metadata: authors: 0: author: Lopez,Mariano Alejandro
count: Colombia
docna: 0: docna: Why did Colombian private savings decline in
            the early 1990s?
docty: Policy Research Working Paper
subtopic: Consumption,Fiscal & Monetary Policy,Urban Housing and Land Settlements,Urban Governance and Management,Urban Housing,International Trade and Trade Rules,Inflation,Macroeconomic Management,Municipal Management and Reform
teratopic: Poverty Reduction
abstracts: cdata!: The sharp drop in private savings in the
            1990s in Colombia can be attributed to a decline in private
            disposable income and, to a lesser extent, to growth in
            consumption. The permanent decline in private disposable
            income in Colombia between 1950 and 990 is closely linked to
            tax increases. This trend was accentuated in the early 1990s
            by a reduction in corporations' gross operating
            surplus. Contrary to the usual hypothesis, the author shows
            that in the 1990s private consumption had a relatively minor
            effect on national savings. He highlights two findings.
            First, private consumption's recent behavior can hardly
            be called a boom. It declined throughout the second half of
            the 1980s before finally showing an upturn equivalent to 2
            percent of gross national product. Second, consumption of
            durable goods after trade reform cannot be blamed for the
            decline in private savings. In fact, savings began falling
            in 1988 and, until 1993, trade reform did not cause a stock
            adjustment of durable goods.
geo_reg_key: 119228,517191
repnme: repnme: Why did Colombian private savings decline
            in the early 1990s?
display_title: Why did Colombian private savings
            decline in the early 1990s
listing_relative_url: /research/1997/01/695047/colombian-private-savings-decline-early-1990s
topicv3: Current Account m1326278 1135,Inflation m1326709 0870F4727ACED1CF8525815C00471347,Trade m1326924 698,Macroeconomic and Structural Policies
            m1327380 439,Land and Housing m1327648 817
publishtoextweb_dt: 2010-07-01T00:00:00Z
historic_topic: Poverty Reduction
origu: Macroeconomics and Growth Division
no_of_pages: 40
author_keys: 0: author_key: 1913203
model_extractions: I POLICY RESEARCH WORKING PAPER 1713

# Summary findings

The sharp drop in private savings in the 1990s in Colombia can be attributed to a decline in private disposable income and, to a lesser extent, to growth in consumption.

The permanent decline in private disposable income in Colombia between 1950 and 1990 is closely linked to tax increases. This trend was accentuated in the early 1990s by a reduction in corporations' gross operating surplus.

* Private consumption's recent behavior can hardly be called a boom. It declined throughout the second half of the 1980s before finally showing an upturn in 1992 equivalent to 2 percent of gross national product.

* Consumption of durable goods after trade reform cannot be blamed for the decline in private savings. In fact, savings began falling in 1988 and, until 1993, trade reform did not cause a stock adjustment of durable goods.

Contrary to the usual hypothesis, L6pez shows that in the 1990s private consumption had a relatively minor effect on national savings. He highlights two findings:

- - This paper a product of the Macroeconomics and Growth Division, Policy Research Department is part of a larger effort in the department to assess the determinants of saving. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Emily Khine, room N11-061, telephone 202-473-7471, fax 202-522-3518, Internet address kkhine@worldbank.org. January 1997. (34 pages)

_The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represen_ **_t_** _he view of the World Bank, its Executive Directors, or the countries they represent._

## Produced by the Policy Research Dissemination Center
# **Why Did Colombian Private Saving Decline in the Early 1990s?***

Alejandro L6pez** The World Bank

* For their useful comments on firsts drafts I would like to thank Juan Carlos Jaramillo, Juan Luis Londoino, Ernesto May, Armando Montenegro, Paulo Neuhaus, Luis Serven, Roberto Steiner and Levy Yeyati. This is a revised version of a paper written with Carolina G6mez and Norberto Rodriguez, researchers from El Banco de la Republica (The Central Bank of Colombia).

**This paper was written while the author was a research fellow at The World Bank.
# 1. **Introduction**

Many have pointed out that prior to 1990 the Colombian econorny was characterized by the presence of many microeconomnic distortions and prudent macroeconomic management (see, among others, World Bank (1991), Urrutia (1994)). As a consequence, growth only had a decent performance and inflation and budget deficits were moderate. For most Colombian policymakers, the lack of a major macroeconornic crisis and the failures of different economic experiments throughout Latin America were sufficient evidence that no serious economic reform was needed. However, during the period 1990-1994 several structural reforms were undertaken in areas such as foreign trade, foreign investment, labor markets, financial markets and public utilities. The ultimate objective of the reforms was to foster growth by strengthening the role of the government in the provision of security and justice and by allowing the private sector to compete in former protected markets and expanding its role in the production of "public goods" (Montenegro (1995)).

