Evolution of Saving and Investment

This section examines historical data spanning 2000 to 2008 on the saving and investment (S-I) balance at the macroeconomic level for the Asian tiger economies. In addition, we present the sectoral composition of saving and investment when such data are available. Figure 1 [ PDF 15.4KB | 1 page ] depicts the trends in overall gross national saving and gross investment, while Figure 2 [ PDF 12.7KB | 1 page ] shows the overall current account balance for the grouping.²

The overall gross national saving rate remained high at an average rate of 31% of GDP in the last decade. Such a high level of savings could be attributed to key factors that influence long term development in private saving rates such as economic growth, demography, and the level of financial uncertainty faced by households (see Loayza et al., 2000). Over the same period, overall gross investment hovered around a lower mean level of 26% of GDP. Possible explanations for the lower post-Asian crisis level of investment include the relocation of production facilities from the Asian tigers to PRC as well as the shift in emphasis from capital intensive production to information technology (IT) and knowledge-based economy (IMF, 2005). In any case, both the saving and investment rate fell in 2009 by about 3% and 5%, respectively, in the aftermath of the global economic crisis. The resulting S-I balance stayed positive throughout the period and widened by only 2% of GDP over the past decade. Concomitantly, the current account balance climbed from 3.5% of GDP in 2000 to nearly 6% of GDP in 2010 (see Figure 2 [ PDF 12.7KB | 1 page ]).

Do these movements in overall rates mask variations across the countries? In what follows, we provide a series of charts that give an overview of the evolution of saving and investment in the individual countries. Figure 3 [ PDF 17.5KB | 1 page ] depicts the trends in gross national saving and gross domestic investment, while Figure 4 [ PDF 16.6KB | 1 page ] shows the current account balance. Each figure (and relevant ones that follow) comprises charts a to d that show the corresponding figures for Hong Kong, China; Korea; Singapore; and Taipei,China, respectively.

Figures 3b and 3c reveal that the S-I balance first increased and then narrowed over the last decade for both Korea and Singapore. In Korea, gross domestic investment overtook gross domestic saving, producing a negative current account balance in 2008 (see Figure 4b). In comparison, the S-I balance for Hong Kong, China and Taipei,China broadened between 2000 and 2008. In particular, Hong Kong, China's S-I gap widened considerably from 4% to 14% of its GDP over this period. From the external perspective, the charts in Figure 4 show that the current account surplus in Hong Kong, China exhibited the most persistent climb over the last decade.

A better understanding of the determinants of the trends in gross saving and investment would require a breakdown of the macroeconomic level data into sectoral level data. Unfortunately, published data on the composition of saving and investment in terms of government, corporate and household sectors are available only for Korea. While the dichotomy between public and private domestic investment is available for the three other Asian tigers, there are no official data on public and private saving. To gain a tentative indication of the trends in public versus private saving rate, we compute public saving as the difference between total government revenue and government consumption. Private saving is then estimated as the residual from gross saving. The evolution of gross national saving and its various components for the individual economies are plotted in Figure 5 [ PDF 17.7KB | 1 page ], while the corresponding charts for investment are found in Figure 7 [ PDF 17.9KB | 1 page ].

We observe from Figures 5a and 5d that gross national saving in Hong Kong, China and Taipei,China rose by 3% and 4% of GDP, respectively, over the last decade. While the increase in Hong Kong, China was largely driven by public saving which went up by more than 2% of GDP, it was private saving which rose by 8% of GDP that led to higher gross saving in Taipei,China. By contrast, gross national saving in Korea fell from 33% of GDP to 31% of GDP between 2000 and 2007 as household saving more than halved from 9% to 4% (see Figure 5b). Government saving held steady at around 10% of GDP while corporate saving increased by 3% of GDP over the same period. As for Singapore, there was hardly any change in gross national saving between 2000 and 2008 (see Figure 5c). Public saving, which tended to be the driving force of the saving process in Singapore, fell by about 6%, but this was completely offset by an increase in private saving.

