The determinants and long-term projections of saving rates in emerging Asia

Charles Yuji Horioka, Akiko Terada-Hagiwara 28 November 2011

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Governor Ben S Bernanke of the Federal Reserve Board has repeatedly warned of the dangers of global imbalances and a global saving glut and has asserted that the economies of emerging Asia have contributed to both global imbalances and the global saving glut by shifting from current-account deficits to current-account surpluses (Bernanke 2005, 2010, 2011). The economies of emerging Asia achieved this turnaround via a juxtaposition of buoyant saving and stagnant investment. Thus, high saving rates in emerging Asia play an important role in Bernanke’s story, and future trends in saving rates in emerging Asia have important implications for future trends in global imbalances and the global saving glut (see also Alfaro et al 2011 on this site).

In a recent paper (Horioka and Terada-Hagiwara 2011), we present data on trends in domestic saving rates in twelve economies in emerging Asia during the 1966–2007 period, analyse the determinants of those trends, and project trends in domestic saving rates during the next twenty years (2011–30 period).

The determinants of domestic saving rates in Asia

To summarise our main findings, we find that domestic saving rates in emerging Asia have, in general, been high and rising but that there have been substantial differences between countries (with domestic saving rates being high in East Asia, low in South Asia, and sometimes high and sometimes low in Southeast Asia). We find that the main determinants of the domestic saving rate in emerging Asia during the 1966–2007 period appear to have been the age structure of the population (especially the aged dependency ratio), income levels, and the level of financial sector development, that the direction of impact of each factor has been more or less as expected, and that income levels and the level of financial-sector development have a nonlinear impact on the domestic saving rate. In particular, we find that the ratio of the aged population (the population aged 65 or older) to the working aged population (the population aged 20-64) has a negative and significant impact on the domestic saving rate, and that per capita GDP levels have a nonlinear (convex) impact on the domestic saving rate, with its impact being negative at low income levels and positive at high income levels. The level of financial-sector development (proxied by the ratio of private credit from deposit-money banks and other financial institutions to GDP) has a nonlinear (concave) impact on the domestic saving rate, with its impact being positive at low levels of financial-sector development and negative at high levels thereof.

Future trends in domestic saving rates in Asia

We project future trends in domestic saving rates based on our estimation results and find that the domestic saving rate in emerging Asia as a whole will remain roughly constant during the next two decades because the negative impact of population ageing thereon will be roughly offset by the positive impact of higher income levels thereon but that there will be substantial variation from economy to economy, with the rapidly ageing economies showing a sharp downturn in their domestic saving rates by 2030.

More specifically, we project that domestic saving rates in Hong Kong, Indonesia, Korea, Malaysia, the Philippines, Singapore, Thailand, and Taiwan will decrease for the next two decades (except for a slight upturn in Korea in 2021–30). We also project that the domestic saving rate of Viet Nam will increase in 2011–20, then decrease in 2021–30; that the domestic saving rate of the People’s Republic of China will remain roughly flat for the next two decades; and that the domestic saving rates of India and Pakistan will increase for the next two decades. The reason why we project the domestic saving rate of the People’s Republic of China to remain roughly flat for the next two decades is that the substantial downward pressure caused by the rapid ageing of her population will be roughly offset by the substantial upward pressure caused by higher income levels.

Future trends in domestic investment rates in Asia

Moreover, Shioji and Vu (2011) project that domestic investment rates in emerging Asia as a whole will show a moderate decline over the next two decades, due in large part to the attenuation of the convergence effect (whereby an economy with a low initial per capita capital stock experiences faster subsequent capital accumulation), unless the government counteracts this trend by reducing distortions in the domestic market and improving the quality of institutions.

Future trends in current-account surpluses in Asia

A roughly constant domestic saving rate, combined with a moderately declining domestic investment rate, will cause the capital-account surplus of emerging Asia as a whole to remain high, or even increase further, for the next two decades, implying that global imbalances are not likely to be eliminated any time soon and may, in fact, increase even further during the next two decades.

Policy implications

Turning finally to the policy implications of our findings, policies to stimulate consumption and investment and to discourage saving might be warranted if the amelioration of global imbalances is deemed desirable. Specific measures that might stimulate consumption and discourage saving include further financial-sector development and improvements in social safety nets, both of which will reduce the need for precautionary saving.

References

Alfaro, L, S Kalemli-Ozcan and V Volosovych (2011), “Upstream Sovereigns”, VoxEU.org, 29 October.

Bernanke, Ben (2005), “The Global Saving Glut and the US Current Account Deficit,” remarks made at the Sandridge Lecture, Virginia Association of Economics, Richmond, Virginia, March 10.

Bernanke, Ben (2010), “Rebalancing the Global Recovery,” speech at the Sixth European Central Bank Central Banking Conference, Frankfurt, November 19.

Bernanke, Ben (2011), “Global Imbalances: Links to Economic and Financial Stability,” speech at the Banque de France Financial Stability Review Launch Event, Paris, February 18.

Horioka, Charles Yuji, and Terada-Hagiwara, Akiko (2011), “The Determinants and Long-term Projections of Saving Rates in Developing Asia,” NBER Working Paper no. 17581.

Shioji, Etsuro, and Vu, Tuan Khai (2011), “Physical Capital Accumulation in Asia-12: Past Trends and Future Projections,” ADB (Asian Development Bank) Economics Working Paper Series no. 240.

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Topics:  Macroeconomic policy

Tags:  global imbalances, Asia, saving rates