and a larger capital inflow. The current account balance is that on goods, services, and private transfers.
While the current account imbalances of the industrial countries have been at times quite large, the ratio of these imbalances to their income has generally been small. These flows (typically an outflow) represented less than 3 percent of this group’s domestic savings and less than 1 percent of their combined incomes. However, the combined current account imbalance of $35 billion in 1984 was the second largest since 1973, exceeded only by that in 1980 ($39 billion). Moreover, a distinction must be made between the positions of individual countries and the group as a whole. As noted before, some industrial countries have at times run relatively large current account deficits or surpluses and have therefore been significant users of foreign savings or suppliers of domestic savings to the rest of the world.
For developing countries, foreign savings have often represented a significant addition to domestic savings. The importance of these foreign inflows can be measured relative to both GDP and gross domestic savings. Net foreign capital inflows to the capital-importing developing countries amounted on average to nearly 3 percent of their GDP and 14 percent of domestic savings during 1967–84. Even in 1983 and 1984 when current account deficits declined sharply, foreign savings was equivalent to 11 percent of gross domestic savings. However, there was a considerable divergence between the experiences of different developing country groups. During 1967–82, the market borrowers had an average current account deficit of 3 percent of their combined GDPs, Viewed somewhat differently, foreign savings averaged nearly 13 percent of gross domestic savings during 1967–81 and amounted to nearly 23 percent in 1982. However, this capital inflow had fallen to less than 1 percent of GDP in 1984, and these flows added only the equivalent of 3 percent to available domestic savings.
The major borrowers’ reliance on foreign savings averaged 3 percent of their GDP during 1967–81. but reached 5 percent of their combined GDPs in 1982. Reflecting the adjustment efforts of these countries and the limited availability of external capital, this group recorded a balanced current account position in 1984.
The official borrowers have experienced relatively large foreign capital inflows since 1967. In the late 1960s, foreign capital inflows represented approximately 4 percent of GDP. These inflows rose to 13 percent of GDP in 1975 and remained at nearly 7 percent of GDP during 1982 to 1984. Given the deterioration in this group’s domestic savings ratio (Chart 12), official lending and transfers have played a vital role in maintaining investment. While foreign inflows had equaled 24 percent of domestic savings of the official borrowers in the late 1960s, this proportion reached 58 percent in the late 1970s and 71 percent in the 1980s.
While the ratios of gross capital formation to GDP that prevailed in 1983 and 1984 were not very different from those evident in the late 1960s (Chart 15), there has been considerable diversity of experience both between the groups of industrial and developing countries and within the groups of developing countries during the 1970s and early 1980s. The evolution of the industrial countries’ domestic savings and investment ratios has been quite similar, since the average net supply of savings to the rest of the world by industrial countries represented only a small proportion of their domestic savings or income. In contrast, the large reliance on foreign savings by developing countries during 1973–82 often allowed consumption and investment to expand simultaneously. When this occurred during certain periods in the 1970s, investment ratios rose more rapidly than savings ratios.
Chart 15.Gross Capital Formation, 1967–84
Sources: World Bank; and Fund staff estimates.
The behavior of the ratios of gross capital formation to GDP for different groups of developing countries in the period since 1967 is given in Chart 4. For the market borrowers and major borrowers, the domestic investment ratio rose erratically from the late 1960s until the mid-1970s. This rise in the investment ratios was supported by an increase in both domestic savings ratios (Chart 12) and foreign savings ratios (Chart 14). During the late 1970s, in contrast, the investment ratios for these country groups began to decline, while domestic savings ratios stabilized or declined slightly. Associated with these developments was a fall in foreign capital inflows. The decline in the investment ratio accelerated in the early 1980s as there were reductions in the flows of domestic savings and net foreign capital inflows relative to GDP. For the market borrowers, the investment ratio fell from 26 percent in 1981 to 21 percent in 1984; and, for the major borrowers, the ratio declined from 24 to 19 percent during the same period. As already discussed, this fall in the ratios of investment to GDP for the developing countries was somewhat cushioned by a recovery of domestic savings in 1984, which reflected reduced central government fiscal imbalances.
Note to Appendix III
The countries and territories included in the major country groups of the World Economic Outlook are listed below. Countries and territories for which there are savings, investment, capital flows, and fiscal imbalance data for the period between 1967 and 1984 are denoted by an asterisk.
Germany, Fed. Rep. of*
Antigua and Barbuda
Papua New Guinea
Trinidad and Tobago
Central African Rep.
Lao People’s Dem. Rep.
Sāo Tomé and Principe
Syrian Arab Rep.
Yemen Arab Rep
Yemen, People’s Dem. Rep. of
The note at the end of this appendix lists the countries that are included from each country group. Additional discussions of the relationships between capital flows, domestic savings, and investment can be found in World Economic Outlook, April 1985: A Survey by the Staff of the International Monetary Fund (Washington: International Monetary Fund, April 1985), pp. 63–67 and the World Development Report. 1985 (Washington: World Bank, 1985), pp. 43–70. The country classifications used in this appendix are defined in the World Economic Outlook. The market borrowers consist of those countries that obtained at least two thirds of their external borrowings between 1978 and 1982 from commercial creditors. The major borrowers are a subgroup of the market borrowers and are composed of the seven countries with the largest outstanding external indebtedness. Finally, official borrowers comprise those countries, excluding China and India, that obtained two thirds or more of their external borrowings between 1978 and 1982 from official creditors.
The financing of such a deficit could involve a reduction in the country’s assets, as well as an increase in foreign liabilities. This measure of the use of foreign savings does not rule out the possibility that these funds may be used to acquire external assets in the future. As will be discussed, the measure of the current account balance used in this paper is that of goods, services, and private transfers. An alternative definition would include official transfers.
Although the current account balance is a broad indicator of a country’s use of foreign savings, it is not traditionally measured on the same national income basis as gross domestic savings or gross domestic investment. Studies of the relationships between savings, investment, and current account balances have therefore used a variety of methods to ensure consistency between the three concepts. One approach has been to treat gross savings as a residual obtained by adding gross domestic fixed investments, changes in inventories, and the current account balances (see A, Penati and M. Dooley, “Current Account Imbalances and Capital Formation in Industrial Countries, 1949–81,” Staff Papers, International Monetary Fund (Washington, March 1984), Vol. 31, No. I, pp. 1–24). Alternatively, the current account balances have been calculated as a residual (see J. Sachs, “The Current Account and Macroeconomic Adjustment in the 1970s,” Brookings Papers on Economic Acliviry I. The Brookings Institution (Washington) 1981, pp. 201–68). Gross domestic investment could also potentially be the residual component. In this appendix, however, the actual data for all three concepts are represented in the charts.
For a listing of the countries and territories included in each group, see the note at the end of this appendix. The group savings ratio equals the savings ratio for individual countries weighted by the average U.S. dollar value of their respective GDPs over the preceding three years.
The current account balance is that on goods, services, and private transfers.