The structural reforms carried out by the government were accompanied by a significant decline in private savings. Until 1992 this behavior was offset by public savings and consequently the national saving rate remained stable (Figure 1). Although the deterioration of private savings started in 1988, its extension in the 1990s was associated with the implementation of the structural reforms'. Until 1989 around 70% of disposable income accrued to liquidity constrained consumers (L6pez (1994)). Given

**Figure 1: Savings in Colombia**

<!-- Start of picture text --> 25<br>10<br>1951 1958 1965 1972 1979 1986 1993<br>Private Saving ---- Public Saving - National Saving<br>* Source: National Accounts<br><!-- End of picture text --> XAn additional hypothesis not related with the reforms has been a reassessment of permanent income due to the oil bonanza (see, among many others, L6pez (1995)).

l
this result, Urrutia and L6pez (1994, 1995) suggested that the acceleration of the financial liberalization process in the 1990s relaxed liquidity constraints causing an increase in consumption. In addition, Echeverry (1996) explained the drastic fall in the Colombian private saving rate taking a similar approach to that developed in the exchange rate based stabilization literature (i.e. Calvo and Vegh (1993, 1994)). He argued that nonliquidity constrained consumers increased their durable consumption due to their expectations regarding the effects of the trade reform on import prices and the temporariness of the high level attained by the real exchange rate. Finally, Steiner (1995) attributed to fiscal and monetary policies the fall in the private saving rate. On the fiscal front, the tax burden was increased to prevent a deterioration of the fiscal stance caused by the trade and political reforms (i.e. fiscal decentralization and the enhanced role of the government in the provision of justice and security)<sup>2</sup> . The monetary stance was modified in 1992 when the costs and limits of a two-year sterilization policy were evident. As a consequence, interest rates were drastically reduced, international reserves began to be intermediated by the financial system, credit increased, borrowing restrictions were relaxed and a so called consumption boom seemed to have occurred.

Despite the variety of explanations given to the recent decline in Colombian private savings, most analysts have not looked closely to the data and have failed to recognize that the apparently low level attained by private savings in the 1990s might reflect just data inadequacies. The paper is organized in the following way. Section 2 discusses some methodological issues and explains two important corrections that can be easily made to the saving measures presented in the Colombian National Accounts. In particular, it adjusts the saving measures by net capital gains from revaluations of assets and liabilities due to inflation and changes in the real exchange rate. As explained by Serven and Schmidt-Hebbel (1996), this exercise is useful because it constructs a saving measure consistent with net wealth changes and, therefore, with consumption theory. Section 3 makes the comparison between the adjusted and traditional measure of private savings. This shows that both of them have declined in recent years. However, whereas in 1992 the

> 2 The former had a negative impact on revenues due to the reduction of the import surcharge and the latter increased public consumption from 10% of GDP in 1990 to almost 15% of GDP in 1994.

2
traditional measure attained its lowest level since 1950 and was 3.5% of GNP below the average of the period 1951-1993, the adjusted measure was 0.5% of GNP below that average. Section 4 describes the behavior of the main components of Colombian private savings, an exercise that is very useful to understand its recent behavior. It shows whether consumption is more important than disposable income to explain changes in private savings and identifies which components of consumption/disposable income matter most (i.e. durable or non-durable consumption, interest or non-interest income). The main findings and conclusions are presented in Section 5.

# **2. Methodological Issues**

The Colombian National Accounts contain valuable information when compared to those of other developing countries. In fact, they have been constructed since 1950 and consumption can be divided between durable and non-durable goods since 1965. In addition, savings can be divided between corporations and households, and corporate savings can be divided between public and private enterprises ensuring that the coverage of the public sector does not distort the measures of public and private saving and disposable income3. Nevertheless, these accounts suffer from many of the problems mentioned by Schmidt-Hebbel and Serven (1996). Among them it is worth mentioning the following: (i) Private consumption is the residual that balances the income-expenditure identity and saving is the ultimate double residual. Therefore, it reflects all the inaccuracies incurred in estimating income and expenditure. In the case of Colombia these problems might be important due to the presence of drug trafficking. On the one hand, income might be underestimated since it does not take into account a large percentage of the value _3_ However, between 1950 and 1969 the National Accounts were constructed by the Colombian Central Bank using a different methodology than those constructed by the National Statistical Department (DANE) for the period starting in 1970. The main differences between the two series are: (i) A wider coverage of the public sector in the National Accounts constructed by DANE; (ii) the private saving measure calculated by the Central Bank and DANE are net and gross measures, respectively. However, the National Accounts constructed by the Central Bank present the depreciation of physical assets and, therefore, the gross saving measure can be easily calculated. The Graphs and Tables presented in this paper are consistent with the gross measure of savings. For a detail description of the differences between the National Accounts constructed by the Central Bank and Dane see: Resumen de la Misi6n de Expertos Franceses (1984), Lora (1987), Agudelo (1991).

3
added generated by that sector. However, elements of expenditure, such as investment, include some of the activities undertaken by drug lords. Given that consumption is a residual, it is likely to be underestimated.

