Constantino Hevia*
Macroeconomics and Growth – DRG
May 2010
Saving in Turkey: An International Comparison
1. Introduction
Turkey suffered a profound financial crisis in 2001. Since then, several structural reforms
were introduced aimed at fixing the sources of fragility that led Turkey to the 2001 and to
earlier financial crises. Among these reforms, the Central Bank became a more independent
institution and implemented an inflation targeting regime—implicit between 2002 and 2005
but explicit since then—that was successful in reducing the high and chronic inflation rates that
affected Turkey for several years. On the fiscal side, Turkey was able to restrain fiscal spending,
generating a substantial primary surplus that reduced the public debt-GDP ratio to manageable
levels.1 Other structural reforms introduced in Turkey since the 2001 crisis include a pension
reform aimed at encouraging participation in a new voluntary private pension system on top of
the public pension system; a change in the tax code modifying corporate and personal taxes; a
new banking law aimed at improving the supervisory and regulatory environment; among
others.
Despite the strong growth rates that Turkey experienced since 2001, domestic saving
rates declined substantially during the last ten years, falling from almost 25 percent in 1998 to
just over 16 percent in 2008. Therefore, an important fraction of the rising investment rate—
which went from 15 percent in 2001 to over 22 percent in 2006—had to be financed through
capital inflows, leading to a sustained current account deficit (Figure 1).
There are at least two views about the current account deficit in Turkey. The first, more
benign view, claims that the increase in investment and decrease in national saving is what we
*
I am grateful to Norman Loayza, Kamer Karakurum Ozdemir, Claudio Raddatz, Luis Servén, and Cihan Yalcin for
useful insights and comments. The usual disclaimer applies.
1
The public debt-GDP ratio decreased from almost 75 percent in 2001 to less than 40 percent in 2008. Since the
last financial crisis, this ratio is estimated to be around 43 percent: E. Uygur (2009).
1
should expect because Turkey is becoming more integrated with countries in the Euro area,
both in goods and financial markets. In effect, to the extent that rates of returns in Turkey are
higher than those in its partner countries, Turkey should see an increase in investment;
likewise, prospects of higher future income naturally leads to a decline in national saving due to
consumption smoothing motives. Both effects lead to the observed decline in saving, increase
in investment, and increase in the current account deficit as Turkey catch up with its Euro area
partners. The second, less benign, view, claims that the strong dependence on international
capital flows creates concerns about the stability and sustainability of the growth process.
Indeed, the global financial crisis of 2008-2009 can be viewed as an example of the vulnerability
of financially open economies to developments in external financial markets. Although
international capital flows rapidly returned to Turkey after the crisis, perhaps a sign of the good
structural policies implemented since 2001, there are still concerns about whether these levels
of capital inflows are sustainable.
Perhaps more importantly, the current level of saving in Turkey is not exceedingly low
relative to its historical pattern: Turkey’s average saving rate during the period 1980-2008 is
slightly above its 2007 level. Even though Turkey enjoyed a large saving boom during the 1990s,
the 1980s, particularly the first half, was a decade with very low saving rates, even lower than
those observed in recent years (Figure 1). The important question is, therefore, whether
current low levels of saving rates are a temporary phenomenon, as the catching up hypothesis
described above suggests, or whether current levels of saving in Turkey reflects a longer term
problem that was temporarily alleviated in the 1990s.
The purpose of this paper is to review the international experience on saving rates and
its policy and non-policy determinants. In the process, Turkey’s relative position is considered
and it is asked whether Turkey’s saving behavior is consistent with the experience of other
countries, or if there is something different about Turkey. It is argued that Turkey’s behavior is
in line with the international experience, in the sense that if a typical country had saving
determinants similar to those of Turkey, its saving rate would be similar to that observed in
Turkey. This finding allows for a deeper analysis of the reason why Turkey’s saving rate is low,
2
why it has been declining in the last few years, and what are the future prospects for Turkey’s
saving rate.
The paper is organized as follows. Section 2 discusses the international evidence on
saving providing a literature review of macro and micro studies of saving and illustrating some
results using a large cross-country, time series panel data set composed of 104 developing and
developed countries over the period 1980-2008. The data set is used to describe world saving
trends and to compare Turkey’s experience with that of other countries. Subsection 2.2
provides a broad literature review of the main micro and macro determinants of saving based
on a large number of empirical studies. This subsection also uses the aforementioned data set
to show long-run relationships between saving rates and the determinants identified by the
empirical literature. Subsection 2.3 reviews the tight correlation between investment and
saving across the world. It discusses the current stance of the empirical literature and provides
new evidence regarding the correlation between saving and investment. It is argued that,
although in high income countries investment and saving decisions in the short-run seem to be
decoupling through time, in developing countries this is not the case: countries who save more
are countries who investment more. This is important as a tight connection between saving and
investment could be one mechanism through which an increase in the former drives growth, at
least in the short and medium runs. Section 3 of the paper uses the available evidence to
explain the current decline of Turkey’s saving rate as a function of its determinants, and
provides projections of Turkey’s saving rate into the future under different scenarios about
growth, public deficits, terms of trade levels, and financial development. Section 4 presents
three relevant case studies: Chile, Morocco, and Thailand. Finally, section 5 summarizes the
main findings of the paper and considers some policy implications relevant for Turkey.
2. The International Experience
Before proceeding to the literature review about the determinants of saving, this
section presents some average trends of saving across the world over the period 1980-2008. In
order to gain better understanding of the position of Turkey relative to other countries, this
3
section consider different cuts of the data: countries are first divided by world regions, next by
income groups, next by whether these countries are transitional or takeoff economies, and
finally Turkey’s saving rate is compared to that of a group of selected countries similar to
Turkey along some dimension or that serve as a useful benchmark. The sources of data used for
these graphics and all subsequent analysis are detailed in Appendix A.
2.1 Saving Trends
Figure 1. Saving, investment, and the current account in Turkey
30%
4%
25%
20%
0%
15%
10%
-4%
5%
0%
Current Accout (%GNDI) (right scale)
Domestic Saving Rate (%GDP)
National Saving Rate (%GNDI)
Investment Rate (%GNDI)
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
-8%
Figure 1 depicts saving, investment, and the current account in Turkey during the period
1980-2008. The figure shows two different saving rates that differ according to the definition of
income that is used to compute them. The series labeled “Domestic Saving Rate” plots saving
defined as GDP minus total (government and private) consumption divided by GDP. This is the
standard definition of saving rates. On the other hand, the series labeled “National Saving Rate”
replaces GDP with the Gross National Disposable Income (GNDI). Because GNDI nets out from
GDP all international transfers, factor and interest payments, valuation changes in foreign
assets, and remittances from abroad, the national saving rate better captures the actual saving
behavior of national agents. (A more detailed description of these differences is contained in
the Appendix.) In many cases, particularly in low income and developing countries, there are
4
substantial differences between the two saving rates. Finally, the investment rate and current
account deficit displayed in the Figure are both measured as a fraction of GNDI.
This graph reveals several things. First, domestic and national saving rates in Turkey are
similar. In effect, outflow of net income (i.e. factor and interest payments) averaged about 2
percentage points of GNDI during 1980-2000, and then declined to 1 percentage point of GNDI
by 2008. That outflow of income was compensated by the inflow of current transfers of the
order of 3 percentage points of GNDI during 1980-2000. Since then, the inflow current transfers
declined steadily and stabilized at less than 0.5 percentage points of GNDI since 2003 (see
Figure 2). The net result is that Turkey experienced net inflows of about 1 percentage points of GNDI
between 1980 and 2000, and net outflows of about 1 percent of GNDI since then. These numbers are
not big enough to generate a large difference between national and domestic saving rates. Second,
saving in Turkey went through three clear phases: two periods of low saving rates, 1980-1986
and 2000-2008, and a saving boom during 1987-1998. Third, a large and increasing current
account deficit emerged since 2003, reaching a record deficit of 6 percentage points of GNDI by
2006. This current account deficit was fueled by the simultaneous increase in investment and
decline in saving. Finally, the current level of saving in Turkey, of about 16.5 percent, is just
slightly below the average saving rates during the entire period—the average domestic and
national saving rates are 18 and 19 percent, respectively. Thus, the current low level of saving
in Turkey does not appear to be a new problem.
Because the national saving rate is the preferred saving measures, the rest of paper will
focus entirely on the national saving rate instead of the domestic saving rate even though in the
case of Turkey both are of a similar magnitude.
5
Figure 2. Net income and current transfers from abroad in Turkey
4%
2%
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
0%
-2%
-4%
Net Income (%GNDI)
Net Transfers (%GNDI)
Net Income + Transfers (%GNDI)
The decomposition of saving by world regions is shown in Figure 3.2 The aggregate
world saving rate remained remarkably constant through time, at around 19 percentage points
of GNDI. On the other hand, saving rates across regions show substantial dispersion both
through time and relative to other regions. The median saving rate in countries in the East Asia
and the Pacific region (EAP), the region with the highest saving rates in the world, increased
from 27 percentage points of GNDI in the 1980s to over 30 percent during 1990-2008. At the
other end of the spectrum, countries in Sub-Saharan Africa (SSA) have low levels of national
saving, although they seem to be increasing through time: the median saving rate in SSA
increased from 8 percent in the 1980s to 10 percent in the 1990s and further to 14 percent in
the 2000s. These increases in SSA’s (still very low) saving rates reflect the large international
transfers received by SSA countries over this period.
The median country in the Middle East and North Africa (MENA) region showed stable
saving rates during the 1980s and 1990s, of about 21 percentage points of GNDI, but then
increased to over 25 percentage points of GNDI during the 2000s. The median national saving
rates in the South Asia (SA) region increased from 16 percent in the 1980s to 19 percent in the
2
The world saving rate is computed as the median saving rate in a sample of 104 developing and developed
countries. Saving rates by regions are also computed as the median saving rate of the countries composing the
particular region. Details about the database are contained in the Appendix.
6
1990s and further to 20 percent in the 2000s. The Latin American and the Caribbean region
(LAC) shows a similar pattern than the SA’s region, with saving rates increasing from 15 percent
in the 1980s to 17 percent in the 1990s, and next to somewhat less than 19 percentage points
of GNDI during the 2000s. On the other hand, the East Europe and Central Asia region (ECA)
show declining national saving rates through time: the saving rate dropped from over 25
percentage points of GNDI during the 1980s to 21 percent during the 1990s and further to 18
percent during the 2000s. The large decline observed between the 1980s and 1990s is due to
the saving collapse observed in the transition countries of Eastern Europe.
Except for the temporary increase during the 1990s, Turkey’s saving rate is low relative
to saving rate in most of the world regions, particularly during the 2000s. In effect, Turkey’s
saving rate during the 2000s is only higher than the low saving rate of the median Sub-Saharan
African country and closer to those observed in Latin American countries.
Figure 4 groups countries in terms of their income levels, as categorized by the World
Bank. Several facts emerge from this figure. First, high income countries have the highest saving
rates in the world. The median non-OECD high income country increased its saving rate
enormously between the 1990s and the 2000s, from 23 percentage points of GNDI to 33
percentage points of GNDI—it should be noted, however, that the number of observations in
this country group is relatively small, which could be biasing considerably this finding. On the
other hand, the saving rate in OECD high income countries declined slightly from 22 percent to
21 percent between the 1980s and the 1990s, but then increased to 23.5 percent in the 2000s.
Second, the median Upper Middle Income and Lower Middle Income countries have similar
national saving rates, of somewhat less than 20 percentage points of GNDI, with the difference
that the saving rate of Upper Middle Income countries seems to be decreasing through time.
Third, low income countries have the lowest saving rates, which should come as no surprise as
most low income countries are Sub-Saharan African countries.
7
Figure 3. Saving rates by world region
Average '80-'89
30%
Average '90-'99
Average '00-'08
20%
10%
0%
Turkey
World
MENA
SA
SSA
ECA
LAC
EAP
Turkey does not compare favorably when countries are divided by income groups
either. Except for the increase in the national saving rates during the 1990s, Turkey’s saving
rate is lower than that of countries with similar income level (Upper Middle Income countries).
Figure 5 shows the saving behavior of Takeoff countries, Transition countries, and
China.3 Takeoff countries are defined a priori as those developing countries that achieved high
and sustained growth rates over the entire sample period. 4 China’s saving rate, which was
initially very high, increased substantially through time: China’s saving rate increased from an
average of 36 percent during 1980-1989 to an average of 41 percent during 1990-1999, and
further to 46 percent during 2000-2008. Although not as impressive as China’s performance,
the median Takeoff country also shows large saving rates over the entire period, increasing
from 27 percent during the 1980s to 32 percent during the 1990s and then declining slightly to
31 percent during the 2000s.
3
The group of transition countries in our sample includes Belarus, Bulgaria, Czech Republic, Estonia, Hungary,
Kazakhstan, Kyrgyz Republic, Latvia, Lithuania, Poland, Romania, Slovak Republic, Slovenia, and Turkmenistan,
Ukraine, and Uzbekistan.
4
The group of takeoff countries includes China (considered separately), Chile, Hong Kong, Indonesia, Korea,
Malaysia, Mauritius, Singapore, Taiwan, and Thailand.
8
Figure 4. Saving rates by income group
Average '80-'89
30%
Average '90-'99
Average '00-'08
20%
10%
0%
Turkey
Low Income Lower Middle Upper Middle High Income: High Income:
Income
Income
Non-OECD
OECD
Saving rates in Transition countries collapsed between the 1980s and the 1990s. This
collapse was due to the onset of the economic transformation that started around 1990 in the
Eastern European countries. There are two possible explanations for this collapse: first, the end
of involuntary saving due to the movement from a centrally planned to a market oriented
economy (Denizer and Wolf, 2000), and second, the decline in short term income together with
the prospects of higher economic growth in the future and the adjustment of consumer
durables may have depressed the national saving rate (Schmidt-Hebbel and Servén, 1998).
