When Saving Drains the Economy

Despite current fears of shortages, the prospects for growth in worldwide demand look weaker over the longer term, while supplies of goods in almost every category are surging. Adding to the problem, developing countries with huge external debts to pay off are slashing imports and boosting exports. And the United States, which for the past six years has been the world’s economic locomotive, is under pressure itself to cut imports and increase exports to reduce the massive federal budget and trade deficits.

Meanwhile, production is rising fast in Asia--not only in Japan, but in the newly industrialized countries. Between 1976 and 1986 the four Asian NICs--South Korea, Taiwan, Hong Kong and Singapore--doubled their share of world exports--from 3.3% to 6.6%. This production growth in Japan and the NICs is not only damaging the U.S. trade balance but, in some industries, eroding U.S. production.

Between 1976 and 1986, for example, not only did the U.S. share of world auto production fall to 23.5% from 29.2% while Japan’s share grew to 23.4% from 17.2%, but the absolute level of U.S. production declined. In many consumer appliance sectors, the NICs have virtually squeezed out the U.S. producer.

The pattern in the postwar era has been a shift in production from the United States to Europe, on to Japan and now to the NICs. At each stage, the production has shifted to countries with higher saving rates. While U.S. households saved 3.9% of their disposable, or after-tax, incomes in 1987, Germans saved 13.2%; Japanese, 17%; South Koreans, 36%, and the Taiwanese, a whopping 42%.

National saving rates--measuring the combined saving of consumers, business and government--show a similar pattern: Europe consistently saves more than the United States, and Japan more than Europe. As the NICs’ export-led development accelerates, their already-high saving rates are rising to astronomical heights, far outstripping even Japan. A shift in income from the United States, with a national saving rate of 12.6%, to Taiwan, where the rate is 39%, triples the amount of money not spent on currently produced goods and services.

When the production of, say, a ton of steel moves from the United States to South Korea, income--and therefore purchasing power--switches from the U.S. steelworker to his Korean competitor.

Because the Korean worker saves much more of his new income than does his American counterpart, the effect, all other things being equal, is to reduce world demand.

Why is this so? Because while saving provides the resources for investment, consumption provides its motivation. In a country with no access to international markets, an excess of saving over investment results in falling production, incomes and saving until saving and investment are equal again, but at a lower level of income and output. In the real world, as income moves to the high savers, their high saving rates indeed cause saving to outstrip investment in plant and equipment. But the internationally competitive economies of Japan and the Asian NICs avoid the recessionary implications of their high saving rates by exporting even more.

By definition, the difference between a country’s saving and investment is essentially equal to its current account balance--the balance of trade in goods and services plus net investment income from abroad. An excess of domestic saving over investment is reflected in a current account surplus--when saving exceeds investment and demand for goods and services by consumers, business and government is less than the supply of goods and services being produced. The surplus represents the amount by which exports exceed imports.

For the high savers, exports provide a badly needed boost to supplement inadequate domestic demand.

For the United States, and the rest of the world, however, the high rates of saving in East Asia mean that as production shifts that way and away from the United States, an increasing amount of purchasing power is siphoned out of the world economy--not respent on goods and services--rather than recycled back into it.

In the world of excess supply in which we increasingly find ourselves, the high saving rates and associated surpluses of the Asian countries act as a drag on the growth of world demand, depressing other countries’ exports and levels of economic activity.

So far, the United States has accommodated the Asian big savers at the expense of its domestic production. But with the United States committed to bringing down its trade deficit, the maintenance of a healthy growth rate in world demand will require that high savers in Asia--the NICs and Japan--and in West Germany, Europe’s big saver, stimulate their domestic demand.

If U.S. exports cannot find markets because of weak overseas demand, then the main burden of deficit reduction will be borne by reducing U.S. imports, which will only put a further dent in the growth of world demand.

Japan has taken steps to stimulate domestic demand, but it remains to be seen whether this represents a political gesture or a genuine turnaround in the direction of economic policy.

The Asian NICs and West Germany have done virtually nothing to stimulate their domestic demands. To avoid growing world oversupply and the protectionism that will inevitably follow, it is important that they and Japan do their part to maintain the growth of world demand.