(ii) Durable consumption is classified as consumption rather than investment, but theory suggests that an adequate consumption measure should be based on flow of services of presently owned consumer durable goods. This problem could be particularly relevant during trade reforms, such as the undertaken by the Colombian government in the early 1990s. In fact, it might be argued that the trade liberalization caused a once and for all increase in the stock of durable goods since they were repressed before the reform.

(iii) The balance of payments suffers from significant classification problems, implying measurement inadequacies of external savings and, consequently, of domestic saving. For example, between 1992 and 1993 many Colombian economists argued that during the period 1990-1992 the current account surplus was overestimated because capital inflows were hidden as current account transactions (i.e. through over-reporting net exports or transfers of Colombians abroad). However, according to their estimations this classification problem never surpassed 1% of GDP (Steiner (1995)). Furthermore, even if the problem was larger, it might have been offset by an underestimation of net exports. In fact, if part of the revenue coming from illegal drug exports is held abroad, Colombian savings could be larger than the actual figures since those exports might not be completely compensated by smuggled goods.

(iv) Private (public) saving is under (over) estimated because interests paid on total external debt are subtracted from private disposable income. This problem is accentuated because the interests received by the private sector from the public debt it holds are ignored.

(v) In the National Accounts saving is a current account measure but consumption theory is based on a capital account measure of saving in which it is computed as the change in net wealth.

To ensure a correct diagnosis of the recent behavior of private savings, it is important to correct these inadequacies of the data. Solving the first three problems is beyond the scope of this paper but the last two can be removed easily. In particular, the 4
current account measure of savings can be consistent with that based on net wealth changes if the former is adjusted by net capital gains from revaluations of assets and liabilities due to inflation and changes in the real exchange rate (Arrau and Oks (1992), Schmidt-Hebbel and Serv6n (1996)). If problems (iv) and (v) are corrected, the traditional macroeconomic identity, which suggests that gross investment is financed by national and external savings, takes the following form: I = (Y+ONFS + TR*r - P[r*(l+E) +c]fpr-i + Prb-i -P(7r/1+ 7r)h-i - T - TR- OR+ S- C) _+_ (T + TR _+TR*,_ -P[r*(1 +E) +±]fpb, **-** Prb-i +P(7r/1 + 7t)h-i + OR -S - G) + (M - X - ONFS - TR* + P[r*(1+c) **+±]fpr-i** + P[r*(1+E) +6]fpb-1) where I is gross investment, Y is GDP, TR* are total external transfers (subscripts pr or pb denote external transfers to the private and public sectors, respectively), **fpr** and fpb are the real stocks of private and public net foreign debt, respectively. ONFS is other (noninterest) factor payments from the private to the foreign sector, T is total taxes, TR is net transfers received by the public from the private sector, OR is other government revenues (i.e. the gross operational surplus of public enterprises), S represents subsidies, C is private consumption, G is government consumption, M-X is net exports of goods and non-factor services and P is the private-consumption deflator; h and b are real domestic base money and real domestic public debt held by the private sector, respectively, r is the real interest rate, rt denotes inflation, E represents the change in the real exchange rate and the superscript * denotes foreign currency values5.

Notice that the measures of private and public disposable income have been adjusted in order to correct the measure of savings. In fact, the adjusted measure of private and public disposable income include: (i) The losses (gains) of the private (public) 4For a detailed derivation of the adjusted measures see Arrau and Oks (1992) and Schmidt-Hebbel and Serven (1996). For the case of Colombia see: L6pez et.al (1996a). For the case of Mexico, Arrau and Oks included in the adjusted measure the income form private foreign assets. For the case of Colombia this adjustment was not made because it was impossible to obtain the stock of wealth of Colombian residents abroad during the period 1950-1993.

It should be noted that E and r were calculated as _E1 1_ and [(I+i)/(1+iT)] -1, _(E_l PL1_ / P _1 )_ respectively. To avoid overestimation of the interest paid on external debt, the average change of the exchange rate and of domestic and international prices were used.

_5_
sector due to the inflation-erosion of the real value of internal debt and the stock of base money. These are represented by Prb-i and P(7t/l+ 7r)h-i. respectively. (ii) The capital losses (gains) of the private and public sectors due to a devaluation (appreciation) of the real exchange rate that causes an increase (decrease) of the real value of external Colombian debt in terms of Colombian goods. These adjustments are captured by P[r*(1+c) +±]fpr-i and P[r*(l+s) +c]fpbij, respectively. As a consequence, private and public adjusted disposable income (YDp and YDpb, respectively) are: YDp= Y+ONFS _+TR*,-_ P[r*(I+g) +c]fpr.- + Prb-i -P(7r/l+ 7r)h-t - T - TR- OR+ S (2) YDpb = T + TR _+ TRPb_ -P[r*(l +8) +E]Jfpb-i - Prb-. +P(7r/I+ 7r)h-i + OR -S (3) Finally, it should be pointed out that identity (1) indicates that private savings can be derived by subtracting private consumption from private disposable income (i.e. the first parenthesis of (1)), or as the difference between aggregate investment and the sum of public and foreign saving (the last two parenthesis of (1)). The measure of private saving should be identical independently of the way it is calculated, condition that is satisfied by the series presented in Annex 1 and 26. Once the corrections to the saving series have been made, the description of its recent behavior can be properly done. This exercise and the comparison of the traditional and adjusted measures of savings are carried out in the next section.

