Higher levels of domestic savings are critical both for raising Pakistan's domestic investment rate and for reducing the country's dangerously high reliance on foreign savings. Yet, the factors that determine the level and behaviour of savings in a developing country like Pakistan are still hotly debated subjects; from both the theoretical and empirical points of views. Investment behavior is also not a straightforward phenomenon, depending as a dues on a number of diverse factors.
For the purpose of my presentation, savings and investment behaviours in Pakistan would be examined from two different angles (i) the trends in savings and investment as well as the associated resource gaps over time and (ii) the level and shares of savings and investment in Gross National or Domestic products in Pakistan relative to these aggregates in several other countries. Given the widely differing backgrounds of the participants in this seminar, I propose to keep my presentation as simple and non-technical as possible.
Unless otherwise explained, the numbers on gross domestic investment would represent total fixed capital formation including stocks, the resource gap or foreign savings would be represented by the current account balance of payments gap before official transfers and national savings are derived as residual.
In 1949-50, the country's investment was about 4% of GDP, comprising of 2% of GDP in National Savings and 2% of foreign savings.
Twenty years later (in 1969-70) the investment level went up to 14.6% of GDP, national savings to 10% of GDP and the resource gap filled by foreign savings to 4.5% of GDP. In the mid 1990s (1995-96), the investment level forged ahead to 18.2% of GDP with national savings lingering around 11% and the resource gap or reliance on foreign savings jumping to 7% of GDP (amounting to about 4.4 billion US Dollars).
In the same benchmark years, the public sector investment levels were 1.6%, 7.0% and 8.1% respectively of GDP. What it tells us is that during the past half a century and after following eight five year plans the progress we made was to improve upon the gap between the foreign savings and public sector capital formation from minus 0.4% of GDP to plus 1.1% of GDP - an incredibly small achievement. More importantly, however, both in relative and absolute terms the countries resource gap has become very large and unsustainable.
In 1949-50 foreign saving financed 50% of domestic investment: it was reduced to 33% in 1969-79 but went up again to 40% in 1995-96. This reversal of the financing trend is highly worrisome.
Now let us examine Pakistan's Gross Domestic Savings performance (as a % of GDP) relative to some other countries in this part of the world. Over the twenty year period from mid 1970's (1973) to mid 1990's (1993), Pakistan's proportion of savings in GDP went up from 10% to 12% (2 percentage points): India's from 17.7% to 23.8 % (6.1 percentage points): Indonesia's from 22.5% to 30.5% (8 percentage points): China's from 29.8% to 40.2% (10.4 percentage points): Thailand's from 25.6% to 35.9% (10.3 percentage points) and Korea's from 21.4% to 34.7% (13.3 percentage points).
The point to note is that India's saving rate is twice that of Pakistan's and Thailand's three times higher than that of Pakistan. This clearly shows that we are by far the worst savers in this part of the world.
Looking at the components of Pakistan's national savings in the 1990's (1992-97) we find that government savings have been negative to the tune of 0.3% of GNP with other public sector entities contributing collectively around 2.2% of GNP. Private sector accounted for the largest share, 11.4% of GNP (or 86% of total national savings) of which the household sector contributed 10% of GNP (90% of the total within the private sector) and the corporate sector just around 1.3% of GNP.
Let us now review Pakistan's resource gap phenomenon relative to some other countries over the two decades (1974-83 and 1984-93). From the first decade to the second one, our resource gap as a % of GDP improved by 0.8%, Malaysia's and Turkey's by 2.3%, Bangladesh by 2.5%, Egypt by 6.8% and Korea's by 6.4%. Again, a meager and miserable achievement.
Since export growth is an important factor in determining the level of a country's current account balance of payments gap, thereby affecting the level of foreign savings, let us examine Pakistan's export performance over the 15 years period from 1980-95. We were able to achieve an increase in exports of goods and services around 9.3% per annum over the period, compared with Sri Lanka's 9.7%; Indonesia's 10.3%; Thailand's 16.6%; Malaysia's 13.6% and Korea's 11.5%.
However, going back another decade in time we find that Pakistan's exports of manufactured goods in 1970 were about 2/3rd of the level of exports from Korea and much larger than exports from Malaysia, Thailand, Indonesia and Turkey. By 1993, Pakistan's $5.6 billion manufactured exports were only a small fraction of the level of such exports from Korea ($77 billion), Malaysia ($31 billion), Thailand ($27 billion) and Indonesia ($18 billion).
Let me now turn to the results of some empirical studies on savings in developing countries. A quick review of literature on this issue highlights some interesting findings that are relevant to our situation, (i) the rate of return on savings as indicated by real interest rates did have a substantial effect on saving rates in some countries.
However, this was not a universal phenomenon; some researchers found sonic support for a positive effect of real interest rates on savings in Asia, but not so in Latin America, (ii) Negative real interest rates, resulting from high inflation tend to cause a flight into real assets, including consumers durables and into foreign currency via capital flight, (iii) there is a broad consensus that faster growth and higher incomes contributed to higher saving rates, (iv) in some studies it was also found that the higher the demographic dependency ratio (people under age 15 or over 65 as a share of total population), the lower the saving rate, (v) the growth rate of per capita disposable income had a strong effect on household savings - faster growth of per capita income over the medium term is an important vehicle to raise the private saving rate and (vi) foreign savings appear to show a stable and negative influence on domestic savings.
If we want to improve the country's growth performance and inject a measure of stability in the growth process at home, and at the same time improve the country's creditworthiness abroad, the objective of increased domestic savings must be adopted as one of the highest national economic goals. Our marginal saving rate must be more than doubled from the current 14-15% to 30-35%. Let me present a nine point agenda in this respect.
Pursuing relentlessly the goal of eliminating negative government savings through improved macro-economic balances and reduced budget deficits by disallowing any government borrowing or financing current budgetary expenditures; keeping inflationary pressure low so that the real interest rates do not become zero or negative; improving the efficiency of the financial sector by reducing its intermediation margins which are one of the highest in the world; strengthening the capital market under the thoughtful and professional guidance of the Securities and Exchange Commission; introducing new instruments for savings such as the mutual funds, private
pension schemes and wider insurance mechanisms; pursuing policies that discourage transfers of domestic saving into foreign assets; increasing political stability and generating a climate for private sector development; restoring confidence in the domestic currency by avoiding the need for frequent devaluations and substantially improving the international reserves position and finally; by promoting genuine austerity at all levels - especially by the leaders who must shun conspicuous consumption and exercise utmost care in incurring general non-developmental expenditures.
Let me end by saying that the daunting challenges confronting savings, investment and the resource gap can be turned into opportunities if all the players - the government, the public sector owned enterprises, the households and the corporate sector exert themselves hard to raise their income levels and exercise utmost restraint in expenditures. We are way below our own potential and far behind many other countries in all these areas.
If we do want to improve upon the anemic growth performance, we must push up our investment levels and the only way to achieve this, without further slipping into the dreadful debt trap, is to achieve higher domestic savings. The ever increasing dependence on foreign savings is not an answer to our problems. The sooner we realise this as a nation, the greater will be the chances that we can live with dignity and honour.
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