“National saving can be used domestically or internationally. Explain the basis of this statement, including the benefits to the nation of each use of its saving.” First of all, let’s understand the concept of national savings. In economics, a country's national savings is the sum of private savings (i.e. personal savings) plus the business savings (i.e. undistributed corporate profits) and public savings (i.e. tax revenues less public expenditure). (economicswebinstitute.org, 2003) & (Wikipedia.org, 2008).
So in simple words, what people save i.e. when they avoide to consume all their income, is called "personal savings". These savings can remain on the bank accounts for future use. For the economy as a whole, national saving is the portion of the nation’s income not used for private and public consumption. Just as for people, saving for the national economy is the act of setting some of current income aside for the future instead of spending it for current consumption. (Gao.gov, 2001). So the savings left in bank accounts are an important part of money.
This money could be used by banks, which can decide to finance businesses. The amount of money used for investment depends on the deposits, which banks receive. So an increase of personal savings and/or corporate profits could increase investment. Companies which do not distribute a certain part of its corporate profits, will keep that money in bank accounts also for future business opportunities. Domestic investment could be investment in new factories and equipment, which can increase productivity of the nation’s workforce. The increased productivity, in turn, will lead to higher wages and greater economic growth over the long term. (Gao.gov, 2001).
So we come to the first conclusion that if national savings increase, a country through its banks could invest more in its economy and finance more projects and support the economy. In general, more national saving will increase a nation’s capacity to produce more goods and services and generate higher income in the future.(Gao.gov, 2001). This phenomenon has been seen in a couple of Asian countries, where the saving rate of households was very high like in Russia, Japan and China, which were able to industrialize quickly. It seems also that there is a close association between national savings and domestic investment in developing countries.
These countries are in desperate need for cash to invest in infrastructure and boost its economy including industry, service, etc. Before going to the international market and asking for loans, these countries will first of all make use of every penny that they can find in their banks. So one of the main findings, is that national saving provides resources for a nation to invest domestically. Traditionally, there has been a strong relation between domestic savings and investment ratios. (feweb.vu.nl, 2009) The question now is: will these resources be used only in the country itself or could they be used elsewhere. In a closed economy the national savings will definitely be reinvested in the domestic economy.
But this is only in theory, since nowadays we can not really find a 100% closed economy anymore! There are countries that have high net saving surpluses and which need to invest it. These countries are sometimes too small to be able to offer the right investment opportunities for this huge liquidity. Countries in the Arabian Peninsula like Qatar, UAE or Kuwait are the best example. In addition, capital is getting very mobile and can be moved easily from one country to another and invested abroad. (wikipedia.org, 2008).
With all that money floating around looking for an investment, it doesn't seem that domestic savings are all that important any more. (socrates.berkeley.edu, 2011). Let’s elaborate more on the benefits of investing the national savings abroad? We agree that the sum of national saving and saving borrowed from abroad represents the total amount of resources available for investment. This investment could be used to purchase capital goods like plant, equipment, software, houses, and inventories, by businesses and governments. (socrates.berkeley.edu, 2011).
So what are the benefits of investing the national savings abroad? Will this really lead to improving domestic economy and increase the wealth of the people? An investment abroad does indeed increase the nation’s wealth and will generate income.
This income could be again reinvested in the domestic country or abroad. One of the very obvious examples is the economy of the GCC countries. Qatar is one of the smallest and wealthiest countries in the world. Its main wealth comes from oil and gas, which accounts for more than 90% of its GDP. Qatar invested huge billions in its domestic economy (infrastructure, refineries, ports, real estate, preparation for world cup 2022, etc). It still has huge amount of money, which could be invested strategically. It currently, invests billions of petrodollars in all 5 continents. It has bought shares in big companies in all kind of industries (oil and gas, banks, luxury, airlines, soccer etc).
By doing so, it will even help other companies and countries invest in successful businesses and boost their economies. The other countries probably have national savings which are lower than the needed domestic investment. They will borrow from foreign savers (in this case Qatar) to compensate the difference. Qatar will also repatriate this money or even reinvest it. This is a way to create more wealth to Qatar and the Qatari people of the next generations. A similar phenomenon is seen in other GCC countries, Singapore or Norway which have the so called sovereign wealth funds, that move huge amount of money from one place to another searching for the best investment opportunities.
National savings is beneficial for each nation,, which needs to invest in its domestic economy. It’s also important for other nations, which borrow the money in the international capital market. By doing so, they can make use of the capital flows to invest in their economies and pay back the loans. So in total the world economy is more dynamic. Huge amount of money go to where the investment opportunities are. As a conclusion, we can say that national savings and the resulting investment have huge implications on the wealth of a nation and of course on the well being of people in current and future generations.
REFERENCES (1) Valentino Piano (2003), Savings retrieved from http://www.economicswebinstitute.org/glossary/savings.htm
(2) United States General Accounting Office (June 2001), National Savings: Answers to key questions retrieved from http://www.gao.gov/assets/210/201778.pdf. (3) Wim Boonstra (May 2009), Ageing, national savings and the international investment position: what does the current account tell us? retrieved from http://www.feweb.vu.nl/en/Images/paper%20boonstra_tcm97-110281.pdf (4) National savings (2008) retrieved from http://en.wikipedia.org/wiki/National_savings (5) Pierre Olivier Gourinchas and Olivier Jeanne (October 2011), Capital flows to developing countries, retrieved from http://socrates.berkeley.edu/~pog/academic/allocation_october11.pdf