3. A **Comparison Between the Adjusted and Traditional Measures of Savings** Figure 2 presents the adjusted measure of national savings and its components (i.e. public and private savings) as a percentage of GNP. In addition, it shows a measure of adjusted private savings as a percentage of adjusted private disposable income (YD). The latter is a better measure of the private saving rate, but its behavior is very similar to the rate expressed as a percentage of GNP. Several issues should be highlighted when these series are compared with the traditional data of the National Accounts (Figure 1):

> 6Annex I and 2 present the unadjusted (i.e. the raw variables of the Colombian National Accounts) and adjusted measures of saving, respectively. The data were joined using the procedure suggested by L6pez et.al (1996a) which ensures that the measure of private saving will be the same independently of the way it is calculated.

6
<!-- Start of picture text --> Figure 2: Savings in Colombia Adjused by Capital Gains<br>28<br>1951 1958 1965 1972 1979 1986 1993<br>Private Saving (% of GNP) - - - - - Public Saving<br>--- - - National Saving ------- Private Saving (%YD)<br>Source: National Accounts and Authors Calculations<br><!-- End of picture text --> (i) The adjusted series show greater fluctuation, particularly before 1967 when the exchange rate system was characterized by an adjustable peg. In that period several maxidevaluations of the nominal exchange rate were carried out leading to significant capital losses for the private and public sectors (Figure 3)7. However, the effects of the nominal devaluation upon the real exchange rate were quickly compensated by higher inflation and the saving rates returned to the levels attained before the adjustment (For a detailed description of that period, see Diaz-Alejandro (1976)). The differences between the corrected and traditional measures of savings are reduced after the implementation of the crawling peg system in 1967. An important exception occurs in the mid 1980s when the public sector suffered significant capital losses due to a real devaluation of the exchange rate at a time where external debt had increased. As a consequence, in 1985 and 1986 the public sector experienced capital losses of 3.2% and 4.0% of GNP, respectively, whereas the private sector's capital losses reached 1% of GNP in each of these years.

(ii) On average, between 1951-1993 the national saving rate suggested by the National Accounts was 0.2% of GNP higher than the adjusted measure. However, whereas the traditional measure of private saving was on average 0.6% of GNP below the adjusted measure, the National Accounts measure of public savings was 0.8% of GNP above the adjusted measure. As far as the private sector is concerned, the capital gains 7 The capital losses of the private sector are likely to be overestimated since the adjusted measure of saving does not include the income from private assets held abroad. In fact, it could be possible to argue that before the devaluation these assets were increased through unrecorded capital flight.

7
<!-- Start of picture text --> Figure 3: Net Capital Gains<br>19<br>14<br>0. 9<br>2<br>S -1 L=-_ -d -i'. - -. , ;<br>-11<br>1951 1958 1965 1972 1979 1986 1993<br>Private Sector ------- Public Sector - External Sector<br>Source:Authors Calculations<br>Figure 4: Net Capital Gains of the Private Sector<br>4<br>z -1<br>0<br>-6--<br>1951 1958 1965 1972 1979 1986 1993<br>On Public Internal Debt ------- On Private External Debt<br>- - - - On Base Money Holings Total Net Capftal Gains<br>Source: Authors Calculations<br><!-- End of picture text --> caused by the real exchange rate appreciation plus those due to domestic debt holdings are higher than the inflation tax it pays on money holdings (Figure 4).

(iii) According to the National Accounts, in 1992 the private saving rate attained its lowest level since 1950 when it reached 9.3% of GNP, and was 3.5% of GNP below the average private saving rate of the period 1951-1993. Although this rate recovered in 1993, its level was still 2.5% of GNP below the average of the last 23 years. In contrast, the decline of the adjusted measure of private savings continued in 1993 but its level was 0.5% of GNP below the average of the period 1951-1993. Therefore, the low level attained by private savings in the 1990s is more dramatic in the National Accounts than in the adjusted measure. However, the decline in the adjusted measure is steeper. In fact, between 1988 and 1993 the private saving rate fell 5.4% of GNP and 4.6% of GNP according to the adjusted and traditional measures, respectively. The purpose of the next 8
section is to understand the causes of this behavior and its effects upon the national saving rate.

# **4. Understanding the Recent Behavior of Savings**

Figure 5 takes a first step towards accounting for the change of private savings. It shows that during the period 1950-1993 private disposable income experienced a permanent deterioration. However, this performance was reflected in a decline of the private saving rate only if accompanied by increases in consumption or if the latter suffered a less severe deterioration than disposable income. Two points should be highlighted about the behavior of private consumption: (i) It is doubtful that the deterioration of the private saving rate can be explained by stock adjustment of durable goods as a consequence of the trade reform (i.e. Echeverry (1996)). In fact, Figure 6 shows that consumption of durable goods only had a moderate increase in 1993 (0.7% of GDP) after a period of decline, whereas private savings have been falling since 1988.

