Inadequate domestic savings

It is generally agreed that the pace of economic development is associated with the growth of savings. This is because an act of saving makes possible the release of productive resources from consumption which may then be utilized to add to the stock of productive capital, thereby promoting the expansion of output.

It is estimated that a rate of domestic savings of at least 15% of gross income would be a necessary condition for self-sustained growth in the developing countries. Many countries are unable to achieve this.

In 1990 it was estimated that the global pool of savings had decreased markedly. The very high Japanese savings rate that helped finance growth in the 1980s was slowly shrinking and other countries were seeing a decline in savings as well. The savings rate in virtually every country, other than the USA, was lower than in 1985.

In the USA, the savings rate was at a historic low point in 1990. Net savings had fallen from more than 7% of the economy in the 1960s to about 3% in the 1980s. On average 4.2% of disposable personal income was allocated to saving in 1993 compared with 8.6% in 1973.

In most developing countries, total investment exceeds national savings; and the gap is filled by the net inflow of financial resources from abroad, on which the countries are therefore dependent.