9
Figure 5. Saving rates in takeoff and transition countries
50%
Average '80-'89
40%
Average '90-'99
Average '00-'08
30%
20%
10%
0%
Turkey
Takeoff
Transition
China
Finally, Figure 6 considers the saving behavior of a selected group of countries. These
are countries that serve as a benchmark to compare their saving behavior with that of Turkey
either because of cultural similarities (Egypt, Pakistan, Morocco) because they have similar
institutional and economic backgrounds (Chile) or because they can serve as a useful
benchmark for comparison (Thailand and Malaysia).
Egypt’s saving rate remained stable at around 20 percentage points of GNDI through the
period, with a small decline during the 2000s. Pakistan’s saving rate during the period 19801999 remained stable at around 15 percentage points of GNDI, but then increased to almost 18
percentage points of GNDI during the 2000s. Morocco’s was successful in permanently
increasing its saving rate: Moroccan saving rate increased from 18 percent during the 1980s to
21 percent during the 1990s and then further to 28 percent during the 2000s, reaching a level
similar to that of East Asian countries. Section 4 describes the Moroccan experience in more
detail, and suggests that a surge in remittances explains, to a large extent, the increase in
Morocco’s saving rate. Chile is another example of an economy that succeeded in permanently
increasing its saving rate. In effect, Chile’s saving rate rose substantially from an average of 12
percentage points during the 1980s to 23 percentage points during the 1990s and further to 24
percent during the 2000s. The increase in Chilean saving rate between 1984 and 1989 was
10
spectacular, and a discussion of that episode is contained in section 4. The Asian countries,
Thailand and Malaysia, have extremely high saving rates. Malaysia’s high saving rate of 26
percent during 1980-1989 increased abruptly to 37 percent during 1990-1999 and further to 38
percent during the 2000s. Thailand also displays large saving rates although somewhat lower
than those in Malaysia; Thailand’s saving rate increased substantially from 26 percentage points
of GNDI during the 1980s to 34 percent during the 1990s, but then declined to just over 30
percent during the 2000s (section 4 discusses Thailand’s experience in more detail). Compared
with these countries, Turkey has a relatively low saving rate, and none of these countries
suffered a decline in the national saving rate as large as that suffered by Turkey during the last
decade.
Figure 6. Saving rates in selected countries
40%
Average '80-'89
Average '90-'99
Average '00-'08
30%
20%
10%
0%
Egypt
Pakistan
Turkey
Morocco
Chile
Malaysia
Thailand
In summary, Turkey’s saving rate is relatively low independently of how we cut the cross
country data: it is below the saving rate of countries in its same income group and closer to the
saving rate of low income countries and Sub-Saharan African countries; Turkey’s saving rate is
substantially below that of takeoff and transition economies, and is similar to the saving rate of
countries with a similar cultural background: Egypt and Pakistan.
2.2 Determinants of Saving
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This section provides a literature review of the main micro and macro determinants of
private saving that are based on systematic econometric analyses. These determinants are
summarized from a reading of cross-country panel data studies, country studies, and household
and corporate survey studies. Most of these papers consider reduced form regressions where
the dependent variable is a measure of the national or private saving rate and the independent
variables are chosen according to analytical relevance.
While the main objective of this section is to review the determinants of saving, it is
important to have a well defined theoretical framework to interpret the empirical findings. For
that reason, whenever appropriate, the findings are discussed and interpreted in terms of
different versions of the Theory of Consumption. Understanding the behavior of the saving rate
requires understanding the intertemporal allocation of consumption. This logic applies to the
private sector—how do consumers and corporations allocate their resources through time—
and to the public sector—how do governments allocate public expenditures and taxes through
time. Perhaps because the behavior of the public sector is still not well understood, the
overwhelming majority of the theoretical literature focuses on understanding the consumption
behavior of the private sector. The purpose of this section is to briefly summarize the main
determinants of consumption—and therefore saving—as identified by the theoretical
literature.
Most modern theories of consumption and saving are based on one of two basic
paradigms: the Permanent-Income model, based on infinitely lived consumers or perfectly
altruistic families, and the Life-Cycle model, based on the aggregation of many finitely lived
overlapping generations. Many times, these theories predict the same qualitative dependence
of saving on a given determinant; other times, their predictions differ and that is taken as an
identifying restriction to prefer one model over the other. These theories can be thought as two
theoretical extremes, with reality lying somewhere in between: while it is certainly false that
families are perfectly altruistic toward their descendents, it is not less false that families do not
care at all about them.
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In discussing the determinants of saving, this section also shows a number of bivariate
scatter plots between the national saving rate and its determinants, devoting particular
attention to Turkey’s position relative to other countries in the world. As mentioned above, the
figures that follow are based on the broader definition of national saving, defined in terms of
the GNDI concept of income. The database used for creating these scatter plots as well as the
previous graphs is a cross-section, time-series unbalanced panel of 104 high income and
developing countries that cover the period 1980-2008 (see appendix A for more details).
In what follows we review the non-policy determinants of the private saving rate as
identified by a large group of studies. These include persistence, the level of income, income
growth, demographic factors, and different measures of economic uncertainty. The analysis of
the policy determinants follows afterwards.
PERSISTENCE:
Saving rates show substantial persistence over time. That is, even after
controlling for a large number of policy and non-policy determinants, lagged values of the
saving rate remains strongly significant. This finding has the consequence that the effects of a
change in any determinant of saving are fully realized after a number of years. Loayza, SchmidtHebbel, and Servén (2000a) find that the long-run response of a change in a given determinant
of saving is about twice as large as the short-run (within a year) impact. Other studies that
document the importance of the dynamic nature of saving rates include Agenor and Aizenman
(2004), Ozcan and Ozcan (2004), IMF (2005), Horioka and Wan (2007), and Ferrucci and Miralles
(2007).
The scatter plot in Figure 7 depicts the strong persistence of the national saving rate
across countries. The horizontal axis contains the average saving rate over the period 19801989, while the vertical axis, the average saving rate over 1990-1999. The straight line in the
figure is the regression line of the 1980s saving rate on the 1990s saving rate. The positive
relation between these 10 year averages is clear: countries with high saving rates during the
1980s are countries with high saving rates during the 1990s.
13
Figure 7. Persistence of saving rates
1980s versus 1990s
50%
1990s Savimg Rate (%GNDI)
40%
30%
Turkey
20%
10%
0%
-10%
0%
-10%
10%
20%
30%
40%
50%
1980s Saving Rate (%GNDI)
Turkey’s observation lies above the regression line. This means that Turkey’s average
saving rate of over 22 percent of GNDI during the 1990s is almost 4 percentage points above
that predicted for a typical world country having the same saving rate that Turkey had in the
1980s. In effect, the regression line predicts that a typical country with a saving rate of 17.6
percentage points of GNDI in the 1990s (Turkey’s level of saving in that period), will have a
saving rate of 18.4 percentage points of GNDI during the 1990s. This observation reflects the
saving boom experienced by Turkey during the late 1980s and the 1990s.
INCOME: Higher levels of per capita income are invariable associated with higher saving rates.
This finding has been widely documented in the empirical literature; see, for example, Edwards
(1996), Loayza, Schmidt-Hebbel, and Servén (2000a), Ozcan and Ozcan (2004), and Chaturvedi,
Kumar, and Dholakia (2009).
The impact of higher income on saving, however, varies by country groups. In particular,
changes in real income per capita in developing countries have a higher impact on saving than
in OECD countries. Indeed, the estimates in Loayza, Schmidt-Hebbel, and Servén (2000a)
suggest that doubling per capita disposable real income in developing countries, keeping all
other determinants constant, raises the private saving rate by about 13 percentage points of
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disposable income in the long-run. On the other hand, the same experiment applied to OECD
countries gives an increase in the long run private saving rate of just 4 percentage points of
disposable income. However, because other determinants—demographic, institutional, and son
on—are never equal in practice and are likely to change as the income of a country increases,
movements in these other determinants are likely to reduce (or perhaps reinforce), the level of
saving as the economy develops. In any case, these estimates imply that policy measures aimed
at increasing income independently of saving—through, for example, institutional reforms,
import of new technologies, and so on—are an indirect and effective way of increasing saving
rates.
The Permanent Income model of consumption differentiates temporary from
permanent income shocks, with the former having a larger impact on saving than the latter. In
effect, according to the theory, consumption depends on the present value of future incomes.
Because temporary income windfalls affect the present value of income by a small amount,
consumption increases substantially less than one-to-one with the temporary income windfall,
which is mostly saved. In contrast, permanent changes in income affect substantially the
present value of future incomes which has a large impact on current consumption and,
therefore, a small (or nil) impact on saving. Loayza, Schmidt-Hebbel, and Servén (2000a) test
this hypothesis by decomposing the income series using different filters. They find that, in
effect, temporary income changes have a larger impact on private saving than permanent ones.
The strongly positive relation between saving and income is displayed in Figure 8. This
figure reports average saving rates and the logarithm of per-capita Gross National Income
measured in 2005 purchasing power parity (PPP) prices. In effect, the figure confirms that
countries with higher income are countries that save more. Although close to the regression
line, the chart shows that Turkey’s saving rate is slightly below the saving rate of a typical
country with Turkey’s level of per capital GNI: about 19 percentage points in Turkey versus
almost 21 percentage points predicted by the regression line.
15
Figure 8. saving and per-capita income
Average, 1980-2008
50%
Savimg Rate (%GNDI)
40%
30%
20%
Turkey
10%
0%
6
7
8
9
10
11
(Log) Per-capita GNI
TERMS OF TRADE: Most empirical studies find a positive and significant effect of improvements
in the terms of trade on private saving rates. In effect, an increase in the terms of trade
increases the purchasing power of the country’s exports, thereby increasing real income (the
Harberger-Laursen-Metzler effect). Thus, improvement in terms of trade affect saving rates, at
least qualitatively, in the same way as income does. Studies that find a positive impact of the
terms of trade on saving include Loayza, Schmidt-Hebbel, and Servén (2000a), Agenor and
Aizenman (2004), Ozcan and Ozcan (2004), IMF (2005), Ferrucci and Miralles (2007), among
others.
Loayza, Schmidt-Hebbel, and Servén (2000a), and Agenor and Aizenman (2004) also
decompose terms of trade shocks into their temporary and permanent components. They
confirm the hypothesis derived from the permanent income theory that temporary changes in
terms of trade increase the saving rate substantially more than permanent ones.
Figure 9 displays the correlation between average saving and average terms of trade
based on our panel dataset. Although this simple bivariate scatter plot suggests a slightly
negative relation between saving and terms of trade, the relation is not significantly different
from zero. In addition, because most empirical studies that use multivariate empirical models
16
find a positive and significant relation between saving and the terms of trade, the lack of a
significant sign in the scatter plot is likely to reflect the existence of omitted variables that are
correlated with both, the saving rate and the terms of trade. In any case, Figure 9 shows that
Turkey behaves almost exactly as the typical country in terms of having a saving rate that is
consistent with its average level of terms of trade. That is, Turkey’s observation lies almost
perfectly on the regression line.
Figure 9. Saving and terms of trade
Average, 1980-2008
50%
Savimg Rate (%GNDI)
40%
30%
20%
Turkey
10%
0%
0.8
0.9
1
1.1
1.2
1.3
1.4
1.5
1.6
Terms of Trade (2000=1)
INCOME GROWTH: Most cross-country studies find a positive association between per capita
income growth and the saving rate. The papers are too numerous to cite, but some prominent
ones are Modigliani (1970), Carroll and Weil (1994), Edwards (1996), and Loayza, SchmidtHebbel, and Servén (2000a).
Some observers interpret this correlation as proof that increasing the saving rate
promotes growth. But, of course, since correlation does not imply causation, it could be the
case that higher income growth induces higher saving, or perhaps that a third structural factor
determines both, the saving rate and the growth rate of income. The direction of causality
between saving and growth has profound policy implications. If it is the case that saving drives
growth, then policies aimed at boosting the saving rate are likely to induce permanent
17
increases in output. On the other hand, if the direction of causality goes from growth to saving,
policies aimed at increasing saving rates may fail to increase growth on a permanent basis.
These policies may have a temporary impact on growth by channeling these saving to
investment and, therefore, to capital accumulation, but in the long run, they could fail to
increase growth permanently—this is the prediction of the standard growth model with
diminishing returns to capital.
Researchers tried to account for the simultaneity issue through several ways: Loayza,
Schmidt-Hebbel, and Servén (2000a) use a panel instrumental variable approach to estimate
the effect of income growth on saving. They find that an increase in income growth of 1
percentage points increases the private saving rate by roughly the same amount. The saving
increase, however, is mostly transitory. To tackle the causality issue, Rodrik (2000) examines
long-lasting and short-lived episodes of saving and growth episodes. He concludes that
sustained increases in saving rates are typically followed by temporary increases in output
growth, but after a number of years, that higher growth disappears. In contrast, sustained
increases in growth are associated with permanent increases in the saving rate. Rodrik’s
findings suggest that policies targeted at increasing saving rates need not generate permanent
increases in output growth.
On the other hand, a recent paper by Aghion et al (2009) finds that, in developing
countries, higher saving rates help predict (Granger-cause) higher income growth in the future.
In contrast, higher saving rates do not predict higher income growth in developed countries.