(ii)The macroeconomic imbalances that characterized the Colombian economy during the first years of the 1980s went along with significant increments in consumption (For a comprehensive analysis of that period, see Garay and Carrasquilla (1987)). However, the adjustment process that started in 1984 led to a decrease in consumption and the private saving rate rose. Since 1988 consumption stop falling as a percentage of GNP and had an increase in the 1990s, leading to a decline in private savings. Still, the recent increment in consumption has been smaller than the experienced in the early 1980s and 1960s and it is surprising that this moderate rise had been described as a consumption boom (see, among others, Urrutia and L6pez (1994, 1995)). Nevertheless, it is clear that to understand the behavior of private savings the determinants of private consumption should be identified. The paper by Lopez et.al (1996b) is a first step in this direction. According to their evidence, precautionary savings, public consumption and real interest rates have an important impact upon private consumption. In particular, they found a large an negative effect of real interest rates upon consumption and suggest that public consumption complements household spending, reinforcing the idea that public 9
expenditure cuts are the most efficient way in which government saving can increase the national saving rate.

<!-- Start of picture text --> Figure 5: Accounting for the Behavior of Private Savings<br>95<br>90<br>85<br>o 80<br>75<br>70<br>65<br>601<br>1951 1958 1965 1972 1979 1986 1993<br>Disposable Inconme----- Consurrption<br>Source: National Accounts<br><!-- End of picture text --> <!-- Start of picture text --> Figure 6: Consumption of Durables<br>4.00<br>3.50<br>a.3.00<br>z<br>e 2.50<br>o 2.00<br>1.50-<br>1.00<br>0.50<br>I 0.00- , I I | q I I I I i I I I I I I I I I I i 1 + -<br>| 1965 1972 1979 1986 1993<br>Source: National Accounts and L6pez et.al (1996a).<br><!-- End of picture text -->

As far as disposable income is concerned, it is worth describing the behavior of its components in order to explain its permanent decline. Figure 7 presents subsidies (S). transfers received by the public sector from private agents (TR), transfers received by the private sector from abroad (TR*) and other (non-interest) net factor payments from the foreign to the private sector (ONFP). In general these items represent less than 1% of GNP and its behavior does not contribute significantly to the decline in disposable income. On the contrary, in recent years subsidies to the private sector have been stable after that fall in the early 1970s. In addition, since 1984 transfers from the external to the private sector have shown an increasing trend and transfers from the private to the public sector have declined. An important clue to understand the permanent deterioration 10
of disposable income is presented in Figure 8. It shows that total taxes experienced a continuous increase as a percentage of GNP since 1950, diminishing private disposable income. This trend was reversed in some periods (1978-1983) or remained stable (19861990) but, between 1983 and 1993 total taxes increased almost _5%_ of GNP explaining 71% of the decline in private disposable income observed during the same period. Although this evidence cannot be interpreted as a causal relationship between taxes and savings, existing empirical evidence suggests that tax increases is not the most efficient way of rising national savings given its large negative effect on private savings (see, among others, Corbo and Schmidt-Hebbel (1991)). The magnitude of this effect is an empirical matter that deserves a careful investigation in Colombia.

<!-- Start of picture text --> Figure 7: Components ofPrivate Disposable Income<br>4<br>3<br>ffi 0. 2<br>0-1<br>-2-<br>1951_ 1958 1965 1972 1979 1986 1993<br>--- Subsidies TR TR' x ONFP<br>Source: National Accounts and Authors Calculations<br>Figure 8: The Behavior of Taxes<br>-5<br>0.<br>-15<br>-20 +-t-<br>1951 1958 1965 1972 1979 1986 1993<br>- - - - Total Taxes- Direct Taxes ------- Indirect Taxes<br>Source: National Accounts<br><!-- End of picture text --> 11
A comprehensive review of the behavior of savings in Colombia is presented in Tables 1 to 3. These Tables show 5 year averages of adjusted private, public and national saving rates, quantify its movements as a percentage of GNP and identify the causes behind those changes<sup>8</sup> . The explanations of the change in savings are divided among movements in consumption, capital gains and disposable income. The latter is divided among changes in gross operating surplus (GOS), taxes and other components (i.e. subsidies, transfers from the external to the private and public sectors, transfers from the private to the public sector and ONFP). As can be seen in Table 1, private disposable income also include labor income. Several important conclusions can be derived from those tables regarding the recent behavior of savings.

