What to do with the Savings Glut?

---

Zaidi Sattar
Bangladesh seems like an unlikely country to have excess savings. Yet, that is xactly the impression one would get looking at the aggregate picture of savings. Our hard-working population is not only churning out income at a higher rate every year (6 percent plus GDP growth), they are also saving a good part of it – nearly 30 percent of GDP. Our migrant workers are known to be saving and sending pretty much all of their hard-earned wages. Two questions emerge from our present state of savings: is it a good or bad thing to have excess saving? Are we putting our savings to good use?
It was John Maynard Keynes, the leading economist of the 20th century, who popularized the notion of paradox of thrift (or paradox of saving). The paradox states that if everyone saves more money during times of recession, then aggregate demand will fall, lowering income generation, which will in turn lower total savings in the population because of the decrease in consumption and economic growth. The paradox is, narrowly speaking, that total savings may fall even when individual savings (as a percentage of income) rises, and, broadly speaking, that increases in savings may be harmful to an economy!
The Bangladesh case is not exactly akin to the Keynesian paradox but has a flavor of it nonetheless. It was in 2006, at a meeting of the Planning Commission to finalize the Poverty Reduction Strategy Paper (PRSP), that I pointed out that the PRSP – a medium-term planning document – had ignored an emerging paradox of excess savings over investment, an event which began around fiscal year 2002 [Fig. 1]. Planners had not taken notice of the fact and so there was no strategy to address this. For thirty years prior to that, Bangladesh, like every other non-oil developing country, ran a savings deficit which had to be met from inflow of foreign savings to match the demand for investment. Reliance on concessional foreign aid (i.e. foreign savings) for financing bulky infrastructure investment was justified by development theory (Big Push a la Paul Rosenstein Rodan) and post-war global practice. Now that we are paradoxically running a savings surplus over investment, we should be asking why in the world should we need foreign aid to finance investment?