Too Much Saving, Too Little Investment

Talk abounds of a global savings glut. In fact, the world economy suffers not from too much saving, but from too little investment.

To remedy this, we need two kinds of transitions. How well the world makes them will determine whether the strong global growth of the last few years will be sustainable. This is the central message of the IMF’s World Economic Outlook, which will be released this week [editors: on Wednesday, September 21st 2005] on the eve of the Fund’s 2005 Annual Meeting.

First, consumption has to give way smoothly to investment, as past excess capacity is worked off and as expansionary policies in industrial countries normalize. Second, to reduce the current account imbalances that have built up, demand has to shift from countries running deficits to countries running surpluses. Within this second transition, higher oil prices mean consumption by oil producers has to increase while that of oil consumers has to fall.

The current situation has its roots in a series of crises over the last decade that were caused by excessive investment, particularly the bursting of the Japanese asset bubble, crises in emerging Asia and Latin America, and the collapse of the IT bubble in industrial countries. Investment has fallen off sharply since, and has since staged only a very cautious recovery.