**Table 1 Accounting for the Change in Private Savings**

|**Period**|**Adjusted**<br>**Saving**<br>**Rate**<br>**(% of**<br>GNP)|**Change**||**Movements**<br>**(%**|**in Pri**<br>**of GN**<br>**Expl**|**vate Savi**<br>**P)**<br>**anations**|**ng**|||
|---|---|---|---|---|---|---|---|---|---|
||||**Consumption**|**Capital**<br>**Gains**||**Unadjust**|**ed Disp**|**osable Inco**|**me**|
||||||**Tot.**|GOS|TAX|**Salaries**|**Other**|
|56-60|14.0|4.3|-3.3|0.6|0.4|0.7|0.1|-0.1|-0.3|
|61-65|12.0|-2.0|2.3|-1.1|1.4|-2.7|0.6|3.6|-0.**1**|
|66-70|13.0|1.0|-1.5|3.0|-3.5|-3.2|-3.1|0.7|2.1|
|71-75|13.4|0.4|-1.9|-0.6|-0.9|-1.1|-0.5|1.0|-0.3|
|76-80|14.5|1.1|-2.4|0.5|-1.8|-2.9|-1.7|0.7|2.1|
|81-85|13.6|-0.9|2.0|-0.8|1.9|-4.4|1.9|3.8|0.6|
|86-90|16.7|3.1|-5.2|0.2|-2.3|0.6|-2.2|-4.8|4.1|
|91-93|14.2|-2.5|0.7|1.3|-3.1|-2.4|-1.2|0.5|0.0|

Source: National Accounts, Data Appendix and Authors Calculations. Between 1950 and 1969 the measure of private saving constructed by El Banco de la Rep6blica was a measure of net saving. In order to be consistent with the measure of gross saving constructed by DANE since 1970, the depreciation of physical capital was added. The interests on external public debt were subtracted from the unadjusted measure of disposable income presented in the National Accounts.

s It could be possible to argue that Table I would be more illustrative if the private saving rate is defined as a percentage of private income before taxes and its changes are explained only by movements in taxes and consumption. However, this would not show the causes behind the changes in disposable income, an issue relevant for policy makers.

12
(i) Private saving has been remarkably stable during the last 43 years. As far as private unadjusted disposable income is concerned, it should be pointed out that in the last 9 years it has declined continuously. In fact, it fell 2.3% and 3.1% of GNP during 1986-1990 and 1991-1993, respectively. In the first period this behavior did not cause a lower private saving rate because private consumption declined 5.2% of GNP. However, in the 1990s private consumption rose 0.7% of GNP and the private saving rate deteriorated 2.5% of GNP<sup>9</sup> . According to Table 1, in the 1990s the deterioration of disposable income has been associated with the decline in the GOS of the private sector (2.4% of GNP) and the increase in taxes (1.2% of GNP). However, given that disposable income of corporations is equivalent to corporate savings, the behavior of households and corporations should be analyzed separately to have a better understanding of private savings.

Figure 9 indicates that the behavior of households and corporations has been different. It shows that the stability of the unadjusted private saving rate between 1973 and 1990 was hiding a small but secular decline in household savings (almost equivalent to 4% of GNP). Given that this pattern seems to be closely linked to the deterioration of the GOS generated by these agents (Figure 10), future research should explain the reasons behind the behavior of the latter'°. Figure 9 also shows that the long run decline in household savings was compensated by an increase in corporate savings, specially in the second half of the 1980s. Still, in the early 1990s the stability of the private saving rate was broken because household savings continued its secular fall whereas corporate savings returned to the levels attained between 1970 and 1985. Figure 11 shows that the decline in corporate savings is explained by the increment in direct taxes and by a deterioration of the GOS after a period of significant increase in the second half of the 1980s. According to Sanchez, et. al (1996) the decline in corporate GOS in the 1990s should be associated with the trade reform as it increased external competition. Moreover,

> 9 This decline is less acute than the suggested by the traditional measure because the private sector had capital gains equivalent to 1.3% of GNP.

> **'1** The GOS generated by households includes profits of small industries that are not formally constituted in corporations (i.e. family industries, barber-shops, shoeshops, etc.). It also includes income from effective housing rent and that imputed to the house owner for living in it.

13
<!-- Start of picture text --> Figure 9: Components of Unadjusted Gross Private Savings<br><!-- End of picture text --> <!-- Start of picture text --> 20 -<br>a. 15<br>2<br>5<br>1951 1958 1965 1972 1979 1986 1993<br>-Household Saving - - - - - Corporate Saving Total<br>Source: National Accounts.<br><!-- End of picture text --> <!-- Start of picture text --> Figure 10: Components of Household's Unadjusted Disposable<br>60 -____ Income<br>50<br>a. 40..........<br>20<br>% 20<br>-210<br>1951 1958 1965 1972 1979 1986 1993<br>tGOS . Salar-eSa.ar es Direct Taxes x-- TR+TR<br>Source: National Accounts. Depreciation of physical assets is added to the GOS during 1951-1969.<br>Figure 11: Components of Gross Private Corporate Savings<br>20 _____<br>a. 10<br>z<br>-0<br>-10 I I I I I I I I I I I I I I I I I ' III ' ' '<br>1951 1958 1965 1972 1979 1986 1993<br>- _ --- - GOS - Distributed Profits Direct Taxes X TR+TRj<br><!-- End of picture text --> Source: National Accounts. Depreciation of physical assets is added to the GOS during 1951-1969.

