More Saving, Less Debt Will Allow World Economy to Keep Growing
We in the United States and people in the world more generally have a golden opportunity ahead of us. The simultaneous emergence of a technological and a political revolution offer the possibility of an enormous and widely distributed explosion in world trade and world output--if only we take advantage of the new opportunities. We can expect to see relatively rapid rates of growth in many less developed countries as they employ their resources more effectively and make use of existing knowledge. This will produce a tendency toward convergence in economic capability on a world scale.
High and rising investment activity is a characteristic of this expanding world economy. Investment depends on savings, and in this highly interconnected world, competition for savings is global.
A critical issue, therefore, is whether the supply of savings can keep up with the rising demand for capital.
Looking back over the post-World War II period, real interest rates hovered from the mid-1950s through the 1960s around 2% to 2 1/2%. This period was long enough to be used frequently as a point of comparison--or even, by the unwary, as the norm. In the mid-1970s rates dropped sharply and actually turned negative for awhile; that constituted one reason for a burst of unwise lending and borrowing. It has taken some countries and financial institutions a long time to recuperate from the hangover from that binge. By the mid-1980s, a time of high prosperity in the developed world, real interest rates had more than doubled from the 1960s level. They since have declined somewhat, but are still well above 1960s levels.
The 1980s developments were widely labeled “capital shortage,” but the alarm has been muted in the 1990s thus far because of the economic slowdown in developed countries. As we again enter an era of global growth--and that is where we are right now--the problem is re-emerging as demand for investment capital rises rapidly.
One aspect of the demand for investment is the advancing integration of the world’s most populous countries, China and India in particular, into the world economy. Integration implies that what were once enormous, underutilized and low-cost national labor resources--a non-monetary and relatively immobile form of savings--are now low-cost global resources that will attract global capital. As a result, demand for financial resources will be much more widely based around the world than ever before.
On the supply side, savings rates as a percentage of gross domestic product have been decreasing in many parts of the world. In the United States, the rate of net personal and corporate saving has been falling since the mid-1970s, and has been running in recent years at historically low levels.
I am puzzled as to why this is so, but the fact is not in dispute. Consider also other easily observable and important developments: In the 1980s, Germany was a major net supplier of international capital; since reunification she has become a net user. To a lesser extent the same is true of Saudi Arabia.
The easiest and most effective way to increase savings would be to reduce the dissaving by governments--that is, government deficits, which in general have been large as a percentage of GDP throughout the developed economies.
The United States is a contributor to the problem of deficits, but when all governments units are taken into account, our present deficit situation is for the moment better than that of most other industrialized countries. The rhetoric at big meetings is there, but on the record of performance I am not optimistic about prospects for fiscal discipline in the developed countries. We need more examples like New Zealand, where fiscal and monetary discipline have recently been combined, the economy is growing, inflation is negligible and the government is running a surplus.
True enough, the rapidly developing countries of Asia, including China and India, are big savers. Nevertheless, it appears likely that demand for capital will grow faster than the supply of savings and lead to an increase in real interest rates, perhaps well beyond what we have regarded as normal historically. And the global nature of financial markets means individual nations--including the United States--cannot shield themselves from the worldwide competition for investment capital.
Political-economic conditions in a country will be critical to its success or failure in this global competition for funds. Lenders and investors abhor political risk, and they will have plenty of attractive alternatives if political risk in one area seems too high. Sudden, unpredictable changes in the rules of the game for investment are devastating.
Corruption, too, is a particularly important impediment to attracting capital. Many firms from throughout the world will not accede to corruption because it is at variance with their internal ethical codes. U.S. firms cannot accede to corruption even if they were tempted, because to do so is illegal and the penalties are severe.
Moreover, the investor never knows when or from where the next demand will come, or how much it will cost. This creates unacceptable risks for many investors, even if moral scruples are no obstacle. Of course, corruption is a mark of inefficient use of resources, as well as being debilitating in its effect on political confidence.
Beyond dealing with political risk and corruption, nations and investors will, I believe, look more and more to privatization as they compete for scarce financial resources and try to use those resources effectively. The privatization of activities that formerly were the exclusive provinces of government is well under way around the world. Government ownership of activities--including important elements of the vast infrastructure sure to be built--is decreasing.
The reason is simple and compelling: Governments have run into relentless limits on their ability to raise taxes and to borrow. So they look for other ways to get necessary tasks accomplished.
Beyond the sheer necessity to shift costs from governments to the private sector, privatization opens important opportunities: to tap the new sources of capital that private owners bring with them, to improve efficiency through private-sector incentives, to avoid sovereign foreign debt and to shift economic risk from government to the private sector--from “nobody’s money” to “somebody’s money.”
Although privately sponsored infrastructure projects are likely to be increasingly important, implementing them will not be easy. Such projects are complicated, with many participants, public and private. Entrenched public bureaucracies pose a continuing threat of rules changes even after an investment has been made.
Privatization calls for government to set ground rules--especially for infrastructure--and stick to them. Pricing can present difficult issues, especially when the public has been accustomed to receiving the service involved at a low, subsidized price. And the process of finding an acceptable allocation of risk among government, private owners, lenders, vendors and public users is difficult.
These and other problems must be faced--and faced down--if privatization is to succeed. But the stakes are very high because privatization, in the end, is an effective way to mobilize capital and to ensure that services are delivered efficiently and at minimum cost to the taxpayer.
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