Although Granger causality (predictability) is not economic causality, this finding is consistent
with the idea that higher saving could drive higher growth. Thus, the issue of causality between
saving and growth is still an open question in the empirical literature.
The strong and significant relationship between growth of GDP per person and the
national saving rate is depicted in Figure 10. Countries that grow faster are countries that save
more. On average, an increase in one percentage point in the growth rate of per capita GDP is
associated with an increase in 3 percentage points in the saving rate. In the last three decades,
Turkey has been slightly below the median country in terms of its saving rate—the average
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Turkey’s saving rate is about 19 percent, while the median saving rate in the sample is 19.4
percent—but above the median country in terms of its per capita GDP growth rate—per-capita
GDP grew at 2.6 percent during 1980-2008 in Turkey, but at 1.7 percent in the median country.
In addition, the typical country that grew at 2.6 percent in our sample (as represented by the
regression line) had an average saving rate of 22 percentage points of GNDI, three percentage
points above that of Turkey.
Figure 10. Saving and growth
Average, 1980-2008
50%
45%
40%
Savimg Rate (%GNDI)
35%
30%
25%
20%
Turkey
15%
10%
5%
0%
-4%
-2%
0%
2%
4%
6%
8%
10%
Per-capita GDP Growth
UNCERTAINTY: The theory of precautionary saving predicts that greater uncertainty together
with incomplete financial markets lead to higher saving rates. The reason for the higher saving
is that risk-averse agents, being unable to perfectly insure idiosyncratic risks, increase their
assets to avoid suffering large adjustment in consumption in the face of uncertain events
(Skinner 1988, Zeldes 1989, Carrol and Samwick 1998).
In the empirical literature, the inflation rate is one of the most used proxies for
macroeconomic uncertainty. The sign and significance of the inflation rate, however, varies
across studies. Loayza, Schmidt-Hebbel, and Servén (2000a), for example, find a positive and
significant effect of inflation on saving: a decline of inflation by 10 percentage points reduces
private saving by more than one percentage point. In addition, Chaturvedi, Kumar, and
19
Dholakia (2009) also report a positive and significant effect of inflation on saving in South-East
Asian and South Asian countries, as does Ferrucci and Miralles (2007) for a large group of
emerging market economies. Other studies, however, find that the inflation rate is not
significantly associated with private saving (e.g. Edwards, 1996) or even negatively associated
with it (e.g. Dayal-Gulati and Thimann, 1997).
Figure 11. Saving and inflation
Averages, 1980-2008
50%
Developing
High Income
Developing (fit)
High Income (fit)
Saving Rate (%GNDI)
40%
30%
Turkey
20%
10%
0%
0%
20%
40%
60%
80%
100%
Inflation Rate
A simple scatter plot between the saving rate and the inflation rate does not reveal any
clear relationship between these variables. The lack of a clear pattern remains even after
adjusting for the level of income (Figure 11). This is likely to reflect the problem of omitted
variables. We also observe that Turkey’s average inflation rate is among the highest in our
sample during the period 1980-2008, and close to the (insignificant) regression line.
The urbanization rate is also commonly used as a proxy of macroeconomic uncertainty.
In effect, rural incomes are substantially more uncertain that urban incomes, particularly in
developing countries. Thus, an increase in urbanization should be associated with a decrease in
overall income volatility. Therefore, in the absence of financial instruments to diversify rural
income risks, rural household would save a larger fraction of their income for precautionary
motives. The empirical literature has found a negative and significant effect of urbanization on
20
saving rates (Loayza, Schmidt-Hebbel, and Servén (2000a) and Edwards 1996). Loayza, SchmidtHebbel, and Servén (2000a) estimates suggest that a 1 percentage point increase in the
urbanization rate leads to a decline of 0.4 percent of the private saving rate.
Figure 12. Saving and urbanization rate
Average, 1980-2008
50%
Savimg Rate (%GNDI)
40%
30%
20%
Turkey
10%
0%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Urbanization Ratio
A simple bivariate plot between saving and the urbanization ratio is unable to capture
the negative association found in the panel studies (Figure 12). Again, this is most likely because
several omitted variables not present in the scatter plot are also correlated with the degree of
urbanization. For example, the level of income is highly correlated with the urbanization rate. In
any case, Turkey’s average saving rate is in line with that predicted for a country with Turkey’s
level of urbanization (Turkey’s observation lies almost exactly on the regression line).
DEMOGRAPHICS: The Life-Cycle model predicts a hump-shaped pattern of consumption over
time. Over their lifetime, consumers borrow when young, saving reach a peak at middle age,
and then dissave during retirement as they run down their assets. This basic theory predicts
that saving would be negatively associated with young-age and old-age dependency ratios.
Adding other components into the model could weaken the negative association between the
old-age dependency ratio and saving. For example, Bloom, Canning, and Graham (2003) add
21
longevity and health into the basic Life-Cycle model and find that increases in life expectancy
could lead to higher saving rates at all ages, including those belonging to the old-age group.
Figure 13. Saving and dependency rates
50%
50%
40%
40%
Saving Rate (%GNDI)
Savimg Rate (%GNDI)
Average, 1980-2008
30%
20%
30%
20%
Turkey
Turkey
10%
10%
0%
-3.4
0%
20%
30%
40%
50%
60%
70%
80%
Young Dependency Ratio
90%
100%
-2.9
-2.4
-1.9
(Log) Old Dependency Ratio
-1.4
Developing
High Income
Developing (fit)
High Income (fit)
-0.9
The evidence gathered from panel data studies suggests that the old-age dependency
ratio (the ratio of people over 65 years old to the working age population) and the young-age
dependency ratio (people with less than 15 years divided by working age population) affect
negatively private saving rates (see for example, Loayza, Schmidt-Hebbel, and Servén (2000a),
Ozcan and Ozcan 2004, and IMF 2005). Results in Loayza, Schmidt-Hebbel, and Servén (2000a)
indicate that a rise in the young-age dependency ratio by 1 percentage point leads to a decline
in the private saving rate of 0.3 percentage points, and that an increase in the old-dependency
ratio by 1 percent leads to a decline of 0.65 percentage points in the private saving rate.
Based on our data set, we observe a strong negative correlation between average saving
and the average young dependency ratio (left panel of Figure 13). On average, an increase of 10
percentage points of the young dependency ratio is associated with a decline of over 2
percentage points in the national saving rate. Moreover, because Turkey lies exactly on the
regression line, Turkey’s saving rate of 19 percent is entirely consistent with its average young
dependency ratio of 56 percent.
22
On the other hand, the right panel of Figure 13 displays a scatter plot with the saving
rate and the natural logarithm of the Old Dependency ratio. There is no clear correlation
between these variables across the entire sample, which most likely reflects a problem of
omitted variables. In effect, a regression of saving on the (log) Old Dependency ratio on the
entire sample delivers a positive and significant coefficient (not shown in the graph). However,
because the life expectancy increases with the level of income, and income is positively
associated with the saving rate, it is likely that the positive association between the Old
Dependency ratio and saving is capturing the correlation between income and saving. A simple
way to adjust for the level of income is to divide the sample between high income countries
(blue circles) and developing countries (green triangles). If we focus on the group of high
income countries, there is a clear negative association between saving and the old dependency
ratio, as theory predicts. Within the group of developing countries, however, this association is
not present, which is likely to reflect that several other important variables are omitted.
Another factor that has been identified as a potential determinant of saving is female
labor force participation. This variable is particularly important in Turkey, as female
participation has been historically low and slightly declining through time: the WDI reports that
the female participation rate declined from an average of 34.2 percent during the 1980s to 32.6
percent during the 1990s, and further to 27.4 percent during the 2000s. In theory an increase in
female labor force participation could lead to an increase or to a decrease in measured
household’s saving. On the one hand, an increase in female participation increases the
household’s income and reduces the dependency rate, suggesting that saving increases when
female participation increases. On the other hand, there are a number of factors that could
lead to a decrease in measured saving when female participation increases (see Attanasio and
Banks, 1988). First, if the precautionary motive for saving in quantitatively important, female
participation may reduce uncertainty about household income, leading to a decrease in
precautionary saving; second, any domestic services purchased on the market to substitute for
those that women produce at home when not working—e.g. child care services—will cause
measured saving to decline.
23
Attanasio and Banks (1998), based on UK household data from the Family Expenditure
Survey for the period 1968-1992 and synthetic cohort techniques report a negative impact of
female labor force participation on household saving. In contrast, based on Australian
household survey data and an extended Life-Cycle framework, Apps and Rees (2001) report
positive and substantial impact of female labor force participation on household saving. In
particular, the authors claim that the marginal propensity to save of a second earner’s
income—typically, the wife in a household—is very high, even after controlling for the presence
of costs of entering the labor market.
In addition to the factors mentioned above, a number of policy variables have been
found to affect saving either directly or indirectly. The remaining of this section discusses these
policy variables, which include fiscal policies, pension reform, and financial liberalization.
FISCAL POLICY: One of the main predictions of the permanent income model and other models
with infinitely lived consumers or perfectly altruistic families is that, under some conditions,
changes in the timing of taxes do not affect the consumption behavior of private agents. In
particular, given a sequence of government expenditures, it is irrelevant whether the
government raises taxes today or in the future in order to pay these expenditures. Thus,
changes in public saving derived from changes in the timing of tax collection are offset one-toone with changes in private saving, leaving national saving unchanged (for a textbook
discussion of this finding, referred to as the “Ricardian Equivalence Theorem”, see chapter 10 of
Ljungqvist and Sargent 2004). It should be noted, however, that if the change in public saving is
due to changes in government expenditures instead of current taxes, the Ricardian Equivalence
Theorem does not hold, and changes in public deficits will have an impact on national saving.
Most empirical studies find that public saving only partially crowds out private saving
(Edwards 1996, Dalai-Gulati and Thimann 1997, Loayza, Schmidt-Hebbel, and Servén 2000a,
and IMF 2005). Although this finding is not proof that the Ricardian Equivalence Theorem does
not hold—because the change in public saving could be due to changes in public
expenditures—we follow the empirical literature and claim that the data is consistent with a
partial equivalence effect. Loayza, Schmidt-Hebbel, and Servén (2000a), for example, find that a
24
one percentage point increase in public saving leads to a decline of about 0.3 percentage points
in private saving in the short run and about twice that amount in the long run. This means that
if the public saving rate increases by 10 percentage points, the aggregate national saving rate
increases about 7 percentage points in the short run and about 4 percentage points in the long
run. Both short run and long run impacts are substantial, which suggest that public saving is an
effective instrument to increase the national saving rate. It should be noted, however, that the
offset coefficient varies substantially across studies. For example, Loayza and Shankar (2000)
estimate an offset coefficient of less than 30 percent in India, but Burnside (1998) finds an
offset coefficient of 80 percent in Mexico. Ozcan, Gunay, and Ertac (2003), find that in Turkey
an increase in the public saving rate by one percentage point decreases the private saving rate
just by 0.30 percentage points, implying that public saving could be an important tool to boost
the national saving rate in Turkey.
The relation between average national and public saving rates is depicted in Figure 14.
The coefficient of the regression line is about 0.71, suggesting that public saving is an effective
instrument to increase national saving rates. In effect, the long-run offset coefficient implicit in
that regression is about .29, meaning that, on average, an increase of 10 percentage points in
the public saving rate leads to a decline in private saving of about 2.9 percentage points, with a
net increase in national saving of 7.1 percentage points. Turkey’s observation lies above the
regression line, suggesting that its current level of national saving is higher than that predicted
for the typical country with Turkey’s average public saving deficit of 4 percentage points of
GNDI.
Tax incentives that modify the effective interest rates faced by households have been
identified as another policy tool to increase saving. In theory, however, the net impact of
increases in interest rate is ambiguous. The real interest rate is the intertemporal price of
consumption: the higher is the interest rate, the lower the price of future consumption relative
to today’s consumption. Thus, substitution effects (changes in the relative price) suggest a
positive association between interest rates and saving. Interest rates, however, also induce
25
wealth effects: an increase in interest rates changes the present value of future incomes which
affects current consumption.
Figure 14. National and public saving rates (%GNDI)
Averages, 1980-2008
50%
National Saving Rate (%GNDI)
40%
30%
Turkey
20%
10%
0%
-10%
-5%
0%
5%
10%
15%
Public Saving Rate (%GNDI)
Consistent with the theoretical predictions, the evidence on the elasticity of national
saving to changes in interest rates is mixed and ambiguous: while Loayza, Schmidt-Hebbel, and
Servén (2000a) find that an increase in interest rates affects negatively private saving; Edwards
(1996), Ozcan and Ozcan (2004), and IMF (2005) report a zero coefficient of interest rates on
saving; and Masson, Bayoumi, and Samiei (1995) find a positive effect. In the case of Turkey,
Ozcan, Gunay, and Ertac (2003) find that changes in real interest rate are not significantly
correlated with the saving rate; in contrast, based on household survey data, Van Rikckeghem
and Ucer (2010) claim that because a large number of households “live off interest income”,
wealth effects of changes in interest rates are likely to be large and perhaps outweigh
substitution effects on household saving. They find, in effect, that after the large drop in real
interest rate after the 2001 crisis (see next section), households with substantial interest
income did not reduce their saving—in a subsequent regression, however, a dummy variable
for having interest income turned out insignificant.
