A Closer Look at Saving and Investment

Information from this table and this guide.

Gross saving is the unconsumed portion of national income. It can also be defined as gross domestic investment plus net exports. Though it is rare for gross saving to be negative, it is not impossible given sufficiently little investment and negative net exports.

Gross domestic investment is the portion of gross domestic product produced for ends other than final consumption.

Net lending is gross saving less gross domestic investment. If it’s negative, the rest of the world lends to us. If it’s positive, we lend to the rest of the world. It is identical to Net Exports, that is, exports less imports.

Net saving is gross saving less consumption of fixed capital. Since the end of the second World War, it has only been in negative territory in the United States during the Great Recession and its aftermath.


By definition, worldwide saving=worldwide investment. This, as Nick Rowe says, is an accounting identity, much like apples sold=apples bought. There is nothing savings can be, in the end, other than investment. Otherwise, they wouldn’t be savings. If a country had exported nothing and had no gross domestic investment, but imported $100 million worth of stuff, its gross saving rate would be negative. Just like in Afghanistan. Likewise, if another country had no gross investment and imported nothing but exported $100 million worth of stuff, it would have $100 million both gross and net savings. If those were the only two countries which existed, worldwide savings would be zero and worldwide investment would be zero.

Thus is the nature of saving and investment.

As a rule, investment is the most variable part of GDP. Thus, changes in the investment to GDP ratio are strongly correlated with real GDP growth. Yes, changes in the ratio of total investment to GDP (R-squared=.5749) are better correlated with real GDP growth than changes in the ratio of private investment to GDP (R-squared=.4936). Government investment is investment, too.

This variable nature of investment results from the fact that when an economy contracts, the parts of it producing for ends other than consumption are the least vital parts of the economy to immediately maintain. Thus, they contract the most. The mirror of this holds true for expansions.

Contra vulgar Keynesian/prog claims, during recessions, the saving rate (both gross and net) falls, as people have less money to put aside on savings. Thus, less Chinese investment in Africa when trouble brews in China, and less Japanese investment in the U.S. during the Lost Two Decades. What the vulgar Keynesians refer to as an increase in saving is actually a fall in the velocity of money, which has nothing to do with the subject of this post. However, in at least the United States, investment during recessions typically falls faster than the national saving rate, thus leading to larger net exports.

It is now time to go back to the subject of the last post. Why do countries which desire to grow their gross domestic product at high rates necessarily have to have high savings rates? Let us look at the graph again:

Screenshot (129)2

Countries with a gross savings rate of under 10% invariably had per capita real GDP growth rates of below 1%. There are no countries with an average growth rate of over 6% that had an average savings rate of less than 30%.

Why is this so? Because in order for real GDP in a country to quickly advance to prosperity like in China, Korea, Singapore, and Taiwan, a country has to rapidly accumulate product not meant for final consumption -housing, malls, dams, trucks, ships, power plants, streetlights, docks, hospitals, tractors, factories, computers, highways, railroads, airports, inventory, etc. Compare Shanghai in 1990 to Shanghai today:


If a country does not accumulate these at a rate faster than capital consumption, its capital stock will inevitably decrease, thus hurting prospects for increasing income. Thus, the low or negative per capita GDP growth of countries with savings rates below 9%.

It’s also desirable for rapidly rising countries to accumulate foreign currency and to build up their productive capacities and consumptive opportunities by selling their production to foreign markets. Isolation from foreign trade, as Argentina, Brazil, Mexico, and Turkey attempted before 1980, is consistent with fast economic growth, but hurts in the end, whether via debt crises (the bane of such practitioners of import-substitution), deterioration of the relative qualities and prices of domestic production, or the spread of corruption and favoritism.

And gross saving is precisely investment+net exports. China has often been accused of insufficiently focusing its growth on consumption. Yet, extraordinarily high investment rates are an inevitable part of getting rich quick. There is no country that has grown as fast as China over a sustained period of time without having investment rates similar to it. And China, due to its lack of need of foreign imports and insufficient foreign purchases of its assets, also has a large quantity of net exports, thus, further adding to its gross savings rate. This is precisely what should happen to a country with great natural wealth and a huge differential between the prices of its exportable production with the rest of the world.

Of course, a high rate of investment+ net exports alone will do a country no good. Were the reverse true, the economy of the Philippines would be soaring, as well as that of Algeria. The GDP of the Soviet Union would have eventually surpassed the size of that of the United States. Such impossibilities show that not all investment is good investment, and not all net exports are invested productively (cf., Venezuela, early 1980s).

In conclusion, for rising nations, high savings rates are neither good nor bad. They are necessary.

Author: pithom

An atheist with an interest in the history of the ancient Near East. Author of the Against Jebel al-Lawz Wordpress blog.

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