{"id":4247,"date":"2021-02-17T21:54:15","date_gmt":"2021-02-17T17:54:15","guid":{"rendered":"https:\/\/www.pluriconseil.com\/?p=4247"},"modified":"2021-02-17T21:54:15","modified_gmt":"2021-02-17T17:54:15","slug":"analysing-and-understanding-the-national-savings","status":"publish","type":"post","link":"https:\/\/www.pluriconseil.com\/analysing-and-understanding-the-national-savings\/","title":{"rendered":"Analysing and understanding the national savings"},"content":{"rendered":"
By Mubarak Sooltangos<\/strong><\/em><\/p>\n T<\/span>here have been loads of articles written, mainly by economists and finance professionals, since the start of the Covid pandemic. If we take stock of what is the real substance of these articles and opinions in this period of difficulty where deep thinking and quick initiatives are of the essence, we invariably come to the conclusion that the only information given by these experts is an \u00e9tat des faits<\/em> of our economy without any real analysis of its causes and, obviously, not an iota of solution proposed.<\/p>\n <\/p>\n The mathematical accuracy of the figures mentioned may lure us into the perception that this has been the product of voluminous and deep thinking. Not at all, the major part of these figures is contained in published economic data, is available on internet, and has been largely copy-pasted. The general message given by these experts is that we are in deep difficulty followed by empty statements like \u201cwe should protect our SMEs\u201d, \u201cwe should optimise our resources\u201d, \u201cwe should invest in productive sectors\u201d without elaborating in the least. Nobody says, for example, maybe for lack of courage, that we should bring an immediate stop to dubious government investments in sumptuous infrastructure which we cannot afford and which do not bring GDP growth, except for some job creation in the construction stage.<\/p>\n There is a lot of rhetoric on the state of the economy, but no answer to what should be done. If we listen to economy and finance professionals piecemeal, we come to the conclusion that we should not borrow, we should not resort to money creation, we should not increase interest rates, we should not deplete our foreign exchange reserves, we should protect household purchasing power, we should not resort to protectionist measures because this would \u201cannoy\u201d the World Trade Organisation (WTO). In the meantime, subservience to the same WTO has sent our import substitution industry to the gallows.<\/p>\n I personally presided over the setting up of the only table salt refinery plant 20 years ago and it is now closed because the product price is uncompetitive. Make a calculation of the excess money our population would have spent if import of salt was banned, and we will not go beyond Rs 10.00 per household per month. In the meantime, our salt pans, which also have a cultural, historic and emotional value have been invaded by waist high wild grass. Enough to break any heart with some patriotism in it.<\/p>\n The rhetoric can sometimes turn into a show, like the competition between economists to calculate what will be the expected GDP growth next year. A totally useless debate over figures which have nothing productive in them. What we are interested in is how to produce growth, create employment and raise purchasing power, but everybody is clueless on these issues.<\/p>\n Another show is the quarterly determination of the Bank of Mauritius Key Repo Rate, with the media involved in this masquerade. How does half a point increase or decrease in interest rate help in materialising the results we want from the economy? It does neither promote savings, nor discourage it, nor promote investment and even less discourage investment because all business people table on return on capital employed (ROCE) averaging 20% before they decide to invest.<\/p>\n Another widely talked about subject is the constant fall in national savings rate, because this is considered to be a vector of investments. Our savings ratio has come down to 6% of GDP and all ex-finance ministers ring the alarm bell to highlight the failure of those in office, without perhaps understanding some basic fundamentals, namely, 1) what are the constituents used in the calculation of this rate, 2) what are the important constituents that are not taken into account, 3) what are the factors that influence the creation or the destruction of savings, and 4) what eats up savings? Let us examine them one by one.<\/p>\n Experts and books say: \u201cThe national savings rate measures the amount of income that households, businesses and governments save. It essentially looks at the difference between the nation\u2019s income and consumption and is a gauge of a nation\u2019s financial health, as investments are generated through savings.\u201d<\/p>\n However, there are enormous misconceptions about the nature of the word \u201csavings\u201d. Firstly, statisticians collect data about \u201cmonetary savings\u201d only, that is, savings in bank accounts of households, pension funds and profits generated by companies. Including government savings into this total would be a misnomer, because most governments in the world are over spending, as evidenced by chronic budget deficits everywhere.<\/p>\n The more liberal and advanced the welfare state is, the lesser people will feel the need to save.<\/p>\n<\/blockquote>\n There is a more than an obvious paradox in the published figures. I would like to understand how our national savings have come to a low of 6% of GDP, and at the same time, the Bank of Mauritius reports \u201can all-time high of Money Supply (M2) of USD 17 billion in December 2020\u201d. With loss of employment, reduction in household income, reduced disposable income of households due to a 10% depreciation of the rupee, drastic reduction in corporate profits due to a severe contraction in demand, we would all have expected our national savings to take a severe blow. If yes, where does the excess money supply generated in 2020, in the middle of the pandemic come from? True, a big component of money supply is money created by the banking system through new customer borrowings, but we have to come to the reality that new bank lending has also considerably decreased in 2020. The likely conclusion is that the published savings rate is not based on realistic information.<\/p>\n We have seen above that according to the definition of experts, savings is calculated by the difference between income and consumption. What is misunderstood as being \u201cconsumption\u201d in this definition is that not all income which is spent goes unto consumption. Money spent out of income also goes into investments, namely housing, land and buildings, participative investment in businesses and investments in stocks and shares on the stock exchange. All these important elements are lumped together with living expenses into what is called \u201cconsumption\u201d and are not factored in the calculation of national savings, thus grossly understating the savings rate. What is also overlooked is savings deposited in overseas bank accounts which can be repatriated at any time. Finally, what is considered as private businesses\u2019 savings does not include new investments, but the depreciation of these new assets is deducted from their profits causing a mathematical and totally virtual reduction in their savings. It is a real paradox in the science of econometrics which I fail to understand.