26
Figure 15. Saving and real interest rate
Averages, 1980-2008
50%
Savimg Rate (%GNDI)
40%
30%
20%
Turkey
10%
0%
-5%
0%
5%
10%
15%
20%
Real Interest Rate
Our panel data set shows a negative association between real interest rates and saving
across the world (Figure 15).5 Although there is substantial dispersion in the sample, the
regression line is significant at the 5 percent level. Turkey’s observation lies slightly below the
regression line, which means that its saving rate of 19 percent is just below that predicted for a
country with Turkey’s average interest rate (of 0 percent), about 20.5 percent of GNDI. This
negative correlation between saving and interest rates is consistent with Loayza, SchmidtHebbel, and Servén’s finding, suggesting that wealth effects are relatively more important than
substitution effects in the intertemporal consumption choice. It should be noted, however, that
a bivariate plot does not control for additional determinants of saving; doing so may change the
observed partial correlation of saving with the interest rate. In any case, the overall evidence
about the relation between real interest rates and saving is not conclusive.
FINANCIAL LIBERALIZATION: Episodes of financial liberalization are typically associated with
changes in the regulatory environment: liberalization of interest rates, elimination of credit
ceilings, enhanced prudential regulation and supervision, and increase in competition in the
finance sector.
These episodes of financial liberalization and, more generally, financial
5
In this figure two outlier countries were dropped: Belarus with an average real interest rate of -27 percent, and
Brazil, with an interest rate of 50 percent.
27
development, lead to changes in the flow of credit, the stock of credit, in prices (interest rates),
and in how efficiently are saving allocated to investment opportunities.
The impact that financial liberalization and development have on saving can be
decomposed in terms of their direct, short-run, impact and their indirect, long-run, impact. The
short-run impact, typically negative, has two components: a price channel reflected in higher
interest rates that is usually observed in episodes of financial liberalization, and a quantity
channel, reflected in the expansion of credit to previously credit-constrained private agents.
The impact of the price channel on saving is uncertain: higher interest rates lead to income and
substitution effects which affect saving in opposite directions. In contrast, the expansion of
credit that occurs immediately after the liberalization has a negative impact on saving.
In contrast, the indirect, long-run, impact refers to the positive effect that financial
liberalization and development have on improving financial intermediation. Countries with
efficient financial intermediaries are able to channel their saving and investments to their most
efficient uses, driving income growth. But as income increases, the saving rate increases as well,
as documented above. Thus, it could be that the long-run positive association between financial
development and saving is due to the positive impact that the former has on income growth.
(Levine, Loayza, and Beck (2000) and Levine (2005) document this fact across a large group of
countries.)
The prediction that the expansion of credit, everything else constant, reduces saving is
supported by the evidence: Loayza, Schmidt-Hebbel, and Servén (2000a) report that a 1 percent
increase in the ratio of private credit flows to income reduces the saving rate by about 0.75
percentage points in the long-run. Likewise, IMF (2005) report that, in emerging countries, a 1
percentage point increase in flow of credit relative to GDP is associated with a decline in the
saving rate of 0.74 percentage points in the long run. In contrast, the impact of the real interest
rate is seldom found to be strongly associated (positively or negatively) with private saving,
suggesting that the relative importance of income and substitution effect could be different
across countries and/or time periods. For example, Edwards (1995); Masson, Bayoumi, and
Samiei (1998); and IMF (2005) find that the real interest rate is not significantly associated with
28
the saving rate. On the other hand, Loayza, Schmidt-Hebbel, and Servén (2000a) find that a 1
percentage point increase in the real interest rate leads to a decline of saving rates of about
0.25 percentage points in the short run.
Micro data studies also find that financial liberalization lead, on impact, to a decline in
corporate saving as external finance becomes more readily available. In effect, corporations
that expect higher costs of external finance are found to increase retained earnings and reduce
dividend payments to shareholders and, therefore, increase saving. These finding is found in
several corporate saving studies, see for example, Aron and Muellbauer (2000) for the case of
South Africa, Hsieh and Parker (2007) for the case of Chile, and Love (2010) for the case of
Egypt.
The cross-country correlation between credit flows and saving is depicted in Figure 16.
There is a clear positive relation between these variables, which is inconsistent with the
findings in the literature. This inconsistency is likely to reflect a problem of omitted variables.
For example, private credit flow is highly correlated with the level of per capita income. Thus,
the positive correlation found Figure 16 is likely to be capturing the effect of income instead of
the exogenous component of credit flows on saving. In any case, Turkey’s observation is very
close to the regression line, meaning that Turkey’s saving rate is entirely consistent with its
average level of private credit flow.
29
Figure 16. Saving and private credit flow
Averages, 1980-2008
50%
Savimg Rate (%GNDI)
40%
30%
20%
Turkey
10%
0%
-5%
0%
5%
10%
15%
20%
25%
30%
Private Credit Flow (%GNDI)
Finally, some empirical studies considered the impact that financial depth, as proxied by
the stock of private credit or broad money (M2) relative income, has on saving. For example,
Loayza, Schmidt-Hebbel, and Servén (2000a) report a negative, although insignificant,
coefficient of the ratio of M2 to income on the private saving rate, and IMF (2005) and Ferrucci
and Miralles (2007) find that the stock of private credit relative to GDP affects negatively the
national saving rate. These two financial depth variables are highly correlated with income, thus
the positive correlations between these measures of financial depth and saving, reported in
Figure 17, are most likely capturing the impact of income instead of the exogenous component
of these variables. However, as was the case with most variables above, Turkey’s observation
lies very close to the regression line, suggesting that its saving rate is consistent with its current
level of financial depth.
30
Figure 17. Saving and financial depth
50%
40%
40%
Savimg Rate (%GNDI)
Savimg Rate (%GNDI)
Averages, 1980-2008
50%
30%
20%
Turkey
10%
30%
Turkey
20%
10%
0%
0%
1.5
2.5
3.5
4.5
5.5
1.5
2
2.5
(Log) M2/GNDI
3
3.5
4
4.5
5
5.5
(Log) Private Credit/GNDI
PENSION REFORM: The structure of the pension system has been identified as an important
determinant of the level of national saving. Although some proponents of privatizing pension
systems claim that replacement of a pay-as-you-go by a fully funded system is an effective tool
to increase national saving, in theory, implementation details are important. In effect, the
impact of pension reform on saving depends on the way the transition deficit is financed and on
the reform’s efficiency gains. If the government finances the deficit by issuing debt, private
saving rates are likely to remain roughly constant, because this policy entails making explicit an
implicit government liability. If, on the other hand, the public sector manages the transition by
imposing higher current taxes, or reducing government expenditures and pension payments to
current retirees, saving of current generations are likely to decline.
Panel data studies suggest that pay-as-you-go systems reduce national saving rates
(Edwards 1996, Dayal-Gulatti and Thiman 1997, Bailliu and Reisen 1998, and Samwick 2000)
and pension systems with mandatory fully funded contributions increase national saving (DayalGulatti and Thiman 1997). On the other hand, country case studies provide a less uniform view.
Evidence from Chile suggest that almost 4 percentage points of the 12.2 percentage point
increase in the national saving rate since 1986 can be attributed to the privatization of the
31
pension system (Schmidt-Hebbel 1999). Other case studies, however, provide less convincing
evidence (Samwick 2000). These discrepancies suggest that implementation details are, in
effect, crucial to determine whether pension reforms are useful tools to increase saving rates.
2.3 The Investment-Saving Correlation
In a closed economy saving equals investment. Each good that is not consumed today is
necessarily invested and the current account always equals zero. Therefore, higher saving leads
to higher investment and, therefore, to higher capital accumulation and income growth. On the
other hand, if the economy is open and capital is mobile, saving need not be equal to
investment and the economy could run current account deficits or surpluses. Most models of
international trade with capital mobility predict that capital should flow from countries with
low marginal productivity of capital to those with high marginal productivity of capital, in effect,
decoupling investment from saving decisions. Alas, in practice, the connection between
national saving and investment is quite close, even in substantially open economies. This
observation, first documented for OECD countries by Feldstein and Horioka (1980), also holds
for different time periods and for developing countries, and has been interpreted as proof that
capital is immobile even across industrial countries.6
Independently of the structural interpretation that is attached to the correlation
between investment and saving, if that correlation remains significant and roughly invariant to
some policy interventions, then one may conclude that targeted policies aimed at increasing
saving rates could have an impact on investment and, therefore, on growth. To what extent
these growth effects are permanent or temporary is still an open question. For example, the
standard growth model with some frictions in the mobility of capital predicts a short and
medium run impact of saving on growth. However, a saving-based growth agenda is likely to
become infeasible in the long run, as the levels of saving that are required to attain a given
growth rate in output could be increasing through time. This prediction is due to the decreasing
6
Feldstein (1983), Obstfeld (1986), Feldstein and Bacheta (1991), Tesar (1991), Obstfeld (1995), Coakley, Kulasi,
and Smith (1996), Mamingi (1997), Obstfeld and Rogoff (2000), Blanchard and Giavazzi (2002)
32
marginal productivity of capital that is embedded in the growth model (see Hevia and Loayza
for a quantification of this effect in the case of Egypt).
The following table, taken from Obstfeld and Rogoff (2000), documents the FeldsteinHorioka fact. The table reports the results of OLS regressions of the aggregate investment rate
(relative to GDP) on the national saving rate (relative to GDP) plus a constant, for a group of
OECD and non-OECD countries averaged over the eight year period 1990-1997. If investment
and saving decisions were perfectly decoupled from each other, the coefficient ߚ in Table 1
should be zero. The estimated coefficients, however, is positive and highly significant. For
example, the coefficient of 0.6 for OECD countries is sometimes interpreted as a proof that
capital is not highly mobile even among industrial countries. If this argument is correct, and the
positive correlation implies some sort of causation from saving to investment, as Feldstein and
Horioka suggest, then policies aimed at increasing saving could help increase investment and,
therefore, growth.
Table 1. Feldstein-Horioka regressions ሺࡵ/ࢅሻ = ࢻ + ࢼሺࡿ/ࢅሻ + ࢿ࢚
Averages, 1990-1997
No. observ
All countries
Countries with GNP/cap.>1000
Countries with GNP/cap.>2000
OECD Countries
56
48
41
24
ߙ
ߚ
ܴଶ
0.15
0.41
0.33
(0.02)
(0.08)
0.13
0.48
(0.02)
(0.09)
0.07
0.70
(0.02)
(0.09)
0.08
0.60
(0.02)
(0.09)
0.39
0.62
0.68
Source: Obstfeld and Rogoff (2000)
Notes: OLS Regressions. Standard errors in parentheses. OECD countries exclude Korea.
Figure 18 displays a scatter plot and the regression line between investment and saving
rates—both measured in terms of GNDI—based on the sample of 104 developed and
developing countries used in the last section, and averaged over the period 1980-2008. (Results
are almost identical if saving and investment rates are measured relative to GDP instead.)
33
There are two things to note. First, the strongly positive and significant correlation between
average investment and saving rates: the ܴ ଶ of the regression of average investment on
average saving is 0.72, and the coefficient of the regression is 0.63 with a standard error of just
0.04. Second, Turkey’s observation lies almost perfectly on the regression line, which means
that Turkey’s investment rate is perfectly in line with that predicted for a typical country with
Turkey’s level of saving rates.
Figure 18. Investment and saving rates
Average 1980:2008
50%
Investment Rate (%GNDI)
40%
30%
20%
Turkey
10%
(I/Y) = 0.1 + 0.63(S/Y)
R² = 0.718
0%
0%
10%
20%
30%
40%
50%
National Saving Rate (%GNDI)
Although the Feldstein Horioka finding is not controversial, its interpretation is. Many
authors challenge the interpretation of the high correlation between saving and investment as
indicating low capital mobility, both from empirical and theoretical grounds. 7 For example, the
positive correlation of saving and investment has been replicated in models with perfect capital
mobility. In particular, the correlation between saving and investment follows from the longrun cointegration of investment and saving in an intertemporal model of the current account.
Therefore, critics argue, the positive correlation between saving and growth does not measure
the lack of capital mobility but the long-run relation between investment and saving present in
any intertemporal model of the current account. Note, however, that the cointegration
7
Obstfeld (1985), Obstfeld (1989), Obstfeld (1995), Baxter and Crucini (1993), Obstfeld and Rogoff (1995), Obstfeld
and Rogoff (1996)
34
argument does not apply if we observe a high correlation between saving and investment in the
very short run.
Recently, Blanchard and Giavazzi (2002) present some evidence for the Euro area and
OECD countries showing that the tight correlation between investment and saving could be
weakening. They proceed to run regressions as those shown in Table 1 but on a yearly basis
over the period 1975-2001. They consider regressions of the form
ሺ‫ܫ‬/ܻሻ௜௧ = ߙ௧ + ߚ௧ ሺܵ/ܻሻ௜௧ + ߝ௜௧ ,
(1)
where ሺ‫ܫ‬/ܻሻ௜௧ and ሺܵ/ܻሻ௜௧ are ratios of investment and saving to GDP in country ݅ and year ‫ݐ‬,
and ߙ௧ and ߚ௧ are time dependent parameters. Their analysis shows that the coefficient ߚ௧ ,
which captures the short-run correlation between saving and investment, remains roughly
constant between 1975 and 1995, but then starts to decline in all country groups they consider.
Moreover, the drop in the coefficient is particularly large for countries in the Euro area,
suggesting that integration and financial globalization did, in fact, weaken the InvestmentSaving correlation.
To test whether these results extend to a larger group of countries and to more recent
periods, I used the panel dataset described above to run regressions of the form (1). Two issues
differentiate the following regressions from those of Blanchard and Giavazzi. First, the sample
that we use contains 104 countries, 68 of which are middle income and low income countries.
And second, the measure of saving and investment rates are different: while Giavazzi and
Blanchard use the domestic saving rate, we use the national saving rate after correcting for net
transfers and net income from abroad. As discussed in the previous section, this adjustment
better captures the actual saving performed by national agents of a country.
