13.06.2007
There is no glut of global saving. Yes, global saving has risen steadily over the past several decades, but contrary to widespread belief, the rise in recent years has been no faster than the expansion of world GDP. In fact, the overall global saving rate stood at 22.8% of world GDP in 2006 – basically unchanged from the 23.0% reading in 1990. At the same time, there has been an important shift in the mix of global saving – away from the rich countries of the developed world toward the poor countries of the developing world. This development, rather than overall trends in global saving, is likely to remain a critical issue for the world economy and financial markets in the years ahead.
There can be no mistaking the dramatic shift in the mix of global saving in recent years. A particularly stunning change has occurred in just the past decade. According to IMF statistics, in 1996 the advanced countries of the developed world accounted for 78% of total global saving. By 2006, that share had fallen to 65%. Over the same decade, the developing world's share of global saving has risen from 22% in 1996 to 36% in 2006. Put another way, the rich countries of the developed world – which made up 80% of world GDP in 1996 – accounted for just 43% of the cumulative increase in global saving over the past decade.
By contrast, the poor countries of the developing world – which made up only 19% of world GDP in 1996 – accounted for fully 58% of the cumulative increase in global saving over the 1996 to 2006 period, or approximately three times their weight in the world economy. This wealth transfer from the poor to the rich is the exact opposite of that which occurred in the first globalisation of the early 20th century. And it is one of the most extraordinary developments in the modern history of the global economy.
Global saving rates: US stands out
The United States, of course, stands out for extreme negligence on the saving front. By 2006, America's gross national saving rate – the combined saving of individuals, businesses, and the government sector – stood at just 13.7%. That's down from the 16.5% rate of a decade earlier and, by far, the lowest domestic saving rate of any major economy in the developed world. Adjusted for depreciation – a calculation which provides a proxy for the domestic saving that is left over after funding the wear and tear on aging capacity – the US net national saving rate averaged just 1% over the past three years, a record low by any standards.
Over the 1996–2006 period, the US accounted for a mere 12% of the total growth in worldwide saving – less than half its 26% share in global economy as of 1996. Elsewhere in the developed world, it has been more of a mixed picture. The Japanese saving rate, while a good deal higher than that of the US, fell from 30.4% in 1996 to 28.0% in 2006. By contrast, gross saving in the Euro Area held steady at around 21.0% over the past 10 years. Global saving rates: Asia leads the way
Trends in the major countries in the developing world stand in sharp contrast to those in the developed world. By now, it is well known that the large and rapidly growing developing economies of Asia have led the way. Collectively, these economies have taken their gross domestic saving rate from 33% in 1996 to 42% in 2006 – enough to have accounted for 31% of the overall gain in global saving over this period, fully four and a half times their combined 7% share in the global economy as of 1996. Nor can there be any mistaking the dominant role played by China in driving saving flows in the region.
According to IMF estimates, China's gross domestic saving rate rose from 40.5% to 50% in 2004. My guess is the Chinese saving ratio probably held near that level over the past two years; if so, that means China accounted for about 23% of the growth in global saving over the past decade, or three-fourths of Developing Asia's contribution to the increase in world saving. Elsewhere in Asia, the global saving impetus over the past decade has been small – for example, only 3% from the region's newly industrialized economies (i.e., Korea, Taiwan, Singapore, and Hong Kong). The Middle East is the only other significant source of incremental growth in global saving – accounting for 8% of the cumulative gain in world saving over the past decade, or one-third the contribution coming from China.
America's saving: are official estimates accurate?
Contrary to popular folklore, these trends in the mix of global saving are not a statistical aberration. In particular, much has been made of the so-called flaws in the US Commerce Department's estimates of the personal saving rate. This criticism, which mainly focuses on the failure of government statistics to capture the capital gains pieces of saving arising from property and portfolio investments, misses a key point: National-income-based measures of saving were never designed to measure asset-based savings accruals. Instead, they approximate the saving arising from current economic activity – in effect, measuring the difference between domestic expenditures and the income generated from current production.
As such, income-based saving gauges are agnostic over the possible existence of alternative asset-based sources of saving. Should any such windfalls occur to individuals, businesses, or even government entities, there is no reason, of course, why there couldn't be a shift in the mix between income- and asset-based saving. That doesn't mean the national-income-based saving construct is wrong – it just suggests that another source of saving has the potential to enter the equation.
