Mittwoch, 3. Juni 2009

Savings and Investment: The Singapore Experience

I recently posted on China's savings and investment rates, and how they are extremely high by international standards.

Singapore used to be a country famous for its sky-high savings and investment rates, so I thought it might be useful to check how these numbers changed over time as Singapore's economy matured.

The data (according to Statistics Singapore) surprised me:

- The savings rate dropped from 54 % in 1997 to an average of 40 % in 2002-07 (though it was back on an upwards trend from 2005 onwards, increasing from 38.5 % to 46.8 % in 2007).

- The investment rate dropped much faster: It went from 39 % in 1997 to an average of only 20 % in 2003-07 (again, there was an upwards trend from 19.9 % in 2005 to 22.6 % in 2007). In other words, Singapore's investment rate wasn't particuarly high during the last few years. It was more or less equal to Germany's.

- The trade surplus skyrocketed: It went from 13 % in 1997 to nearly 30 % in 2005-07. That's right: Singapore has been running a trade surplus of 30 % of GDP!

If this is an indication of how things will develop in China (i.e. savings rate dropping a bit, but investment rate dropping much faster once a "long-term sustainable capital stock" is reached), there is a major problem brewing:

Singapore is a tiny country, and the world doesn't really care if it runs a large trade surplus or not. China, on the other hand, cannot possibly run a trade surplus of 20 % or more of GDP. The current 8 % or so are already considered a major problem, and as China's economy keeps growing, a constant 8 % would already turn into an ever larger absolute number.

If China's investment rate eventually comes down into the 20-30 % range, the savings rate must also drop by nearly half. There is no other way. And as speculated previously, I suspect that higher government debt is the only feasible way to get there.


  1. I think Singapore invested more in 2008, though. Not sure why. Maybe it's all that Integrated Resort & Casino stuff.

  2. According to Statistics Singapore, the investment rate did rise again in 2008 compared to 2007, and most of the increase appears to be due to "transport equipment". Not sure what that means. Maybe Singapore Airlines bought lots of new planes?

  3. Maybe Ships & Containers? Airplanes sounds plausible too.

  4. Hi Thomas, I have been following your excellent blog for sometime.

    I am not sure I understand the relationship between savings, investment and trade surplus. I researched a bit but didn't grasp it completely. Could China's excess savings be invested in other countries like say India? I am basing this on a little conversation you had with another blogger (bomlat). Thanks again for your blog.

  5. By definition, GDP can be decomposed as follows:

    GDP = Consumption + Investment + Trade Surplus

    At the same time, it can be stated as:

    GDP = Consumption + Savings

    The income earned in an economy is either consumed today, or it is saved.

    Savings can be used either to make investments (long-lived stuff used to produce things in the future, e.g. machines or factories, or to be consumed in the future, e.g. residential houses or inventories), or they can be lent to foreigners by selling them stuff.

    If total savings in a country are bigger than investment demand, and there isn't enough foreign demand either to absorb them, then there is a demand shortfall, and the economy will be in trouble.

    This can in principle be counteracted by Keynesian-style government deficit spending (if the government spends money on consumptive stuff, consumption goes up and savings go down; if the government spends on investments, savings stay the same, but investments go up), or even by tax-financed government spending (if households have a marginal savings rate above zero, taxing their income to finance government spending increases overall demand).

    One thing that confuses lots of people is the definition of "savings" in the national accounts terminology:

    It consists of household savings + corporate savings + government savings (all three categories can be positive or negative).

    If e.g. households save a lot, but the government does lots of deficit spending, the overall savings rate of the economy can be low or even negative.

    If the corporate sector takes a bank loan to buy a machine, it's savings neutral (because the negative saving of taking a bank loan is offset by the positive saving of the value of the investment).

    If a company retains profits to buy a machine, that's positive savings, because the company doesn't use other people's savings (household savings channelled to the firm via a loan), but saves money itself (instead of distributing it to shareholdrers).

  6. Quote: "Could China's excess savings be invested in other countries like say India?"

    In theory yes (if India runs a sufficient trade deficit). Currently, they mostly get invested in US treasury bonds.

  7. Hi Thomas, thanks a lot for the explanation. I appreciate it a lot.

    I wish there were such good blogs or even information about India on the Internet.

    Thanks again.