Figure 19 plots the evolution of the coefficient ߚ௧ together with its 95% confidence
interval when using the sample of all countries. The coefficient on the Investment-Saving
regression fluctuated at a level around 0.65 over the period 1980-1997. Since 1998, the
coefficient declined steadily reaching its lowest value of 0.17 in 2007. This result is consistent
with the claim that the higher financial integration lead to a decline of the sensitivity of
investment to saving, or a weakening of the Feldstein-Horioka puzzle.
35
Figure 19. Investment-Saving regression
All Countries
1.00
0.75
0.50
0.25
-0.25
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
0.00
Notes: GNDI measure of saving and investment rates; robust confidence intervals
IS Regression Coefficient
95% Confidence Interval
These coefficients, however, hide important differences between developed and
developing countries. For that reason, Figure 20 reports the same regression coefficients, but
now differentiating high income from middle and low income countries. For the group of high
income countries (left panel of Figure 20), the result is even more striking than before: the
decline in the regression coefficient that starts in 1997 is more pronounced than that found in
Figure 19, and by 2007 the regression coefficient becomes negative. Because the confidence
bands include the value zero since the year 2002, this finding is consistent with the view that, in
the short run, saving and investment became perfectly decoupled in high income countries.
That decoupling, in turn, is likely to be due to the deeper financial integration that took place
since the 1990s within that group of countries.
The story is different if we focus in the set of developing countries, to which Turkey
belongs. The right panel of Figure 20 depicts the Investment-Saving coefficient but this time
restricted to the set of middle and low income countries—we do not distinguish between
middle and low income countries because of the low number of observations in the latter
group. Although the regression coefficient does decline substantially since 1998, by 2007 it still
remains positive and statistically significant, with a point estimate value of 0.39. In other words,
even though the increase in globalization that took place since the mid-1990s did weaken the
36
investment-saving correlation, by 2007 this correlation remains positive and significant in the
group of developing countries. Thus, whatever the interpretation of the Feldstein-Horioka
puzzle is, it is still present in middle and low income countries.
Figure 20. Investment-Saving regressions
By Income Groups
Middle and Low Income Countries
High Income Countries
1.25
1.00
1.00
0.75
0.75
0.50
0.50
0.25
0.25
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
0.00
-0.25
IS Regression Coefficient
95% Confidence Interval
IS Regression Coefficient
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
-0.50
1982
1980
0.00
95% Confidence Interval
Related work by Aizenman, Pinto, and Radziwill (2004) tackle the investment-saving
correlation from a different perspective. They construct an index of self-financing ratio by
constructing a counterfactual series of capital stock in terms of domestic saving, and then
comparing the series with the actual capital stock that includes both domestic and foreign
saving. They find that almost 90 percent of the stock of capital in developing countries during
the 1990s is self-financed, and the this ratio remains remarkably stable during all the decade,
suggesting that the process of financial integration did not add new sources of financing capital
in developing countries.
Summarizing, although the Feldstein-Horioka fact seems to be less of a puzzle in
advanced countries, it still remains alive in developing countries, at least in the short-run. If, as
noted above, there is some short-run causality from saving to investment, these results suggest
that policies aimed at changing domestic saving may have an impact on aggregate investment
and, therefore, on growth in developing countries.
37
4. Saving in Turkey: Explanations and Projections
This section applies the available international evidence to decompose and project
Turkey’s saving rate as a function of its determinants. The exercise uses the estimates in Loayza,
Schmidt-Hebbel, and Servén (2000a) (LSS), which is one of the most comprehensive and
detailed studies about world saving rates to date. In particular, using the estimated coefficients
in that study and data from Turkey, this section discusses how much of the actual behavior in
Turkey’s saving rate can be accounted for by variations in its determinants. The main advantage
of performing this experiment is that LSS’s database has been thoroughly checked for quality
and consistency (Loayza, Schmidt-Hebbel, and Servén, 1998), and the estimates have passed
several robustness tests. Perhaps even more surprising, even though the estimates are now 10
years old, the empirical model reported in LSS’s paper is able to explain remarkably well the
behavior of Turkey’s saving rate during recent years. This ability to account for Turkey’s saving
behavior since 1998 is a great out-of-sample test that confirms the validity of LSS’s estimates.
To start with the discussion, we first decompose the national saving rate into its private
and public components (Figure 21). These saving rates are measured relative to GNDI—the
construction of these series is explained in Appendix A. The graph shows that most of the
saving boom experienced between 1987 and 1998 was due to a large increase in the private
saving rate. During the 1990s, the private saving rate remained high at a level above 25
percent. The public sector, however, started to run a persistent and increasing deficit that
impacted negatively on the national saving rate. In effect, we can divide the sample into three
periods according to the behavior of the national saving rate: from 1980 to 1986, a period of
low private and national saving; from 1987 to 1998, a period with high private and national
saving rates but increasing deficits in the public sector; and from 1999 to 2008, a period with
increasing public saving, but decreasing national and private saving. Although the adjustment in
public expenditures led to a substantial increase in public saving between 2001 and 2005, the
decline in private saving that begun in 2002 kept the national saving rate low.
38
Figure 21. Public and private saving in turkey (%GNDI)
30%
25%
20%
15%
10%
5%
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
-5%
1980
0%
-10%
-15%
Private Saving Rate
Public Saving Rate
National Saving Rate
LSS estimate reduced form regressions for the saving rates of the form
‫ݏ‬௜௧ = ߙ‫ݐ݅ݏ‬−1 + ߚ ′ ܺ݅‫ ݐ‬+ ߟ݅ + ߝ݅‫ݐ‬
(2)
where ‫ݏ‬௜௧ is the saving rate, ܺ௜௧ is a vector of determinants of the saving rate, ߟ௜ is an
unobserved country specific effect, ߝ௜௧ is an error term, ߙ and ߚ are parameters, and subscripts
݅ and ‫ ݐ‬represent country and time periods, respectively. Note that in this specification, the
slope parameters ߙ and ߚ are the same for all countries. This specification allows for country
heterogeneity only through the level fixed effect ߟ௜ .
Because the country fixed effect ߟ௜ is unobserved, LSS estimate the following
differenced version of equation (2) using a version of GMM with instrumental variables that
accounts for the possible joint determination of the saving rate and its explanatory variables,
൫‫ݏ‬௜,௧ − ‫ݏ‬௜,௧ିଵ ൯ = ߙ൫‫ݏ‬௜,௧ିଵ − ‫ݏ‬௜,௧ିଶ ൯ + ߚ൫ܺ݅,‫ ݐ‬− ܺ݅,‫ݐ‬−1 ൯ + ‫ݒ‬௜,௧ ,
(3)
where the new error term is defined as ‫ݒ‬௜,௧ = ߝ௜,௧ − ߝ௜,௧ିଵ .
In these regressions, the gross private saving rate is computed as gross private saving
divided by gross private disposable income (GPDI). In turn, gross private saving is defined as
gross national saving minus gross public saving, and GPDI is measured as GNDI minus gross
39
public disposable income. Gross public saving is defined as total government revenues minus
total government expenditures plus public investment—that is, public saving is net of
investment expenditures. Finally, gross public disposable income is defined as gross public
saving plus total government consumption expenditures.
The vector of determinants ܺ௜,௧ includes a group of variables that were selected on the
basis of analytical relevance as well as data availability: the logarithm of real per capita GPDI
(RPGPDI), the growth rate of real per-capita GPDI (GRPGPDI), the real interest rate (RIR), the
ration of broad money to gross national income (M2/GNI), the logarithm of the terms of trade
(TOT), the urbanization rate (UR), the old dependency rate (ODR), the young dependency rate
(YDR), the ratio of public saving to GPDI (GS/GPDI), the ratio of the flow of private credit to
GPDI (PC/GPDI), and the inflation rate (INFL).
Figure 22 depicts the evolution of the private saving rate as a percentage of GPDI
together with its determinants in Turkey. These series are constructed exactly as those used in
LSS’s empirical model of the saving rate using Turkey specific data. Given the expected impact
of each of these determinants on the saving rate, we conjecture the following hypothesis:
•
The decline in private income during the late 1990s is unlikely to be the main factor
driving the large decline in private saving because the timing of the declines do not
coincide.
•
The huge increase in real interest rates—from -16 percent in 1997 to 24 percent in
2003—could be an important factor behind the behavior in private saving.
•
The ratio of broad money to private income (M2/GPDI) increased substantially since
1998; thus, this variable could explain the decline in private saving.
•
The large decline in the terms of trade since 1998 could be an important factor
behind the drop in private saving.
•
The urbanization rate and old age dependency rate move too slowly to be a likely
factor behind the sudden drop in saving rates. These rates, however, could be an
important factor behind middle and low frequency movements in private saving.
40
2006
2004
2002
2000
1998
1996
1994
0%
1992
20%
1990
Private Credit Flow / GPDI
70%
8%
60%
40%
6%
30%
20%
0%
2000
1998
1996
1994
1992
1990
1988
1986
2008
80%
2008
Young Dependency Ratio
2006
-0.3
2006
-0.2
2004
0
2002
0.1
2004
-0.1
2002
2000
1998
1996
1994
1992
1990
1988
4%
1988
50%
1986
10%
1984
M2/GNI
1986
Old Dependency ratio
1984
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
0.4
1984
0.2
1980
10%
1982
1980
0.6
1982
2008
2006
2004
2002
2000
1998
1996
1994
30%
1980
2008
2006
2004
2002
2000
1998
1996
1992
1990
1988
Log Per Capita GPDI
1982
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1986
1984
1982
1.2
1980
2008
2006
2004
2002
2000
0%
1998
5%
1996
Government Savings / GPDI
1994
20%
1994
40%
1992
60%
1992
80%
1990
Real interest rate
1990
Urbanization Ratio
1988
-20%
1988
0.2
1988
0%
1986
0.3
1986
-10%
1980
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
Private saving rate (%GPDI)
1986
10%
1984
0.4
1984
20%
1982
0.5
1984
-30%
1980
0
30%
1982
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1980
0%
1980
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
20%
1982
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
40%
1980
-15%
1982
1980
Figure 22. Determinants of private saving in Turkey
15%
Growth real per Capita GPDI
1
0.8
10%
5%
0%
0
-5%
-10%
0.1
Log of Terms of Trade
Inflation Rate
120%
15%
80%
-5%
10%
5%
40%
-10%
0%
41
•
The 10 percentage point decline in the young dependency rate between 1998 and
2008 could have contributed to the behavior of private saving. Note, however, that
private saving increases when the young dependency ratio declines; therefore, this
variable could have absorbed part of the decline in private saving.
•
There is a large increase in private saving. Thus, if Ricardian effects are sufficiently
strong, the improvement in the government budget could have contributed to the
decline in private saving.
•
The large decline in private credit flows is not a likely variable affecting private
saving because the timing of the changes does not coincide.
•
Finally, the inflation rate, being a proxy for the degree of uncertainty, is a factor that
could contribute to the drop in private saving: inflation declined drastically between
1998 and 2008 at a time in which private saving was decreasing as well.
The empirical model for the private saving rate that is used in this section is based on
the regression displayed in column 2, Table 5 of LSS’s study. That regression, referred to as
`Bounded’ in that study, drops outlier observations that are more than 4 standard deviations
away from the mean in their panel dataset. Although this is not LSS baseline regression (their
baseline regression includes those outliers), it is the one that better explains Turkey’s private
saving rate.
LSS regression leads to the following equation for the private saving rate as a function of
the change in its determinants,
‫ݏ‬௧ =
‫ݏ‬௧ିଵ + 0.494 Δ‫ݏ‬௧ିଵ + 0.035 Δܴܲ‫ܫܦܲܩ‬௧ + 0.379 Δ‫ܫܦܲܩܴܲܩ‬௧ − 0.162 Δܴ‫ܴܫ‬௧
‫ܯ‬2
−0.007 Δ ൬
൰ + 0.06 Δܱܶܶ௧ − 0.241 Δܷܴ௧ − 0.555 Δܱ‫ܴܦ‬௧ − 0.275 Δܻ‫ܴܦ‬௧
‫ ܫܦܲܩ‬௧
‫ܵܩ‬
ܲ‫ܥ‬
−0.172 Δ ൬
൰ − 0.316 Δ ൬
൰ + 0.127 Δ‫ܮܨܰܫ‬௧ + ‫ݒ‬௧ ,
‫ ܫܦܲܩ‬௧
‫୲ ܫܦܲܩ‬
(4)
where Δ represents the time-difference operator (that is, Δ‫ݔ‬௧ = ‫ݔ‬௧ − ‫ݔ‬௧ିଵ for any variable ‫ݔ‬௧
and ‫ݒ‬௧ = Δߝ௧ is the new error term. This is the equation that is used to explain and project
Turkey’s saving rate.
42
We first assess whether the empirical saving equation (4) provides a good fit of Turkey’s
private saving rate. In particular, the experiment considers whether Turkey’s actual private
saving rate behaves as predicted by the empirical model given the evolution of Turkey’s saving
determinants. If it does, then it is possible to understand these variations in terms of the
determinants. If it does not, there is something special about Turkey that makes it behave
differently from the typical country in the world. To perform this experiment, we compute the
fitted value of the private saving rate starting from 1999, the year identified as the beginning of
the permanently lower national saving rate (Figure 21). Mechanically, the fitted private saving
rate is found by computing the year-on-year change of all the determinants of saving from 1999
to 2008, setting ‫ݏ‬ଵଽଽ଼ and Δ‫ݏ‬ଵଽଽ଼ to their actual values, setting the error term ‫ݒ‬௧ to zero at all
dates, and then iterating on equation (4) to compute a time series for the private saving rate ‫ݏ‬௧
for ‫ = ݐ‬1999,2000, … ,2008.