Source: National Accounts. Depreciation of physical assets is added to the GOS during 1951-1969.

14
they argued that the collapse of corporate savings was not reflected in investment because there was almost a perfect substitution of domestic savings by external and domestic debt as a consequence of the structural reforms that relaxed liquidity constraints. Given the importance of corporate savings in the recent decline of the private saving rate, it is clear that additional efforts are required to have a better understanding of corporate behavior in Colombia.

(ii) Contrary to private saving, public saving has been very unstable, specially since the 1970s. In recent years, public disposable income (defined as in equation 3) increased 2.1 % and 3.1 % of GNP in 1986-1990 and 1991-1993, respectively. This behavior is explained by the increment in taxes and in the GOS generated by the public sector. Moreover, due to the revaluation of the exchange rate, in the 1990s the capital gains of the public sector increased 3.6% of GNP and the public saving rate attained 9.7% of GNP, its highest level ever (Table 2). Nonetheless, it seems that the way in which public saving was attained was not the most efficient to increase the national saving rate. On one hand, given that public consumption seems to complement household expenditure, the increments observed in the former during the 1990s might have trimmed private consumption (Lopez, et. al (1996b)). On the other hand, the evidence suggests that the rise in taxes might have significant negative effects on private savings (Corbo and Schmidt-Hebbel (1991)).

(iii) In 1991-1993 the adjusted measure of the national saving rate increased 3.3% of GNP and reached 23.9% of GNP (Table 3). This level is the highest of the last 43 years, followed by that attained in 1976-1980 (22.5% of GNP). However, there is an important difference between the two periods. In the late 1970s the national saving rate increased mainly due to a reduction of 3.2% of GNP in total consumption (i.e. private plus public consumption). In contrast, in the early 1990s total consumption increased 1.6% of GNP and this was not reflected in a fall in the adjusted national saving rate because capital gains of the private and public sector increased by 4.9% of GNP. Finally, it should be pointed out that Table 3 shows a simple but important fact about the explanations of the movements in the national saving rate. In particular, those changes can not be explained by unadjusted disposable income since the decline (increment) observed _15_
# **Table 2 Accounting for the Change in Public Savings**

|**Period**|**Adjusted**<br>**Saving**<br>**Rate**<br>**(% of**<br>**GNP)**|**Change**|**M**|**ovements in P**<br>**(% of G**<br>**Exp**|**ublic Savi**<br>**NP)**<br>**lanations**|**ng**|||
|---|---|---|---|---|---|---|---|---|
||||**Consumption**|**Capital**<br>**Gains**|**Unadj**|**usted Dis**|**posable I**|**ncome**|
||||___________<br>|__________|**Total**|**GOS**|**TAX**|**Other**|
|56-60|4.8|0.7|-0.5|0.7|-0.5|0.1|-0.1|-0.5|
|61-65|2.1|-2.7|0.8|-0.6|-1.3|-0.1|-0.6|-0.6|
|66-70|5.9|3.8|0.6|1.0|3.4|0.1|3.1|0.2|
|71-75|4.8|-1.1|2.2|0.3|0.8|_-0.5_|_0.5_|0.8|
|76-80|8.0|3.2|-0.8|0.4|2.0|-0.8|1.7|1.1|
|81-85|1.0|-7.0|2.2|-3.0|-1.8|1.7|-1.9|-1.6|
|86-90|3.9|2.9|-0.7|-0.1|2.1|2.5|2.2|-2.6|
|91-93|9.7|5.8|0.9|3.6|3.1|0.8|1.2|1.1|

Source: National Accounts, Data Appendix and Authors Calculations. The National Accounts constructed bv El Banco de la Republica during 1950-1969 did not present explicitlv the depreciation of public physical capital.

# **Table 3 Accounting for the Change in National Savings**

|**Period**|**Adjusted**<br>**Saving**<br>**Rate**<br>**(% of**<br>**GNP)**|**Change**|**Movem**|**ents in National**<br>**(% of GNP)**<br>**Explanat**|**Saving**<br>**ions**|
|---|---|---|---|---|---|
||||**Consumption**|**Capital**<br>**Gains**|**Unadjusted Disposable**<br>**Income**|
|56-60|18.8|_5.0_|-3.8|1.3|-0.1|
|61-65|14.1|-4.7|3.1|-1.7|0.1|
|66-70|18.9|4.8|-0.9|4.0|-0.1|
|71-75|18.2|-0.7|0.3|-0.3|-0.1|
|76-80|22.5|4.3|-3.2|0.9|0.2|
|81-85|14.6|-7.9|4.2|-3.8|0.1|
|86-90|20.6|6.0|-5.9|0.1|-0.2|
|91-93|23.9|3.3|1.6|4.9|0.0|

Source: National Accounts, Data Appendix and Authors Calculations.