A further disaggregation of private saving into household and corporate saving for Hong Kong, China; Singapore; and Taipei,China is hampered by data limitations. Nonetheless, IMF staff estimates of household and corporate savings as a % of GDP from 2000 to 2007 are available for a grouping called “Emerging Asia” which comprises the four Asian tigers and some other regional countries, namely India, Indonesia, Malaysia, the Philippines, Thailand, and Viet Nam (IMF, 2009b). These estimates are plotted in Figure 6 [ PDF 13KB | 1 page ], which shows that household saving climbed by over 3% of GDP while corporate saving rose by less than 1% of GDP between 2000 and 2008. The figure suggests that in the more recent period neither the corporate sector nor the household sector played a dominant role in determining private saving in emerging Asia. The same IMF study advocates the strengthening of corporate governance and the deepening of financial market development in the regional countries to induce a reduction in corporate savings as well as boost consumption, thereby fostering global rebalancing.

Turning to investment rates, fluctuations in investment from 2000 to 2008 also differ somewhat across the Asian tiger economies (see Figure 7 [ PDF 17.9KB | 1 page ]). Gross domestic investment exhibited a downward trend over the past decade for Hong Kong, China and Taipei,China. The decline in both countries can be attributed to a drop in public investment and in the case of Hong Kong, China a slip in private investment as well. By contrast, gross domestic investment in Korea held steady over the period and its composition remained broadly unchanged from 2000. As for Singapore, the gross domestic investment initially slowed and then picked up, despite a continuous decline in public investment. Singapore's high private investment rate is partly due to its development strategy of attracting export-oriented foreign firms.

How do these developments in the S-I balance of the Asian tigers relate to fluctuations in the value of their domestic currency? A higher exchange rate value makes local goods dearer in foreign currency terms and, at the same time, foreign goods cheaper in domestic currency terms. Hence, an appreciation of the domestic currency is expected to dampen exports and boost imports, effectively reducing the trade surplus. Since net exports form the main component of the current account surplus in these economies, a domestic currency appreciation would tend to narrow the positive S-I balance. Is this relationship evident in practice? Figure 8 [ PDF 18.6KB | 1 page ] depicts the real effective exchange rate superimposed on the S-I balance from 1990 to 2009 for the individual economies.

A visual inspection of the charts suggests an apparent negative association between the level of real effective exchange rate and the magnitude of S-I balance. In general, a lower level of the real effective exchange rate tends to be associated with a higher level in the S-I balance. This negative relationship is particularly evident in the case of Hong Kong, China and Singapore, and is discernible for Korea. Figure 8a reveals a persistent decline in the Hong Kong, China dollar in real effective terms over the past decade. During this period, the S-I balance in Hong Kong, China rose steadily. The real effective exchange rate of the Singapore dollar initially fell reaching a trough in 2005 and then started to climb as shown in Figure 8c. Interestingly, the magnitude of the S-I balance in Singapore seems to mirror these movements in the exchange rate but with a lag. The strengthening of the Korean won in real effective terms picked up pace after 2004 accompanied by a lowering of the S-I balance in the recent period (see Figure 8b). Taipei,China is the only exception. We see from Figure 8d that the depreciation in its real effective exchange rate does not appear to have a consistent relationship with the level of the S-I balance.

However, when considering the magnitude of response of the S-I balance to exchange rate changes, the relevant relationship to focus on is not between the levels of the variables but between the movements in these variables. For a tentative indication of the strength of linear association between changes in S-I gap and changes in the real effective exchange rate, we examine the cross-correlation coefficients between the first differences of the two variables for the individual economies as depicted in Figure 9 [ PDF 16.9KB | 1 page ]. Firstly, we observe from Figure 9 that the correlation coefficients at leads are in general not more significant that those at lags, implying that fluctuations in real effective exchange rate do not exhibit a dominant leading relationship over changes in the S-I balance in all four economies. Secondly, the correlation coefficients occurring at lead time are not predominantly negative. These findings suggest that a depreciation of the real effective exchange rate in the Asian tigers may not necessarily be linked to an increment in the S-I balance in the short run.³

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