Briefing papers for the big Asia-Pacific Economic Co-operation (Apec) forum in Kuala Lumpur this week are now beginning to flow in and one in particular is worth highlighting. This one comes from something called the Pacific Economic Co-operation Council (PECC). The report highlights the importance of domestic savings, notes that there is a positive association between economic growth and savings and warns that savings rates tend to level off as incomes rise. 'The Asian [economies] may be an example of this and may not continue to be 'super-savers' for much longer,' it says. First a word about the domestic savings ratio. It does not come from any government survey asking you and your family what proportion of your income you spend and what you invest. Rather, it's done the simple way. Take the components of gross domestic product and isolate from them those things which represent investment. There are three of them - gross domestic fixed capital formation (investment in buildings and machinery), changes in stocks (are the warehouses bulging more than last year?) and net trade (exports less imports of goods and services). Now take these three as a percentage of GDP and you have your domestic savings ratio. As the accompanying chart shows, Asia excluding Japan runs a domestic savings ratio of more than 36 per cent and even during the present financial crisis it has held up. Take your choice between the wealthy Group of Seven (G7) countries, the Indian sub-continent and Latin America, it doesn't matter which, they all run domestic savings ratios of only about 20 per cent. It does no good to explain this by suggesting that poorer countries save more and their savings tend to level off as incomes rise. They should save more but they don't. India doesn't. Latin America doesn't. The Asian savings ratio, meanwhile, has risen along with wealth since 1980, not fallen. And there are two good reasons why it has happened. The first is that Asia generally offers its populations greater opportunities to participate in wealth creation. A peasant working a rented plot on a Latin American estate has little incentive to work harder and save. He just pays it away to his landlord if he does. It happens in Asia too but not to the same degree and Asia's economies are more industrial, which always gives the man at the bottom a bigger chance and a greater incentive to save. The second is that Asian tax policies are generally more geared than those of the G7 to encouraging savings. Try putting your money to work in Canada and watch the tax man stick his hand out every time he sees you with a spare dollar. Plenty of Hong Kong natives have discovered this dismal way of encouraging people to spend their money rather than save it. Nor, as PECC also implies, does much of Asia's high domestic savings ratios represent foreign investment. The heavy foreign capital inflows up to mid-1997 went heavily to paying for imports. Go back to the formula. You deduct imports when totting up domestic savings. You don't add them. On a net basis you still come back to it being predominantly local people who do the saving. It may puzzle some foreign commentators but the big question for them is not why Asia saves so much but why their countries save so little.
