Thursday, 17 January 2008

Saving and the balance of payments

Bryce Wilkinson and Trinh Le have an excellent article in the National Business Review entitled Why blame the ordinary New Zealander? Wilkinson and Le point out that
Loose assertions have been made that high household spending and low household savings are the cause of the large current account deficit or inflationary pressures.
When it comes to the balance of payments it should be noted that the deficit is an outcome rather than a cause. Something else is going on to cause it. Wilkinson and Le explain that
... any balance of payments outcome is a response to fundamental drivers which include world prices for oil and dairy products, the availability of world savings, investment confidence and the exchange rate pressures that reflect the competition for resources between the sectors that are exposed to international competition and those (like government) that are sheltered from it.
Thus even if households in New Zealand increased their savings this would not necessarily reduce a balance of payments deficit. Wilkinson and Le note, with regard to research by the NZIER, that
... there is no reliable association between household savings and the balance of payments through time or across the 21 countries for which such statistics are readily available.
They then go on
[t]o illustrate the point by two opposite cases, Canada’s measured household saving ratio dropped from 13 percent of GDP in 1990 to 2 percent in 2007 while the same ratio in the USA fell from 7 percent to minus 1 percent.

Yet Canada’s current account balance ‘improved’ from a deficit of 4 percent of GDP to a surplus of 2 percent whereas the US current account deficit ‘deteriorated’ by 5 percent of GDP.
It should also be explained that the flip side of a current account deficit is a surplus on the capital account, since the current and capital accounts sum to zero. And as Wilkinson and Le put it,
This surplus represents the use of overseas savings to finance higher investment in New Zealand than might otherwise occur. New Zealanders benefit as long as that investment is profitable.
Perhaps the most important point is that if we really do care about improving economic growth so that we can improve living standards then the we should not look to the balance of payments for our troubles but to
excessive taxation to fund wasteful spending, excess bureaucracy and stifling regulations.
These issues are more important if we wish to increase productivity growth and thus economic growth in New Zealand.

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