The result of this experiment is displayed in Figure 23. The empirical model explains
Turkey’s private saving rate remarkably well, even more when one considers that Turkey’s
weight in the panel estimate is very low (LSS’s data set contains about 150 countries). The
empirical model predicts a decline in private saving between 1998 and 2008 of 11 percentage
points while the actual saving rate declined by 10 percentage points. Moreover, throughout the
period, the predicted saving rate followed the movements in the actual saving rate quite
closely. The year with the highest difference between these two series is 2001, the year of the
crisis, with the difference being less than 3 percentage points. The disruption that a crisis of the
magnitude that Turkey suffered in 2001 introduces in any economy makes that 3 percentage
point difference a small number. Presumably, strong forces are at play in crises that are not
well captured by the determinants considered by LSS.
43
Figure 23. Actual and predicted private saving rates (%GPDI)
40%
Predicted
Private Saving Rate (%GPDI)
Actual
30%
20%
10%
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
0%
Being confident that the empirical model succeeded in explaining Turkey’s private
saving behavior, we now proceed to consider the contribution of each of the determinants to
the decline in the saving rate. That contribution is measured by constructing counterfactual
saving rates that fix one of the determinants to its 1998 value and let all other determinants
take their actual values. For example, by fixing the inflation rate to its 1998 value, the
counterfactual saving rate measures what would have been the private saving rate in Turkey
should the inflation rate being kept at its 1998 value. If counterfactual and actual saving rates
are close to each other, then we conclude that the inflation rate is not an important factor
explaining Turkey’s saving rate. If, on the other hand, the counterfactual saving rate differs
substantially from the actual saving rate, we conclude that the inflation rate is an important
factor behind the behavior of Turkey’s private saving rate.
These counterfactual experiments are depicted in Figure 24. There are four variables
that, by large, explain Turkey’s private saving rate since 1998: the real interest rate, the gross
private disposable income, the young age dependency ratio, and the inflation rate. First, if the
interest rate had remained at its 1998 level, the private saving rate in 2002 would have been
over 33 percent of GPDI, and by 2008 the private saving rate would have been over 23 percent
instead of the 18.6 percent actually observed. Second, the improvement in income also
impacted the private saving rate, particularly since 2005. Had income remained at its 1998
44
level, the saving rate starting from 2006 would have been about 2 to 3 percentage points lower
than that actually observed. Third, the decline in the young dependency ratio absorbed part of
the decline in the private saving rate; in effect, had the young dependency ratio remained at its
1998 value, the private saving rate between 2005 and 2008 would have been close 15 percent.
Finally, the large decline in the inflation rate during the 2000s is an important factor behind the
drop in the private saving rate; had inflation remained at its 1998 value, the private saving rate
in 2008 would have been around 22.5 percentage points of GPDI. Moreover, because predicted
and actual saving rates start to differ significantly in 2002, this result suggest that, in effect, the
effect of inflation in the saving rate is likely capturing the decline in economic uncertainty that
took place during the last few years.
Figure 24. Contribution of determinants to Turkey's private saving rate
Financial Variables
Actual
Fixed Interest Rate
Fixed M2/GNI
Fixed Credit Flow
30%
25%
20%
Actual
Fixed Income
Fixed Terms of Trade
30%
25%
20%
15%
15%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Demographics
30%
35%
Actual
Fixed Urbanization
Fixed Old Dependency
Fixed Young Dependency
25%
20%
15%
Private Saving Rate (%GPDI)
35%
Private Saving Rate (%GPDI)
Income Variables
35%
Private Saving Rate (%GPDI)
Private Saving Rate (%GPDI)
35%
30%
Public Savings and Inflation
Actual
Fixed Government Savings
Fixed Inflation
25%
20%
15%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
45
Equally important as the determinants that explain the private saving rate, are those
that do not explain it at all. In particular, even though there was a huge improvement in public
saving since 2002 (Figure 22), the simulation in the right-lower panel of Figure 24 suggests that
the decline of private saving due to the increase in public saving was tiny: had the public saving
rate remained at its 1998 value, the private saving rate would have been less than one
percentage points higher than the actual saving rate observed in 2008. That is, the short and
medium run Ricardian offset coefficient is very small, which suggest that public saving is a very
useful tool to increase the national saving rate.
3.1 Saving Projections in Turkey
The remaining of this section performs a number of counterfactual experiments to
tentatively project Turkey’s private saving rate until the year 2030 under different scenarios
about income growth, fiscal deficits, financial depth, and the level of the terms of trade.
Because these experiments do not take into account the possible joint determination of the
saving determinants, the result should be taken with caution and as an approximation to future
evolutions of the private saving rate.
To perform these simulations, Turkey’s saving determinants need to be projected into
the future. We consider three scenarios about per capita income growth: one pessimistic, in
which income is expected to grow at 1 percentage points per year; one moderate, in which
income is projected to grow as it did between 1980 and 2008, about 2.6 percentage points per
year; and one optimistic, in which income grows at 4 percentage points per year.
To perform these experiments, we take a stand on the evolution of the remaining saving
determinants. For demographic variables, we use data from the United Nations “World
Population Prospects, 2008 revision database”, and “World Urbanization Prospects, 2009
revision database”, both available online at the United Nations webpage. The United Nations
provides projection over 5 year intervals. Yearly values are then linearly interpolated based on
the 5-year projections. The projections for the old dependency, young dependency, and
urbanization ratios are reported in Figure 25. The young dependency rate is projected to
decline to around 29 percent by 2030 from its current level of 40 percent. The old dependency
46
rate is projected to increase from its current 9 percent level to 15 percent in 2030. Finally, the
urbanization rate is projected to be 78 percent by 2030, almost 10 percentage points higher
than in 2008.
Figure 25. Demographic projections
Dependency Rates
Urbanization Rate
50%
90%
Young Dependency
Old Dependency
40%
80%
30%
70%
20%
60%
10%
0%
50%
2000
2005
2010
2015
2020
2025
2030
2000
2005
2010
2015
2020
2025
2030
The inflation rate is projected to remain at 5 percent per year. Although a yearly
inflation rate of 5 percent is well below Turkey’s historical average, it is a useful and desirable
benchmark to attain, closer to the inflation rates observed in recent years, and consistent with
the inflation targeting regime followed by the Central Bank. The ratio of M2 to GNI is projected
to be 40 percentage points of GNI. Although this proportion is larger than the historical average
in Turkey, 40 percent is the average value over the sample of all middle income countries in our
sample—in any case, private saving does not respond substantially to changes in this variable.
In addition, the real interest rate is set at 7 percent, the average value observed across middle
income countries.
We consider two possible evolutions of the public deficit, the flow of credit to income,
and the terms of trade. Consider first the public deficit. In the first, baseline, scenario, the fiscal
deficit is set at 2.4 percentage points of GPDI, the historical average between 1980 and 2008; in
the second scenario, the government runs a balanced budget. Second, the baseline value of the
flow of private credit is projected to remain constant at 8 percentage points of GPDI, its
47
historical average over 1980-2008; in the second scenario, private credit flow decreases to 5
percentage points of GPDI due to low saving, lower capital inflows, or any other reason. Finally,
consider the terms of trade; in the baseline scenario, the terms of trade is projected to improve
to its historical average; in the second scenario, terms of trade are projected to improve to 10
percentage points above its historical average value. The reason to consider the latter,
optimistic, scenario is that the expectation of higher human capital content of Turkey’s exports
in the future is likely to improve the terms of trade to values above those observed during the
last decades.
In all cases, because the observed values of the saving determinants in the years 2008
and 2007 typically do not coincide with their projected long-run values, we assume a transition
period of 10 years during which the targeted and projected values reach their long-run values.
Let us start with the pessimistic scenario, where per capita GPDI grows at a constant
rate of 2 percent in the long run (Figure 26). In the baseline scenario, the private saving rate is
expected to increase from its current 18 percent to about 21 percentage points of GPDI by
2018. Since then, the private saving rate is projected to decline, reaching 17.5 percentage
points of GPDI by 2030. The main driving force driving the saving rate down since its peak in
2018 is the substantial growth in the old age dependency rate.
The simulation with no public deficit generates, as expected, private saving rates below
those in the baseline scenario due to Ricardian effects. The offset is, however, only partial:
while public saving increases by 2.4 percentage points of GPDI, the difference between the
baseline private saving rate and the private saving rate with no public deficit is less than 1
percentage points of GPDI at any horizon. These estimates imply that national saving, measured
as a fraction of GPDI, is approximately 1.4 percentage points higher when the public deficit is
zero compared to the baseline scenario.8 The counterfactual simulation when the flow of
private credit to GPDI is 5 percent instead of the baseline 8 percent generates a substantial
increase in the private saving rate, reaching almost 23 percentage points of GPDI by 2019, a
8
To measure the increase in national saving in terms of GNDI, we multiply 1.4 by the relative weight of GPDI on
GNDI which historically has been about 90 percent in Turkey. Thus, the national saving rate is projected to increase
1.26 percentage points of GNDI.
48
difference of almost 2 percentage points relative to the baseline. Finally, the projection with
improved terms of trade does increase the private saving rate, but by a small amount: the
difference between the baseline and the scenario with improved terms of trade is always less
than 0.5 percentage points of GPDI. Thus, the proposed improvement of terms of trade is not
expected to impact substantially on the private saving rate—of course, the projected 10
percentage improvement in the terms of trade is arbitrary and a better analysis would include a
more series projection of future terms of trade. As in the baseline case, the private saving rate
in all scenarios is projected to peak by 2018-2019 and decline thereafter, reflecting the negative
impact of the old age dependency rate on private saving.
Figure 26. Projected saving rate under pessimistic income growth
(1% per capita GPDI Growth)
30%
25%
20%
Baseline (pessimistic)
15%
Public deficit = 0
Priv. Cred. Flow = 5%
High terms of trade
10%
2008
2010
2012
2014
2016
2018
2020
2022
2024
2026
2028
2030
Consider next the moderate scenario, where GPDI per capita grows at 2.6 percent per
year in the long run (Figure 27). Because income growth is associated with higher saving rates,
the moderate scenario shows larger increases in the private saving rate compared to the
pessimistic one. In the baseline case, private saving peaks at 23 percentage points of GPDI in
the year 2020 and then declines as old dependency rate starts to become more important; by
2030, the baseline private saving rate is reduced to 20.5 percentage points of GPDI. The
evolution of the projected saving rates under the different scenarios about public deficit, credit
49
flow, and terms of trade is qualitatively similar to those under the pessimistic scenario: there is
a relatively small Ricardian offset of higher public deficit, a lower ratio of credit flow to GPDI
increases the private saving rate by almost 3 percentage points at all horizons, and the further
improvement in the terms of trade has a relatively mild impact on the private saving rate.
Figure 27. Projected saving rate under moderate income growth
(2.6% per capita GPDI Growth)
30%
25%
20%
Baseline (moderate)
15%
Public deficit = 0
Priv. Cred. Flow = 5%
High terms of trade
10%
2008
2010
2012
2014
2016
2018
2020
2022
2024
2026
2028
2030
Finally, let us consider the optimistic case, where per capita GPDI grows at a 4 percent
rate (Figure 28). This is the scenario with the highest increase in the private saving rates. The
baseline scenario predicts a steady increase in the private saving reaching 24.5 percentage
points of GPDI by 2021. Since then, it declines to slightly above 23 percentage points of GPDI by
2030. As in the two previous cases, when public deficit is zero, there is a partial offset of less
than 1 percentage points of GPDI in the private saving rate; the highest increase in private
saving occurs when private credit flow declines to 5 percentage points of GPDI, and the
increase in private saving due to the higher terms of trade shocks is relatively mild. Note that in
all cases, the highest income growth weakens the impact of the increase in the old dependency
rate compared to the other two income scenarios.
50
Figure 28. Projected saving rate under optimistic income growth
(4% per capita GPDI growth)
30%
25%
20%
Baseline (optimistic)
15%
Public deficit = 0
Priv. Cred. Flow = 5%
High terms of trade
10%
2008
2010
2012
2014
2016
2018
2020
2022
2024
2026
2028
2030
In the tree income growth scenarios, it was mentioned that the burden associated with
the increase in the old age dependency rate is behind an eventual decline in the projected
saving rate. To make this claim more evident, Figure 29 depicts two projected saving rates
under the moderate income growth scenario. The red circles line shows the baseline
experiment under the United Nations projected old age dependency rate, 2.4 percentage
points per year. In contrast, the solid blue line assume a constant growth rate of the old age
dependency rate of 1.4 percent per year, 1 percentage point below that estimated by the
United Nations. The difference between the two series is striking. Projected saving when the
old age dependency rate grows just 1 percent less than under the baseline scenario keeps
increasing over the entire projected horizon, reaching almost 24 percentage points of GPDI by
2030, over 3 percentage points above the saving rate in the baseline scenario. These
differences are even larger in the pessimistic scenario, and somewhat less striking, but still
significant, in the optimistic case.
