SAVINGS AS AN INDICATOR OF ECONOMIC HEALTH
June 6 - 12, 2011
Savings and consumption rates vary from economy to economy. Developed and industrialized countries have a comparatively low savings rate and a high consumption rate. During 1980s, the US savings rate used to be around 16 percent of its GNP which came down to two percent by 2007. It picked up again after the subprime crisis and, after reaching the six percent mark, it now stands at around five percent. Pakistan's savings rate, during the last ten years, hovered in the vicinity of 13 to 21 percent.
Explaining the variance, Alan Greenspan, ex-Fed-chairman, writes in his book The Age of Turbulence: 'Developing countries typically have much higher savings rates than do industrialized nations - in part because developing nations' social safety nets are weaker, so households naturally set aside more money for times of need and retirement... The shift of shares of world GDP since 2001 from low-saving developed countries to higher-saving developing countries has increased world saving so much that the aggregate growth of savings worldwide has greatly exceeded planned investments."
CRITICAL ECONOMIC INDICATORS OF PAKISTAN'S ECONOMY
INDICATORS 2001-02 02-03 03-04 04-05 05-06 06-07 07-08 08-09 09-10 Real GDP % 3.1 4.7 7.5 9.0 5.8 6.8 3.7 1.2 4.1 Investment (% of GDP) 16.8 16.9 16.6 19.1 22.1 22.5 22.1 19.0 16.6 Savings (% of GDP) 18.6 20.8 17.9 17.5 18.2 17.4 13.6 13.3 13.8 Tax-Rev (% of GDP) 10.9 11.5 11 10.1 10.6 10.2 10.6 9.5 10.9 Deficit (% of GDP) 4.3 3.7 2.4 3.3 4.3 4.3 7.6 5.2 4.9 Consumer Price Index 3.5 3.1 4.6 9.3 7.9 7.8 12.0 20.8 11.5 GDP Deflator 2.5 4.4 7.7 7.0 10.5 7.7 16.2 20.3 10.1
The current world economic model designed by the leading US Chicago school economists relies heavily on consumption. The free market economist Milton Friedman's mantra 'go shopping' describes it all. The Fed policies during Greenspan regime methodically propagated the high-consumption high-growth dogma. Low interest rates, home equity finance, loose regulatory structure, all combined together to unleash a wave of reckless consumption. US consumers got a bad shock in the process and were made to retreat to the 1980s' saving ways. The psyche of US citizens, after 1980, has undergone a structural transformation. It is now embedded in a typical consumer culture. The lust of easy credit money and spending at will has overtaken them. They are now a feverishly spending economy and love to be known as such.
Taking stock of the economic conditions that prevailed during the last three decades, Alan Greenspan writes: "The apparent excess in savings, combined with globalization, technology-driven increase in productivity, and the shift of workforces from the centrally planned economies to competitive markets, has helped suppress interest rates both real and nominal and rates of inflation for all developed and virtually all developing nations." This was true in case of Pakistan till 2006-07 when higher savings, low interest rates and single-digit inflation highlighted the economy. During the following three years, the economy has gone through a turbulent phase. Low investment, comparatively low savings, higher interest rates, and back-breaking inflation have ruled the roost. It will be unfair to blame globalization, world financial crisis or upsurge in oil and commodity prices for the contracted maladies. Most of the damage has been done by our economic and political failures.
There is a crucial relationship between savings and investment. Theoretically, the sum total of world savings should equal the sum total of world investment. Since investment and savings cannot be accurately forecast, they are more the function of 'human intention' than any set trend, the imbalances between the two cause changes in the interest rates. More investment, less savings mean higher interest rates. Similarly, more savings, less investment mean low interest rates. The present low interest rate scenario has emerged in the aftermath of higher aggregate world savings - particularly savings in the developing economies. These dictates of economics make Pakistan a highly unusual and out-of-this-world economy. Irrespective of the global trends, we are living in a self-created high interest rate market. Both our investment and savings have taken a steep fall, putting a brake on economic growth.
Savings are either public or private. Public savings are generated by the government's fiscal management policies. Budget deficits are negative government savings. If budget deficits are created as a result of government spending on development projects that increase output and generate employment, the transitory negative government savings are likely to do less harm and more good. On the other hand, if deficits are created by government's lavish spending on unproductive activities, the damage is almost certain to be irreparable and longer lasting. Private savings come from corporate sector and households. In a growing economy when interest rates are low and private sector credit is not hard to come by, corporate profits soar. During favorable conditions, dividend are held up or kept to minimum, and major part of profits is plowed back into the business. Retained earnings are corporate savings. Household savings are generated by growing disposable incomes, stable commodity and energy prices, and better security conditions.
Fall in savings and investment levels during the last three years is just proportionate to our economic and political incompetence. We have chosen to be a negatively different economy. We have the potential to fall in line with the world economic trends but our priorities are astonishingly different. Our monetary policies have let us down too. State bank and the banking sector are busy in pampering the government which is bent upon spending far more than it earns. Around Rs700 billion have so far been lent to it jointly by the two thereby paving the way for inflationary forces and private sector credit starvation. Currency in circulation has gone up from Rs982 billion in 2008 to Rs1,628 billion last month, recording an increase of 66 percent in just three years. Monetary expansion has also shot up by Rs677 billion during the first eleven months of FY-11. Where all that money has gone? It is a bottled-up economy and should, therefore, immediately reflect unusual inflows of money. If we want to save Pakistan, then we will have to keep an eye on the movement of three basic factors of production, man, money, and material. There unchecked, unlawful movements have already caused the country a lot of trouble.