Saving - What Do We Know, and Why Do We Care?
In principle, there is little reason people, and countries facing different shocks, and income streams should strive for optimal saving rates. But in practice, the inter-temporal choices that underlie saving, are subject to externalities, market failures, and policy distortions, that can cause saving rates to differ from welfare-maximizing levels. The social value of saving could also exceed its private value, because of imperfections in global financial markets. Still, a national saving rate broadly in line with an economy's investment rate, reduces vulnerability to sudden shifts in international capital flows, driven by uncontrollable behavior, or self-fulfilling investor expectations. Yet, as shown by the recent East Asia crisis, high saving alone does not provide complete insurance against the consequences of weak financial systems, or unsustainable exchange rate policies. This is the subject analyzed in this note, through a recent Bank research project, that shows savings has important interactions with income and growth, with resulting implications for policy. Such policies that spur development are an indirect, but effective way to raise private saving. The note further examines this private saving, and public policy, outlining fiscal issues, financial liberalization, and the impact of pension reform. The note reflects on situations where reforms both invite aid, and induce higher investment and growth - so that aid and saving rise together - concluding that aid need not invariably crowd out national saving.
| Summary: | In principle, there is little reason
people, and countries facing different shocks, and income
streams should strive for optimal saving rates. But in
practice, the inter-temporal choices that underlie saving,
are subject to externalities, market failures, and policy
distortions, that can cause saving rates to differ from
welfare-maximizing levels. The social value of saving could
also exceed its private value, because of imperfections in
global financial markets. Still, a national saving rate
broadly in line with an economy's investment rate,
reduces vulnerability to sudden shifts in international
capital flows, driven by uncontrollable behavior, or
self-fulfilling investor expectations. Yet, as shown by the
recent East Asia crisis, high saving alone does not provide
complete insurance against the consequences of weak
financial systems, or unsustainable exchange rate policies.
This is the subject analyzed in this note, through a recent
Bank research project, that shows savings has important
interactions with income and growth, with resulting
implications for policy. Such policies that spur development
are an indirect, but effective way to raise private saving.
The note further examines this private saving, and public
policy, outlining fiscal issues, financial liberalization,
and the impact of pension reform. The note reflects on
situations where reforms both invite aid, and induce higher
investment and growth - so that aid and saving rise together
- concluding that aid need not invariably crowd out national saving. |
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