That, of course, has been precisely the story in the United States since the mid-1990s. Yet a personal saving rate that moved into negative territory for two years in a row in 2005-06 – the first such development since the early 1930s – doesn't necessarily paint a picture of an irrational American consumer. Drawing freely from a steady stream of wealth effects from sharply rising asset values – first equities and, more recently, property – US households have, in effect, substituted asset-based saving for that which used to be derived from income generation.
These asset effects were hardly inconsequential. During the heyday of the property bubble, net equity extraction from residential property rose from 3% of disposable personal income in 2000 to nearly 9% in 2005. During that same period, however, the spending side of the US economy still needed to be funded on a cash-accrual basis – leaving America to run massive current account deficits in order to make up for the difference between asset-driven aggregate demand and production-driven income generation. Unfortunately, what goes around often comes around: In a post-housing bubble climate, the asset effects are now swinging the other way – suggesting that national income-based saving measures are likely to become much more meaningful in shaping US aggregate demand than has been the case in a long time.
The world is not having an easy time sorting out this battle over the shifting mix of global saving. For its part, the developed world seems more than content to maintain the status quo. That's especially the case for the US, which has long been drawing freely on the saving surpluses of others – and without having to offer up any concessions on the terms of external financing with respect to the dollar and/or long-term US real interest rates.
Global saving rates: developing world must start spending
In the developing world, there's greater tension over the current state of affairs. Lacking in internal support from private consumption, externally dependent emerging economies have been more than content to use their saving flows to subsidize their currencies. At the same time, most developing economies recognize full well that their growth models cannot be sustained without a drawdown in surplus saving and a concomitant increase in private consumption. Nor do they believe they can sustain export-led growth dynamics ad infinitum without suffering serious protectionist pressures. In a nutshell, this is the essence of the problem faced by the world's dominant surplus saver – China.
Saving is the seed-corn for future economic growth. Without it, nations cannot invest in physical or human capital. There are short-term Band-Aids that allow saving-short nations to make ends meet – mainly by borrowing from others and, from time to time, by unlocking value in under-valued assets. The day will come, however, when surplus nations will begin to shift their focus away from functioning as lenders to the external world and turn, instead, toward providing support for internal needs.
Global saving rates: sovereign wealth funds
The increasingly popular asset allocation shift into "sovereign wealth funds" (SWFs) is, in my view, an early warning sign of just such a change in focus. Poor countries want more than undervalued currency regimes that dictate low returns in their massive portfolios of dollar-based assets. They also want higher returns, which the SWFs are designed to achieve, but in addition they want internal absorption of surplus saving in the form of increasingly vigorous private consumption. In the end, this is the only way the benefits of economic growth can be distributed fairly throughout the income distribution. This is a key concern of many developing economies – especially China with its system of market-based socialism.
The dramatic shift in the mix of global saving over the past decade is a big deal. It drives the equally unprecedented disparity between current account surpluses and deficits – the crux of the global imbalances debate. It also accounts for the gap between trade deficits and surpluses that is shaping the current protectionist debate in the US Congress. In theory, of course, this shift in the mix of saving also has the potential to shape relative asset prices between debtor and lender nations. Although those impacts have yet to take on serious proportions, I continue to suspect the risk of such a possibility is a good deal higher than that envisioned by the broad consensus of global investors.
Global saving rates: glut does not exist
>From the start, the concept of the global saving glut was very much a
US-centric vision (see the March 10, 2005, speech of then Federal
Reserve Board Governor Ben Bernanke, "The Global Saving Glut and the
U.S. Current Account Deficit"). From America's myopic point of view,
it believes it is doing the world a huge favour by consuming a slice
of under-utilized saving generated largely by poor developing
economies. But this is a very different phenomenon than a glut of
worldwide saving that is sloshing around for the asking.
The story, instead, is that of a shifting mix in the composition of global saving – and the tradeoffs associated with the alternative uses of such funds. I suspect those tradeoffs are now in the process of changing – an outcome that is likely to put downward pressure on the US dollar and upward pressure on long-term US real interest rates. If the borrower turns protectionist – one of the stranger potential twists of modern economic history – those pressures could well intensify. Don't count on the saving glut that never was to forestall these outcomes.
By Stephen Roach, global economist at Morgan Stanley, as first published on Morgan Stanley's Global Economic Forum
-- Yoshie