16
in private unadjusted disposable income is almost perfectly compensated by an increase (decline) in public unadjusted disposable income. As a consequence, changes in the national saving rate must be explained by movements in consumption and net capital gains.

# **5. Conclusions and Final Remarks**

This paper looked closely to the Colombian National Account data. In order to ensure a correct diagnosis of the recent behavior of private savings, several inadequacies of the data were corrected. In particular, the following problems were solved: (i) The under (over) estimation of private (public) caused by subtracting interests paid on total external debt from private disposable income and excluding interests received by the private sector from the public debt it holds; and (ii) the lack of consistency of the saving measure with consumption theory. In the National Accounts saving is a current account measure but consumption theory is based on a capital account measure of saving in which it is computed as the change in net wealth. This problem was solved adjusting the current account measure of savings by net capital gains from revaluations of assets and liabilities due to inflation and changes in the real exchange rate.

According to the adjusted measure of savings, the decline of private savings in the 1990s is less dramatic than the suggested by the National Accounts. The latter indicates that in 1992 the private saving rate reached the lowest level since 1950 (9.3% of GNP) and was 3.5% of GNP below the average private saving rate of the period 1951-1993. In contrast, in 1993 the adjusted measure was below the level attained in 1992 but it was 0.5% of GNP below the average of the period 1951-1993. However, the decline in the adjusted measure is more dramatic. In fact, between 1988 and 1993 the private saving rate fell 5.4% of GNP and 4.6% of GNP corresponding to the adjusted and traditional measures, respectively. Still it should be pointed out that the level attained in 1988 was the highest of the period 1950-1993.

In order to understand the recent behavior of Colombian private savings, the performance of its main components was analyzed. This was useful to reject and/or confirm some of the hypothesis that have been suggested as explanation of the decline of 17
private savings in the 1990s. The following conclusions, and ideas for future research, emerged: (i) The behavior of private savings between 1991 and 1993 is explained by a deterioration of unadjusted disposable income more than by growing consumption. The increment in taxes explains part of the deterioration of disposable income in the 1990s. This evidence cannot be interpreted as a causal relationship between taxes and savings, but existing empirical evidence suggests that tax increases is not the most efficient way of rising national savings due to its large negative effect on private savings (see, among others, Corbo and Schmidt-Hebbel (1991)). The magnitude of this effect is an empirical matter that deserves a careful investigation in Colombia.

(ii) Although the increase in private consumption explains part of the deterioration of the private saving rate in the 1990s, it only increased in 1992 and the rise was moderate (2.2% of GNP). It is doubtful that the deterioration of the private saving rate can be explained by arguments suggesting a process of stock adjustment of durable goods as a consequence of the trade reform. In fact, the consumption of durable goods only had a moderate increase in 1993 (0.7% of GDP) after a period of decline.

(iii) Given that disposable income of corporations is equivalent to corporate savings, the behavior of households and corporations was analyzed separately. Household savings show a secular decline since 1970 and two elements deserve special consideration to understand this behavior. On one hand, it is important to establish the main determinants of private consumption, step that has already been taken by L6pez, et. al (1996b). On the other hand, the secular decline of household savings seems to be closely related to the GOS generated by households. Therefore, understanding the reasons behind the declining trend of household's GOS should be a priority of future saving studies in Colombia.

(iv) As far as corporate savings is concerned, the period 1983-1994 was characterized by the rise and fall of this aggregate. According to the National Accounts, the decline in the GOS is the main cause of its recent deterioration and, eventually, this could be related to the trade reform as it increased external competition. However, micro data suggests that the decline in corporate profits was temporary, reducing the potential 18
explanatory power of the trade reform. This evidence indicates that the decline of corporate savings was not reflected in investment because there was almost a perfect substitution of domestic savings by external debt. Although Sanchez et.al (1996) argue that this behavior was the consequence of the structural reforms that relaxed liquidity constraints, the importance of the reforms as an explanation of corporate savings should remain an open question for future research.

(v) During 1991-1993 the national saving rate increased 3.3% of GNP compared to the period 1986-1990 and reached the highest level since 1950. This increment was generated by capital gains caused by the revaluation of the real exchange rate which more than compensated the increase in total consumption. In the first years of this decade the increment in public consumption was higher than the increase in private consumption and preliminary evidence suggests that this tendency was accentuated in 1994 since public consumption had a further increase of 1.6% of GDP whereas private consumption fell 2.6% of GDP in 1994. Therefore, it seems that the way in which public saving was attained was not the most efficient to increase the national saving rate. On one hand, given that public consumption seems to complement household expenditure, the increments observed in the former during the 1990s might have trimmed private consumption (L6pez, et. al (1996b)). On the other hand, the evidence suggests that the rise in taxes might have significant negative effects on private savings (Corbo and Schmidt-Hebbel (1991)).

19