ASAHI SHIMBUN, ENGLISH WEB EDITION, NOVEMBER 15, 2010

POINT OF VIEW: Future prospects
for emerging Asia's saving rate andimplications for global imbalances
BY AKIKO TERADA-HAGIWARA AND CHARLES YUJI HORIOKA SPECIAL
TO THE ASAHI SHIMBUN
2010/11/15

Emerging Asia has been characterized by high domestic saving rates
almost across the board in recent years. These high domestic saving
rates have not only made possible high levels of domestic investment
but have also led to large capital outflows.
As Ben Bernanke, chairman of the Board of Governors of the U.S.
Federal Reserve System and others have pointed out, the emerging
economies of Asia have oversaved and underinvested, leading to large
current account imbalances.
But will this trend continue in the coming decades?
The population of emerging Asia is expected to age rapidly, and this will
presumably lead to a sharp decline in domestic saving rates. If so, thelarge current account surpluses will be reduced without any need forgovernment intervention.
However, if other factors, such as culture or corporate saving, are thedominant determinants of domestic saving rates, it is possible thatdomestic saving rates will remain high in emerging Asia and cause
global imbalances despite the rapid aging of these economies'populations.
Our recent research, conducted as part of an Asian Development Bank
project, analyzed the determinants of the domestic saving rate inemerging Asia between 1966 and 2007. We also projected future trends
in domestic saving rates in emerging Asia between 2011 and 2030.

Our sample includes 12 economies, which account for 95 percent ofemerging Asia's GDP, namely mainland China, Hong Kong, Taiwan,India, Indonesia, South Korea, Malaysia, Pakistan, Philippines,Singapore, Thailand and Vietnam.
Three main factors influence saving rates
Trends over time vary substantially among the 12 economies we looked
at, but most economies in the region have saved substantial amounts
over the past 40 years.
South Korea, Singapore, Malaysia, Thailand and Taiwan are the best
examples. The domestic saving rates in these five economies rose
sharply during the 1970s and 80s, exceeding or coming close to 40
percent of gross domestic product (GDP) by the early 1990s. The
domestic saving rates of the economies of emerging Asia declined in thelate 1990s due to the Asian financial crisis, but they then resumed their
upward climb in the 2000s, reaching a new high in all economies except
the Philippines and Pakistan.
A less dramatic but steady upward trend in domestic saving rates wasobserved in mainland China and India between 1970 and 2000. Bothcountries experienced surges in their domestic saving rates after 2000,
partially driven by soaring corporate savings. The sharp increase indomestic saving rates, particularly in mainland China, in the 2000s has
been blamed for increasingly severe global current account imbalancesand for the global financial crisis of 2008.
Meanwhile, a few economies in emerging Asia (such as Hong Kong,Indonesia and the Philippines) have shown a moderate downward trend
in their domestic saving rates since the early 1980s.
Various factors affect domestic saving rates, but according to ourestimation results, the age structure of the population, the degree offinancial sector development, and income levels are the major
determinants.
Looking first at the impact of the age structure of the population, wefound that the aged dependency ratio (the ratio of the population aged
65 and older to the population aged 15-64) has a negative andsignificant impact on the domestic saving rate, since the elderly financetheir living expenses largely by drawing down their previously
accumulated savings. This implies that the aging of a population will put
downward pressure on domestic saving rates.
The aging of the population has been progressing rapidly in almost all
economies in emerging Asia, with the exceptions of Pakistan andVietnam, due in large part to rapid increases in life expectancy (from 53in the early 1960s to 73 in the late 2000s for the sample as a whole),
and it has been especially pronounced in Hong Kong, South Korea,
Singapore, and Taiwan. This has put downward pressure on thedomestic saving rate.
By contrast, the youth dependency rate (the ratio of the population
aged 14 and under to the population aged 15-64), which would also beexpected to put downward pressure on the domestic saving rate, hasshown the opposite trend, declining in all of the economies in oursample, though to a lesser extent in Pakistan.
The degree of financial sector development would also be expected toinfluence domestic saving rates because people can be expected to doless precautionary saving if they know that they can borrow when theneed arises.
Our estimation results show that the degree of financial sector
development and the domestic saving rate have a nonlinear
relationship. In other words, the domestic saving rate will not start
declining until credit markets deepen to a certain level. Since themid-1980s, the liberalization of financial markets has progressed
steadily in emerging Asia, and most East Asian economies' credit
markets have deepened to the point where the ratio of private credit toGDP exceeds 100 percent.
On the other hand, many countries in South Asia and Southeast Asia
still have shallow credit markets. Thus, progress in financial sector
development has put downward pressure on domestic saving rates in
East Asia but upward pressure thereon in South Asia and SoutheastAsia. These trends can be expected to continue for the next twodecades.

