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    Domestic savings from the short-term and long-term perspective

    Fatih Özatay, PhD20 August 2013 - Okunma Sayısı: 817

    In conclusion, Turkey cannot keep up with rich countries just by raising savings and investments.

    Last Thursday I compared domestic savings rates of Turkey, upper-medium income countries that includes Turkey, and emerging market economies (with a regional classification). According to this, Turkey’s domestic savings rate was extremely low. Yesterday in Star, Eser Karakaş made critical assessments taking departure from that commentary of mine.

    He assessed that, given the high mobility of capital between countries in today’s economy, “low domestic savings does not necessarily imply low growth.” He stressed that “a constitutional state that has attained western standards” can make better use of the global pool of savings “by constructing the law of economics.” He added that closing up the savings gap with such method was “more practical, more liberating, and more viable.” This hypothesis of Mr. Karakaş is extremely important. On this wise, I would like to address some points concerning the savings-growth nexus.

    First, low domestic savings limits growth for emerging market economies even given the high capital mobility in today’s world. The latest studies about emerging market economies still reveal a strong relationship in the same direction between domestic savings rate and investment rate. I said “still” because studies stress that the relationship between the two is now relatively weaker, but still strong. In other words, despite the opportunity to offset the savings gap by borrowing from abroad, domestic savings shortfall constraints investments in emerging market economies including Turkey.

    Second, neither of these implies that growth cannot be increased without enhancing domestic savings rate. A country can grow faster with the same domestic savings rate (investment rate) by improving the current level of productivity or advancing the skills levels of the labor force, that is, the human capital.

    Third, it is a well-known fact that episodes of high growth attained by raising the savings rate (or attracting foreign savings) and enhancing investments prove temporary. Two key qualifications of the few countries who achieved permanent high domestic savings rates are the high level of average educational attainment and high-technology export structure.

    Fourth, unless a constitutional state that fulfills the standards that Mr. Karakaş has emphasized or a pro-growth institutional structure – as usual readers are familiar with – are constructed, a country cannot attract investments, ensure equality of opportunity in accessing high-quality education, or allocate funds for research and development instead of pursuing unearned profits from construction.

    Fifth, despite all these facts, low savings rate is a pain in the neck especially in the short-term. Even if you push the button for structural reforms mentioned above immediately, it will take time to reap the fruits. In the transition period from low to high savings, Turkey’s growth performance will be at the mercy of the foreign savers (or fund managers).

    Sixth, the policies that can improve household savings are not that straightforward. But we know that keeping interest rate below the inflation is an extremely risky policy for a country like Turkey. This is another reason why the low savings rate must always be on the agenda.

    Seventh, the above statements would still hold even if the current domestic savings rate was around the 1990-2001 average at 20.8 percent. And the 2008-2012 average is considerably lower, at 14.2 percent.

    In conclusion, Turkey cannot keep up with rich countries just by raising savings and investments. It cannot build a more habitable (in terms of enhancing freedoms) country, either. But it has to endeavor increasing its extremely low domestic savings rate. This is a requirement also to ease the economic risks faced in the shorter-term.

    This commentary was published in Radikal daily on 20.08.2013