Turning long-term savings into long-term investments

For global economy, the year 2016 dawned not with a bang but a whimper. It had a turbulent start in a situation when  stock markets were plummeting; emerging economies were reeling under the pressure of falling commodity prices; Europe was destabilised by influx of refugees and China's growth rate recorded a marked downturn in response to a capital-flow reversal and an overvalued currency while political paralysis gripped the world's lone super power USA. It also happened at a time when oil prices plunged to an all-time low and the oil rich nations, particularly those of the Middle East, had to go for downsising their annual budgets by 25 to 30 per cent. This will definitely slow down their development efforts and result in reduced growth.
In the backdrop of the economic recession across the world particularly in Europe and the US, experts are of the view that few prudent decisions can drag the world out of this mess. Firstly, high global saving and investment must be attained to secure global economic progress. Global economic progress means better living conditions worldwide. No wonder this goal has been included in the new Sustainable Development Goals (SDGs) adopted last September by all 193 members of the UN. Undeniably, global economic progress can not be achieved without high global investment which will help build up the skills, technology and physical capital to propel standards of living to higher levels. In economic development, as in life, there is no easy way out. Without high rates of investment in know-how, skills, technology and sustainable infrastructure, productivity tends to decline (mainly through depreciation) pulling the living standards down.
Again high investment depends on high savings. Savings in a society can be raised by economising consumption expenses. Societies that defer instant consumption in order to save and invest for the future will enjoy higher future incomes and greater retirement security. This is unlike the American economists who advise China to boost consumption and cut savings. In other words, they are merely peddling the bad habits of American culture, which saves and invests far too little for America's future. Happily, call for higher consumption and lower savings by the American economists made very little impact on the Chinese people. The present rate of savings in China is so high that it exceeds local investment needs. China's population is aging rapidly, and Chinese households are saving for retirement.
Secondly, the saving and investment flows must be global and not national. Saving and investment flows need to be global so that extra savings in a particular society can support investment needs in other parts of the world that save less. For example, additional savings in China can help other countries of the world, notably the low-income countries of Asia and Africa who have lower rate of savings. The Chinese know that their household financial assets will be the main source of their financial security. Low-income Africa and Asia, on the other hand, are both capital-poor and have very young population. They can borrow from China's high savers to finance their massive build-up for education, skills and infrastructure to underpin their own future economic prosperity.
Thirdly, a high global saving rate is not automatically translated into a high investment rate. Unless properly directed, it can cause underspending and unemployment instead. Money put into banks and other financial institutions can finance productive activities or speculative ventures like consumer loans and real estate. Full employment can be achieved through high investment matching high savings.
Fourthly, high investments must come from private businesses along side high public investments in infrastructure and human capital. Today's investments with high social returns - such as low-carbon energy, smart power grids for cities, and information-based health systems - depend on public-private partnerships, in which public investment and public policies help spur private investment.
One of the main problems confronting the world today is that the world's financial bodies are not properly steering long-term savings into long-term investments. The problem is compounded by the fact that most governments are chronically underinvesting in long-term education, skill training and infrastructure. Private investment is falling short mainly because of the shortfall of complementary public investment. Some economists say that the world is under-consuming. But refuting this statement there are others who hold that in fact the world is underinvesting. As a result, global investments are falling short of global savings and highly volatile short-term capital flows occur to finance consumption. Such short-term flows are subject to abrupt reversals of size and direction. Now China is facing the same problem, with inflows abruptly giving way to outflows.
Americans' advice to China to increase domestic consumption and cut savings will only encourage overconsumption, underinvestment and rising unemployment in a rapidly aging society and at international level. China, however, is moving with the right policy by channelling its high savings to increased investments in development of infrastructure and skills in low-income Asia and Africa. China's new Asian Infrastructure Investment Bank (AIIB) and its 'One Belt, One Road' initiative to establish modern transport and communication links throughout the region are steps in the right direction.
These programmes will keep China's factories operating at high capacity to produce the investment goods needed for rapid growth in today's low-income countries. China's currency should be allowed to depreciate so that China's capital-goods exports to Africa and Asia become more affordable.
Europe is yet to come out of recession and banks in some European countries are still suffering from liquidity crisis. The influx of refugees that has been bothering and at times becoming rather difficult to handle, are still taking uncertain attempts to reach the west European shores although in lesser numbers. The world is yet to wriggle out of the perilous crisis it was in from day one of the current year and in all likelihood it is going to take some more time.
In simple terminology, savings should be stepped up and long-term savings should be converted to long-term public and private investments in twenty-first-century industries and infrastructure to enable the world to successfully come out of the perilous crisis. Central banks and hedge funds cannot produce long-term economic growth and financial stability. Only long-term investments, both public and private, can lift the world economy out of its current instability and slow growth.
[email protected]