Finally, we found that higher income levels increase domestic savingrates but in a nonlinear way. In other words, the extent to which
increases in income levels boost domestic saving rates increases asincome levels increase. Our results imply that rapid income growth has
put upward pressure on domestic saving rates, especially after income
exceeded a certain level.
Saving rate projections for 2011-2030
We projected future trends in domestic saving rates over the next 20years based on our estimation results and on projected trends in themajor factors influencing saving rates. We found significant differencesamong economies. For example, domestic saving rates are projected tofall by 5 to 13 percentage points in rapidly aging economies such as
Hong Kong, Taiwan, South Korea and Singapore. On the other hand,domestic saving rates will either increase moderately or remain at thesame level in economies where the aging of the population is slower,such as mainland China, Indonesia, India, Malaysia, Pakistan and thePhilippines.
The dramatic differences in these projections are not surprisingbecause there is a 40- to 50-year gap in the timing of population aging
in the 12 economies in our sample. The fact that more than half (seven)of the economies in emerging Asia are projected to see their domestic
saving rates increase suggests that the decline in domestic saving rates
in emerging Asia as a whole will not materialize for the time being.
We projected future trends in domestic saving rates in the 12economies as a whole, and found that the average saving rate inemerging Asia (weighted by real GDP) will increase from 29 percent in
2001-2007 to 32 percent in 2011-2020 and then to 33 percent in
2021-2030.
The population of emerging Asia is projected to age rapidly over the
next 20 years, with the aged dependency ratio expected to climb from
11 percent in 2001-2007 to 19 percent in 2021-2030. However, thedomestic saving rate of emerging Asia is expected to remain highdespite the rapid aging of the population because the impact of otherfactors will more than offset the impact of population aging.

Implications for global imbalances
The current account surplus is defined as the gap between saving andinvestment. What are the prospects for capital accumulation andinvestment rates over the next 20 years?
A recent study by Professors Etsuro Shioji of Hitotsubashi Universityand Vu Tuan Khai of Seikei University analyzes past trends ininvestment rates in emerging Asia and projects future trends therein.
According to their study, improvements in total factor productivity willcause capital accumulation to increase, while a fading out of the"catch-up effect" and a decrease in the working-age population will
work in the opposite direction.
However, they find considerable variation from country to country. For
example, mainland China and India, where capital accumulation is still
low relative to, say, Singapore, can be expected to show a large"catch-up effect," whereas factors such as low total factor productivity
and higher capital goods prices would be expected to act as a brake on
capital accumulation.
The Shioji-Vu study concludes that emerging Asia will continue to show
increases in per capita capital accumulation during the next 20 years
but at a slower pace in some economies, such as mainland China,Vietnam, and South Korea.
The study also projects a decline in the domestic investment rate inmainland China and South Korea, which together comprise more than60 percent of GDP in emerging Asia, and a more moderate decline inemerging Asia as a whole. Given our projection that the domestic
saving rate will show a moderate increase over the next 20 years andShioji-Vu's projection that the domestic investment rate will show amoderate decline over the same period, the current account surplus ofemerging Asia can be expected to remain high and even increase overthe next two decades.
The current global imbalances are unlikely to go away anytime soon.
It should be noted, however, that mainland China will account for morethan 50 percent of the GDP of emerging Asia by 2020. The trajectory ofsaving and investment rates in emerging Asia will therefore be heavily
influenced by developments in mainland China.
For example, increases in expenditures on social insurance andpensions, reductions in corporate saving, etc., would reduce mainland
China's domestic saving rate and therefore the saving rate of emerging
Asia as a whole.
Similarly, domestic investment rates in mainland China and also inemerging Asia as a whole will increase rather than decrease if capital
goods prices fall, total factor productivity increases, and/or theindustrial sector expands. Hence, our predictions might need to bemodified depending on what happens in mainland China.
To put it another way, decisive action by mainland China would help torectify global imbalances.
***Akiko Terada-Hagiwara is an economist in the Economics and Research
Department of the Asian Development Bank (ADB). She received herB.A. from Osaka University and her M.Phil. and Ph.D. degrees fromGeorge Washington University. Charles Yuji Horioka is a professor ofeconomics at the Institute of Social and Economic Research, Osaka
University. He received his B.A. and Ph.D. degrees from Harvard
University.