High Savings Rates and Asia's Economic Crises

A High Rate of Saving Does Not Guarantee High Growth

A high rate of saving among Asians was once credited for its important contribution to the remarkable performance of their “miracle” economies. But Japan’s recession and China’s deflationary cycle indicate that a high rate of saving does not guarantee high growth. This is because high savings reduces overall spending by households and companies. It may also lead to high public and private debt owing to relatively low borrowing costs.

It has become clear that neither aggressive investment spending nor high saving rates can guarantee sustainable growth. High savings should be now interpreted as a symptom of despair in some of East Asia’s economies. In particular, uncertainty over the future has raised savings rates in China and Japan while also contributing to deflation in both countries.

In much of East Asia, a considerable part of the investments over the past decade evaporated in a property bubble or disintegrated into excess capacity of production facilities. This destruction of wealth represents one of the greatest daylight heists in modern time.

As many of the region’s economies are reviving from slowdowns or full-blown recessions, uncertainty about the future is inspiring many Asians to save even more money. Obviously, the increase in savings means there is less buying. In turn companies find themselves holding growing inventories and earning lower profits as they resort to the price-cutting necessary to shed unwanted stockpiles. At the same time, there will be reductions in employment that induce households to begin another cycle of saving more and spending less.

In South Korea, according to estimates from the Asian Development Bank and International Monetary Fund, where unemployment moved toward an all-time high of 2 million, or just over 9 percent, gross national savings rose to over 35 percent of GDP in 1998 from about 33 percent in 1997. The figure for Japan is about 27 percent, just over 30 percent for Hong Kong, and over 45 percent for Malaysia and Singapore, while in Thailand savings are 34 percent of GDP.

Similar results are being observed in China. Although always high (about 44 percent), its marginal saving rate climbed substantially during 1999. Pressures from declining prices induce households and businesses to defer spending.

Japan’s saving rate is likely to continue to remain high and perhaps be pushed higher. Households there have ignored rising public expenditures, entreaties from political leaders, even free sales vouchers. Instead they continue to add to their savings. There is little wonder why.

Japanese workers do not spend because they are worried about whether they will lose their jobs. And then demography works against rising consumption owing to Japan’s swelling ranks of elderly who are not big spenders in any country. Facing huge bills for recapitalizing Japan’s banks and for the additional government spending, taxpayers must put away funds in anticipation of rising taxes in the future. Young Japanese are finding fewer prospects for employment, and many may face a difficult choice to emigrate. In this tough environment of tight-fisted consumers, it is difficult imagining businesses wishing to invest. Even were they willing or able to expand, the banking crisis makes it unlikely that they would find banks willing to lend.

And so it is domestic woes that have been the undoing of countries that staked their economic futures on exports. As a consequence of their neo-mercantilist approach to development, most East Asian economies had two distinct sectors. Their international sectors tended to be modernized and geared up to meet and beat competition from global competitors, while the domestic sectors tended to be much less open to competition. In some cases this was due to restrictions on foreign ownership and investments, while in others there were tariff and nontariff barriers to trade.

Shielded from Competition

Consequently, companies operating locally often found themselves shielded from internal and external competition. Years of protection behind regulatory walls kept them from being cost conscious or stripped them of incentives to innovate. As in most economies, their domestic sectors were the largest component, and it is this sector that is pulling these economies down and holding them back from full recovery to a sustainable growth trajectory.

Political leaders seeking to see their countries escape the economic doldrums need to understand there must be massive restructuring of their domestic sectors. At the same time, there should be an overhaul of their “institutional infrastructure” to make their economic policies more compatible with the requirements for successful engagement with the global economy.

This also involves abandoning reliance on their export-led, neo-mercantilist development policies. Policymakers must be made to understand that the principal advantages from trading are not from exporting. Instead, trade is mostly beneficial because purchases by producers and consumers from the least-cost provider bring about increases in competition and efficiency that promote economic growth.

Import-led growth arises from foreign competitors’ imposing pressures on domestic producers that must become efficient to survive. When these improvements lead to gains in labor productivity, wages rise and provide the basis for higher consumption. Productivity gains also lower unit costs while allowing growth in profits to enhance shareholders’ wealth that can boost consumption and investment.

And then the benefits begin to extend to the international sector. Allowing inputs or intermediate goods to be imported for the export sector leads to lower operating costs. As production costs fall and productivity increases, the capacity to sell in a competitive export market rises. As domestic multinational enterprises experience rising profits, they are able to shop around for overseas production facilities and better sources of raw materials.

East Asia’s economies have to undergo a radical transformation that focuses on inward development through a further opening and liberalization of their trade and financial markets. Savers deserve higher returns on their assets. This will inspire greater efficiency arising from competition and provide a solid base of domestic demand to ensure sustainable economic growth. Ironically, the clearest signals of recovery for East Asia’s economies will be when savings decline and imports rise.