51
Figure 29. Projected saving rate with smaller old dependency rate
(2.6% per capita GPDI Growth)
30%
25%
20%
15%
U.N. old dependency rate
1% less then U.N. old dependency rate
10%
2008
2010
2012
2014
2016
2018
2020
2022
2024
2026
2028
2030
In summary, these projections confirm the importance that income growth, public
saving, and the old dependency rate will have in the forthcoming years as main determinants of
Turkey’s private and national saving rates. Income grow together with higher public saving
seems a natural way to increase national saving rates. On the other hand, these projections
show that prospects of an aging population are likely to reduce Turkey’s saving rate
substantially in the long term unless some policy reforms are introduced to counteract the
negative pressure that old age dependency rate has on saving. It should be noted, however,
that some micro data on household saving in Turkey suggest that older people save more (Van
Rikckeghem and Ucer, 2010). Although this observation is difficult to reconcile with any theory
of consumption and with the evidence in the vast majority of the empirical work, it should be
kept in mind when discussing the impact of longevity on Turkey’s saving rate and deserves
further study.
5. Case Studies
This section discusses three cases studies of countries that could serve as a benchmark
to compare Turkey’s saving rate: Chile, Morocco, and Thailand. Chile is a successful developing
52
country that was able to permanently increase its saving rate and shares some of the
institutional characteristics with Turkey. Morocco’s saving rate increased enormously during
the last ten years, and shares a similar cultural background with Turkey. And Thailand is a
developing country that was able to attain large saving rates, but nevertheless suffered a crisis
during the 1990s due, it is argued, to large and persistent current account deficits, as Turkey
has experienced during the last decade.
5.1 Chile
Chile’s economic performance since the mid 1980s has been very strong. The growth of
real per capita GDP during 1985-1994 averaged 5.4 percent per year, and during 1995-2004, 3.3
percent per year. An important component of these high growth rates, particularly in the
decade following 1985, was a saving and investment boom (Figure 30). On the other hand, the
decade preceding 1985 was extremely volatile and with a low average growth rate of less than
1 percent per year. Chile’s saving rate between 1975 and 1980 stood at around 15 percentage
points of GNDI. At the beginning of the 1980s, the saving rate plummeted, and by 1982 it
reached the extremely low value of 2 percentage points of GNDI. Investment, on the other
hand, was increasing steadily since 1975, reaching 23 percentage points of GNDI by 1981. By
1982, however, the investment rate dropped abruptly, commoving closely with the saving rate.
Then in 1985, Chile experienced a sustained saving and investment boom: national saving
increased from 3 percent in 1984 to almost 25 percentage points of GNDI by 1990. Since then,
the national saving rate stood between 21 and 25 percentage points, and then increased
substantially since 2003 due to a favorable increase in its terms of trade.
53
Figure 30. Saving, investment, and growth in Chile
GDP per capita growth
Saving, investment, and the current account
15%
30%
15%
10%
25%
10%
20%
5%
15%
0%
10%
-5%
5%
0%
1975 1980 1985 1990 1995 2000 2005
-5%
CA (%GNDI) (right axis)
5%
National Saving (%GNDI)
-10%
-10%
Investment (%GNDI)
0%
-15%
-15%
1975
1980
1985
1990
1995
2000
2005
A decomposition of national saving between private and public saving rates shows the
structure of the saving collapse and the saving boom (Figure 31). Between 1975 and 1981,
private and national saving rates were both of similar magnitude. The saving collapse was due
to the large decline in public saving, which went from about 8 percent of GNDI in 1980 to -3
percent of GNDI in 1983. On the other hand, private saving on this period remained roughly
constant at 5 percent of GNDI. The evolution of the saving rates since 1985 reveal that the
saving boom was almost entirely due to a huge increase in private saving, which went from less
than 5 percentage points of GNDI in 1984 to 22 percent in 1988, a 17 percent increase in just 4
years.
54
Figure 31. Private and public saving in Chile
25%
Public Saving (%GNDI)
20%
Private Saving (%GNDI)
15%
10%
5%
0%
1975
1980
1985
1990
1995
2000
-5%
According to Bosworth, Dornbush, and Laban (1994), the 1982 crisis with its associated
saving and investment collapse were due to a number of policy mistakes. The investment boom
between 1976 and 1981 was mostly financed through capital inflows, which increased
substantially since the removal of capital controls in previous years. An overvalued currency
due to a fixed exchange rate regime together with the increasing deficit of the current account
made the economy vulnerable to external shocks. These shocks materialized in 1982 with a
large increase in the international interest rates fueled by the tightening of monetary policy in
increase in the U.S. and with a substantial deterioration of Chile’s terms of trade. Foreign banks
cut off credit to Chile, there was massive bankruptcy in the Chilean financial sector, and the
economy entered a big recession.
Several structural reforms were introduced into the Chilean economy since the early
1980s: a second round of privatization following those of the 1970s, a pension reform, a new
regulatory framework in which the Central Bank had greater supervisory role in rebuilding the
financial system, and a tax reform. Some (or all) of these changes are identified as possible
reasons behind the fast recovery and increase in national saving.
TAX REFORM AND BAILOUT: The tax reform introduced into the Chilean economy in 1984
lowered both, income and corporate taxes. Marfan and Bosworth (1994) emphasize the
55
importance of the tax reform together and a government bailout to reduce the debt burden of
the private sector as key ingredients to increase private saving.
More recently, Hsieh and Parker (2007) argue that the 1984 reform, by reducing the tax
rate on retained earnings, increased the internal funds of many credit constrained firms and
has been responsible for the increase in private saving and investment. They present evidence
suggesting that the increase in saving associated with the investment boom was almost entirely
an increase in business saving.
PENSION REFORM: Chile reformed its pay-as-you-go pension system in 1981. The newly
created fully funded pension system mandated contributions to heavily regulated but privately
managed accounts. The mandatory contribution was about 10 percent of wages after a number
of reductions. Evidence in Schmidt-Hebbel (1999) suggests that 3.8 percentage points of the
12.2 percentage point increase in the national saving rate since 1986 can be attributed to the
pension reform. Hsieh and Parker (2007), on the other hand, are skeptical that the pension
reform is behind the large increase in saving and investment.
STABILITY AND CONFIDENCE: Rodrik (2000) claims the absence of other major reforms before
and after the saving transition of 1985 suggests that the improvement in stability and
confidence derived from the decline in the inflation rate and the smooth transition to
democracy (reflected in the few changes in the way policy was managed) may have helped
sustain the high levels of saving rates during the 1990s.
COPPER STABILIZATION FUND: Chile established a Copper Stabilization Fund in 1985 to help
avoid Dutch disease-type crises resulting from variations in the price of copper. The Fund forces
the government to save part of the income generated from the exports of copper when its
price crosses certain reference point. Rodrik (2000) argues that the Copper Fund had a positive
impact on public saving when the price of copper increased substantially in the late 1980s.
5.2 Morocco
Since 1975, Morocco experienced three growth phases. During the period 1975-1989,
average GDP per capita grew at 2 percentage points per year with considerable volatility.
56
Between 1990 and 1999, GDP per capita became substantially more volatile and, on average, its
growth rate dropped to less than 1 percent per year. Finally, since 2000 until today, Morocco
experienced a phase of high and smooth grow, in which GDP per capita grew at an average rate
of almost 3.5 percentage points per year (left panel of Figure 32).
Figure 32. GDP per capita, saving, investment, and the current account in Morocco
GDP per capita (constant prices)
Saving, investment, and the current account
35%
20000
15%
30%
17500
10%
25%
15000
5%
20%
12500
0%
15%
10000
-5%
10%
CA (%GNDI) (right axis)
7500
5%
National Saving (%GNDI)
-10%
Investment (%GNDI)
5000
-15%
0%
1975
1980
1985
1990
1995
2000
2005
1975
1980
1985
1990
1995
2000
2005
The right panel of Figure 32 shows the evolution of national saving, investment, and the
current account, all as a percentage of GNDI. Between 1975 and 1981, the saving rate
fluctuated at around 16 percentage points of GNDI. During the next decade, national saving
increased substantially, reaching 23 percentage points of GNDI by 1990. Between 1990 and
1995, however, the saving rate plummeted to 16 percent of GNDI. Since then, however,
Morocco’s saving rate boomed, reaching almost 30 percentage points of GNDI by 2007.
The investment rate shows a different pattern. During the period 1975-1996,
investment was large, volatile, but declining through time. The investment rate reached its
lowest value of 19 percent of GNDI by 1996. Since 1997 until today, the investment rate
paralleled the large increase in national saving, reaching 30 percent of GNDI in 2008. The large
imbalance of investment and saving during 1975-1990 led to a large and persistent current
account deficit. The deficit was reduced substantially during the early 1990s and showed a
considerable surplus during the 2000s.
57
There are two factors that could potentially explain the large increase in Morocco’s
saving rate: the large net transfers received from abroad, mainly worker remittances, and the
fast increase in income since 1997. In effect, net current transfers and its main component,
worker’s remittances, increased substantially from just over 5 percentage points of GNDI in
1999 to 9.5 and 8.5 percent, respectively by 2007. Simultaneously, net income from abroad
(mainly property income and interest payments) also increased considerably from almost -5
percent in 1993 to -1 percent of GNDI by 2007 (see left panel of Figure 33). Both effects lead to
an increase in national disposable income. That higher disposable income was mostly saved
instead of consumed as shown in the left panel of Figure 33. Indeed, while consumption as a
fraction of GDP remained roughly constant since 2000 until 2008, consumption as a fraction of
GNDI declined from almost 77 percent in 2000 to 71 percent in 2007.
Figure 33. Net income, current transfers, and consumption in Morocco
Net Income, transfers, and remittances (%GNDI)
Consumption
90%
10.0%
7.5%
85%
5.0%
80%
2.5%
75%
Net Income
Net Transfers
Remittances
as % of GDP
2008
2006
2004
2002
2000
1998
1996
1994
-5.0%
1992
70%
1990
2008
2006
2004
2002
2000
1998
1996
1994
1992
-2.5%
1990
0.0%
as % of GNDI
The consumption and saving behavior during the last decade in Morocco is thus
consistent with the permanent income hypothesis if agents view the current surge in
remittances and international flows as mainly temporary. Theory predicts that these income
windfalls should be saved, as is actually observed.
5.3 Thailand
As most of the Asian Tigers, Thailand economic performance during the period 19871996 has been extraordinary. The growth rate of real GDP per capita during that period
averaged over 8 percent a year (left panel of Figure 34). The boom was fueled by an extremely
58
large investment rate: during aforementioned period, over 40 percent of GNDI was allocated to
investment. The increase of national saving was also remarkable: the national saving rate
increased from 23 percentage points of GNDI in 1983 to almost 36 percent of GNDI in 1991;
between 1991 and 1997, the national saving rate averaged almost 35 percentage points of
GNDI (right panel of Figure 34). Although national saving increased enormously, the investment
rate increased even further, leading to a substantial current account deficit. Indeed, between
1990 and 1996, Thailand’s current account deficit averaged 7 percentage points of GNDI.
Figure 34. Saving, investment, and growth in Thailand
GDP per capita growth
Saving, investment, and the current account
15%
50%
10%
40%
20%
10%
5%
30%
0%
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
0%
20%
-10%
-5%
10%
2006
2004
2002
2000
-20%
1998
1996
1994
1992
1990
1988
1982
-15%
1980
0%
1986
-10%
1984
CA (%GNDI) (right axis)
National Savings (%GNDI)
Investment rate (%GNDI)
Then the crisis hit Thailand. In 1998 real GDP per capita declined by over 2 percent; and
in 1998, by over 11 percent. Investment plummeted from over 40 percent of GNDI in 1996 to
21 percent of GNDI in 1998 and 1999. With national saving rates relatively stable, Thailand’s
current account showed a sudden increase to 13 percentage points of GNDI in 1998. Since
1999, Thailand started to grow again, but at substantially lower rates. Investment recovered to
almost 30 percent of GNDI by 2004 and the national saving rate stayed at about 30 percentage
points of GNDI. The saving rate between 1999 and 2007 averaged about 30 percentage points
of GNDI, reflecting the decline in the growth rate of income.
The decomposition of the national saving rate into private and public saving shows that
the substantial increase in national saving during 1990:1997 was mostly due to a large increase
in public saving: while private saving remained stable at around 27 percentage points of GNDI,
59
the public saving rate increased from 0 percent in 1986 to 8 percent in 1995 (Figure 35). In
recent years, however, the public saving rate declined substantially and the partial offset
observed in private saving was not enough to keep the national saving rate at 35 percentage
points of GNDI, its average value in the years preceding the crisis.
Thailand’s crisis illustrates an important point that is relevant to Turkey’s current
situation of current account deficits: even an economy that saves a large fraction of its
income—Thailand’s saving rate is among the highest in the world—is likely to run into problems
if it runs a large and persistent current account deficits.
Figure 35. Private and public saving in Thailand
40%
Public Savings (%GNDI)
Private Savings (%GNDI)
30%
20%
10%
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
0%
-10%
The literature has identified two possible reasons for that problem (see Chang, 1999, for
a summary of these views). The first is bad policy, in particular, government implicit guarantees
to domestic private borrower and ample financial liberalization and deregulation. These
guarantees led borrowers to invest in excessively risky activities. The second reason is financial
panic due to maturity mismatch of assets and liabilities. Under this hypothesis, countries that
went into crises had financial institutions borrowing at short maturity and lending at long
maturities to firms engaged in profitable, but illiquid project in the short run. The crisis erupts
when foreign creditors panic and simultaneously stop rolling over the debt, very much like the
standard Diamond-Dybvig model of bunk runs. The policy prescriptions differ according to what
view one thinks is behind the crisis. Under the bad policy view, the government should commit
60
to avoid bailing out private agents in order to eliminate the implicit guarantees, and should
perform a more active role in regulating and supervising the financial sector. Under the
financial panic view, the government should pay special attention to avoiding maturity
mismatches between assets and liabilities. Perhaps a prudent policy should consider aspects of
both views.
6. Conclusions and Policy Options
Since the 2001 crisis, Turkey experienced remarkable progress in terms of output
growth, higher investment, lower inflation, and improving the institutional framework. That
growth process, however, was not accompanied by a corresponding increase in national saving,
inducing a sizable current account deficit. Indeed, Turkey’s saving rate is low relative to its
previous level during the 1990s and relative to other similar (and not so similar) countries. To
be sure, some of this decline in the saving rate is expected as Turkey is facing prospects of
becoming a member of the European Union. These are prospects of higher future income and
productivity; therefore, households, internalizing their (still not fully realized) higher wealth,
increase consumption and reduce saving today, and firms increase their investment rates to
gradually build a higher stock of capital to take advantage of the higher future productivity. But
the low saving rate is troublesome for at least two reasons. First, except for the temporary
increase in national saving during the 1990s, these low saving rates could be reflecting a more
structural problem in Turkey. The second reason is the ample evidence that persistent current
account deficits, if not properly managed, can lead to crises and capital outflows, as Thailand’s
experience summarized in section 5 suggests.
The study first reviews the current and historical level of national saving in Turkey
compared with the rest of the world. For this purpose, a dataset of 104 developing and
developed countries over the period 1980-2008 was collected containing levels of national
saving rates and other indicators that have been identified as the determinants of saving,
namely, demographic, income, policy, and other variables for all countries in the sample. The
overall results suggest that, although Turkey’s saving rate is low relative to other similar
61
countries, these saving rates are consistent with what is expected given Turkey’s determinants
of saving.
Then, the study used the data set together with the available international evidence to
draw some conclusions regarding explanations and potential policy measures that can be used
to increase Turkey’s saving rate:
•
The evidence shows that saving rates are persistent. Therefore, policy measures aimed
at increasing saving rates are likely to realize their full impact in a number of years. It
should be noted, however, that there is plenty of cases with sudden increases in saving
rates, as the Chilean and Moroccan experiences show.
•
The evidence suggests that, everything else constant, Turkey’s saving rate is expected to
increase in the future as long as Turkey’s income continues growing. This claim is
supported by the evidence that higher income grow seems to cause higher saving rates.
Thus, a natural and direct policy prescription is to develop policies targeted at improving
productivity and growth, which will, indirectly, improve national saving.
•
Public saving is an effective policy instrument to increase the national saving rate.
Although increases in public saving are somewhat offset by decreases in private saving
(reflecting a partial Ricardian equivalence), available estimates suggest that a 10
percentage increase in public saving increases the national saving rate by somewhat
between 8 and 6 percent in the short-run and about half those values in the long-run.
Therefore, avoiding public saving could be a useful tool to increase the saving rate.
•
The evidence suggests that negative terms of trade shocks impact negatively on the
saving rate. Turkey suffered a persistent decline in its terms of trade since 1998. This
decline could have impacted negatively on Turkey’s saving rate. However, potential
improvements in the terms of trade, for example, by returning to its long-run average
could help increase the national saving rate in Turkey. Estimates in section 5, however,
suggest that the terms of trade worsening did not contribute substantially to the current
decline in Turkey’s saving rate.
62
•
The evidence supports the view that macroeconomic uncertainty increases national
saving rates due to precautionary motives. Thus, the large decline in the inflation rate
observed in Turkey is a likely factor behind the drop in its saving rate. To the extent that
the economy remains stable, the negative impact of the lower uncertainty on saving is
expected to be fully realized. Moreover, to the extent that stability improves the growth
prospects, higher national saving is expected as a consequence.
•
Demographic variables affect saving rates: increases in the young age and old age
dependency ratios have a strong and negative impact on national saving. In addition,
increases in the urbanization rate also decreases national saving. Turkey is currently,
and will be for several years, in a process of demographic transition. This transition is
expected to have a substantial impact on its saving rate, as estimates in section 4
suggest. It should be noted, however, that some studies find that the old dependency
rate does not necessarily lead to lower national saving.
•
Ample evidence suggests that financial liberalization and development impact
negatively on the saving rate in the short-run (by softening borrowing and credit
constraints). However, there is evidence that financial liberalization affect positively the
national saving rate in the long run, by improving the efficiency of financial
intermediation and improved corporate saving.
•
The international evidence on pension reform is mixed: while there is substantial
evidence that the introduction of pay-as-you go systems is associated with a decline in
national saving rates, reforms toward a fully funded system do not guarantee higher
saving unless the reform is carefully planned. For example, the introduction of a fully
funded system initially generates a public deficit, which has a negative impact on
national saving. Therefore, the details of the implementation are crucial. Chile is a
country that successfully reformed its pension system but there are also plenty of
examples of unsuccessful reformers.
•
Tax incentives that affect real interest rates do not seem very promising. On the one
hand, increases in interest rates do not necessarily lead to higher saving, as the cross
country evidence suggest—in addition, there is evidence that in Turkey, increases in
63
interest rate could lead to declines in saving, as some fraction of the population could
suffer from adverse income effects as they are “interest earners”.
•
A change in the female labor force participation rate in Turkey could have a large impact
on household saving. In theory, however, higher female participation could lead to an
increase or a decline in saving. Indeed, there are studies showing both cases. Thus, an
analysis based on household survey data could shed more light on the impact of female
participation on household saving in Turkey.
The paper next focused on discussing the correlation between saving and investment. It
is common in policy circles to claim that, because saving and investment rates are so closely
correlated, increasing the saving rate is an effective way to increase investment and, therefore,
growth. Recent work has shown, however, that the tight correlation between saving and
investment has started to weaken, making the previous argument less compelling. This claim
was tested using the aforementioned data set of developing and developed countries. It was
found that in high income countries it is indeed true that the investment-saving correlation has
weakened since the mid-1990s. This weakening is so strong that it is not possible to reject the
hypothesis of a complete decoupling of investment from saving decisions in high income
countries, particularly during the last few years. In developing countries, however, a full
decoupling did not take place: although the investment-saving correlation has declined through
time, it still remains positive and significant in the short-run. Therefore, policies aimed at
increasing saving rates in developing countries may have a positive impact on growth through
higher investment.
Next, the study used an empirical saving equation to explain and project Turkey’s
private saving rate. The analysis suggests that variations in Turkey’s private saving rate are
remarkably well explained by variations in the saving determinants identified by the empirical
literature. These quantitative estimates allow providing some explanations for the decline in
Turkey’s saving rate during the last ten years. The empirical model suggests that four variables
can explain most of the recent movements in Turkey’s private saving rate: the large increase in
real interest rates, the large reduction in the inflation rate (capturing the decline in
64
macroeconomic uncertainty), the change in income, and the substantial decline in the young
dependency rate.
The empirical equation was next used to perform some tentative projections of the
saving rate under different scenarios regarding income growth, public saving, the level of terms
of trade, and the growth of private credit. Realistic assumptions were imposed on the future
evolution of the remaining saving determinants, as demographic variables, inflation, and so on.
The projections show the importance of income growth, public saving, and the flow of credit as
determinants of private and, therefore, national saving rates. First, the elasticity of private
saving with respect to income is significant: increasing the growth rate of private income from
2.6 percent (its historical average) to 4 percent per year rises the private saving rate by about
2.6 percentage points in the long run (by 2030). Second, private saving rates are not too
sensitive to public saving rates: a 10 percentage point increase in public saving decreases
private saving by about 1.7 percentage points in the short run and 3.4 percentage points in the
long run, both as percentage of GPDI. These estimates suggest that the national saving rate as a
fraction of GNDI increase about 7.5 percentage points in the short run and about 6 percentage
points in the long-run. Third, decreasing the rate of private credit creation from a projected 8
percentage points a year to 5 percentage points increases private saving by almost 2
percentage points in the long run. Finally, the contribution of the terms of trade to private
saving is mild. Everything else constant, increasing the terms of trade from its—very low—2009
level by 20 percentage points leads to an increase in the private saving rate of 0.5 percentage
points of GPDI in the short run and about 1 percentage points in the long run. Therefore,
prospects of better terms of trade in the future are not likely to improve Turkey’s saving rate by
a large amount.
Another implication of the projections is the negative impact that prospects of an aging
population will have on private and national saving rates: reducing the projected growth of old
age dependents by 1 percentage point from a baseline scenario estimated by the United
Nations increases private saving rates about 4 percentage points in the long-run (by 2030). This
negative impact on saving of the old dependency rate is substantially large to merit serious
65
discussions about policy reforms aimed at counteracting its effect. One obvious possibility
would be to increase the retirement age. It should be noted, however, that household studies
in Turkey suggest that saving increases with age. It is difficult to reconcile this observation with
theory, thus further analysis of the causes of that observation is deserved before giving definite
policy recommendations.
Evidence from Chile suggests at least two possible policy reforms that could be applied
in Turkey: a pension reform and a tax reform. Regarding the pension reform, Turkey has a
mixed system with a mandatory pay-as-you-go state social security scheme together with a
voluntary private pension system. As mentioned above, evidence suggests that introducing a
pay-as-you go pension system reduces national saving. The evidence is weaker and mixed when
the reform refers to replacing a pay-as-you-go system with a fully funded private pension
system: the details of the reform seem to matter. Therefore, careful study of successful and
unsuccessful reforms should be performed before embarking in a full-blown pension reform.
The second lesson from Chile refers to its 1984 tax reform. Hsieh and Parker provide
convincing evidence that a decline in the corporate tax on retained earnings could have been
one of the main reasons behind the large investment and saving boom observed in Chile during
the 1980s.
66
Appendix
The panel database used in this paper is composed cross-country, time series data on
104 developed and developing countries over the period 1980-2008. The data come, for the
most part, from the World Development Indicators data set (WDI). The panel is unbalanced and
the list of countries in the database is:
Algeria
El Salvador
Kenya
Philippines
Ukraine
Argentina
Estonia
Korea Rep.
Poland
United Kingdom
Australia
Fiji
Kyrgyz Rep.
Portugal
United States
Belarus
Finland
Latvia
Romania
Uruguay
Belgium
France
Lithuania
Rwanda
Uzbekistan
Benin
Gambia
Luxembourg
Saudi Arabia
Venezuela, RB
Bolivia
Germany
Malawi
Senegal
Brazil
Ghana
Malaysia
Sierra Leone
Bulgaria
Greece
Mali
Singapore
Burkina Faso
Guatemala
Mauritania
Slovak Republic
Canada
Haiti
Mauritius
Slovenia
Central Afr. Rep.
Honduras
Mexico
South Africa
Chad
Hong Kong
Morocco
Sri Lanka
Chile
Hungary
Netherland
Sudan
Colombia
Iceland
New Zealand
Swaziland
Costa Rica
Indonesia
Niger
Sweden
Cote d’Ivoire
Iran, Islamic Rep.
Nigeria
Switzerland
Cyprus
Ireland
Norway
Taiwan, China
Czech Republic
Italy
Pakistan
Thailand
Denmark
Jamaica
Panama
Trinidad and Tobago
Dominican Rep.
Japan
Papua New Guinea
Tunisia
Ecuador
Jordan
Paraguay
Turkey
Egypt, Arab Rep.
Kazakhstan
Peru
Uganda
There are at least tree relevant definitions of saving rates that are useful for our
purposes. These are constructed as a measure of income minus aggregate private and public
67
consumption divided by the measure of income. That is, they differ according to what measure
of income is used to construct them.
When using GDP as a measure of income, we obtain the standard gross domestic saving
rate
ܴܵଵ =
‫ ܲܦܩ‬− ‫ܥ‬
‫ܲܦܩ‬
where ‫ ܲܦܩ‬denotes gross domestic product and ‫ ܥ‬denotes the sum of private and public
consumption expenditures. The shortcoming of this saving measure is that it does not take into
account the net income payments from abroad, remittances, and ad-hoc international transfers
that affect national income but are not measured in GDP. Taking into account these differences,
we can construct two measure of national income: gross national income (GNI) which equals
GDP plus net income from abroad, and gross national disposable income (GNDI) which adds to
GNI the remittances and ad-hoc net international transfers.
These definitions of income are used to construct two additional measures of saving:
ܴܵଶ =
‫ ܫܰܩ‬− ‫ܥ‬
‫ ܫܦܰܩ‬− ‫ܥ‬
and ܴܵଷ =
.
‫ܫܰܩ‬
‫ܫܦܰܩ‬
Even though most policy discussions about saving use the domestic saving rate ܴܵଵ , the
measure that better captures the saving performed by nationals is that defined in terms of
GNDI, ܴܵଷ , followed by that defined in terms of GNI, ܴܵଶ .
Unfortunately, data for GNDI is not reported in the WDI database. To construct the
GNDI measure of income, I used the following national accounts identities
‫ ܲܦܩ = ܫܦܰܩ‬+ ܰ‫ ܫ‬+ ܰܶ
and
‫ ܤܶ = ܣܥ‬+ ܰ‫ ܫ‬+ ܰܶ
68
where ܰ‫ ܫ‬denotes net income from abroad, ܰܶ denotes net transfers from abroad, ‫ ܣܥ‬is the
current account, and ܶ‫ ܤ‬denotes the trade balance. Combining these two expressions gives the
expression that was used to construct the GNDI variable
‫ ܲܦܩ = ܫܦܰܩ‬+ ‫ ܣܥ‬− ܶ‫ܤ‬
The data used to construct the measures of gross public saving (PS) and gross public
disposable income in Turkey was obtained from TurkStat. Gross public saving is defined as total
government revenues minus total government expenditures plus public investment. Gross
public disposable Income is defined as gross public saving plus total government consumption
expenditures. Given the data on gross public disposable income, the series for gross private
disposable income is defined as gross national disposable income minus gross public disposable
income.
69
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