<\/p>\n True, not all investments are liquid and generators of GDP, like housing and real estate, and these are not routed through the banking system to finance other productive investments. They are nevertheless stores of value which can be converted into cash at a future date for productive investment. Or else, these assets can be pledged as collateral with banks to unlock cash which can go into productive investment. There may be a case for not considering these sorts of investments as savings available for investment, but all the other types of investments stated above are real inputs into the productive chain.<\/p>\n My conclusion, therefore is that what is effectively classified as savings in our economic indicators is a strictly monetarist view of savings and very far from the real propensity of the country to save.<\/p>\n Instead of constantly ringing the alarm bell for our decreasing savings rate and painting a doom scenario without proposing anything concrete, it would have been better, in the first instance, if the elements that create or destroy savings are singled out and acted upon. Again, what we see is a perceptual \u00e9tat des faits<\/em> without any solution being proposed.<\/p>\n The easiest beaten track route would be to increase interest rates, and by the same token, deal a blow to indebted businesses and households. But, viewed seriously, interest is in no way a vector of savings. Savings is the resultant of disposable income and no interest rate, however high, can generate more disposable income. The other theory that higher savings interest rates have a positive effect on decreasing consumption to save money for a remuneration is another fallacy. In 90% of cases, consumption is based on necessity and cannot be compressed. Furthermore, I do not see any household decreasing its consumption to earn a meagre additional interest rate of a couple of percentage points. It would perhaps have been a reality if saving interest rates were of the order of 15-20%, but here we would be in the realm of dreams.<\/p>\n The current system rewards risk averseness and allows additional wealth to be built on existing wealth with no effort.<\/p>\n<\/blockquote>\n The real factors of savings creation are:<\/p>\n The factors that reduce savings are:<\/p>\n This ground breaking theory will certainly shock conventional economists and bankers because they have lived in an existing paradigm all their life. Not all paradigms, even those having existed for ages, are the best of what we could call conventional wisdom. There is no special wisdom in a system where possessors of money are guaranteed a remuneration for no effort and no risk while an intelligent and daring entrepreneur, who is the life blood and future promise of any country runs the risk of losing everything he has invested, including his hard work if his business fails for reasons sometimes beyond his control. The current system rewards laziness and risk averseness, and allows additional wealth to be built on existing wealth with no effort. Is this any sort of meaningful philosophy of life?<\/p>\n The items that eat up savings are:<\/p>\n The magnitude of government borrowing shuts out productive private sector enterprises from credit availability.<\/p>\n<\/blockquote>\n Governments live under mountains of debts contracted to finance their budget deficits, year in, year out. The debt economy, fuelled by the practice of interest which gives access to easy money, is the root cause of a whole world collapsing after four months of inactivity due to the pandemic, because there is no cushion of existing savings or unused borrowing capacity to finance overheads in this period of inactivity. For those who say that the debt-based economy has been the vector of productive investment and wealth creation for years, the answer is to be found in the Chinese economic structure. It is not debt based, but equity based and this explains why it has been able to massively buy foreign businesses within its shores and in India specially, which were stranded for lack of liquidity in the middle of the pandemic. On top of being a quasi-cash-based economy, China lends money to 150 countries to serve as a vector to develop its export trade worldwide. So there are other paradigms than the western world paradigm, and the Chinese one has proved its worth.<\/p>\n There is also a theory which says that government budget deficits destroy savings. This is absolutely false. Budget deficits are an over consumption or an over investment by the government, but this has nothing to do with the savings generating power of households and businesses, i.e., what we call private savings. Budget deficits only increase government indebtedness because these deficits have to be financed by borrowings from existing savings generated by the economy.<\/p>\n However, in the process, the magnitude of government borrowing is such that it shuts out productive private sector enterprises from credit availability. The problem is compounded by the fact that lending to the government is a risk-free investment for banks, as compared to lending to business enterprises and it does not require the administrative hassle and cost of appraising and monitoring loans to a plethoric number of private businesses. We have in this situation the answer to the outrageous risk averse attitude of banks nowadays.<\/p>\n The negative side of this situation is that however hard governments try to sell the idea that budget deficits are an economic tool to inject money in the economy to beef up industrial activity and promote growth, the reality is that countries live in chronic budget deficit situations because of the sheer weight of the servicing of existing debts contracted to finance chronic deficits of past financial years.<\/p>\n As per pre-covid data, Mauritius creates (or rather suffers) a yearly budget deficit of 3% of GDP (Rs 16 billion) which has to be financed by new debts, largely because the cost of servicing of interests amounts to Rs 14 billion. How much money is left to boost the economy to create much needed growth? This unveils a story so far untold and unheeded.<\/p>\n This diagnosis and analysis, though subject to debate, at least give a base for the start of a thinking process on how to increase savings to feed investment needs, among other things. I am not an economist, but you will have noticed the holistic approach to this analysis, which is what is needed for the management of a country. In short, we need multi-skilled decision makers with analytical capacity, ability to work in a team, humility to ask advice from others, a lot of common sense and who relegate political issues and management of public opinion to win elections to the place that they deserve.<\/p>\n We have changed focus from process-driven thinking to procedure-driven actions without the thinking.<\/p>\n<\/blockquote>\n The weakness of our country is that we have changed focus from process-driven thinking to procedure-driven actions without the thinking. Everything is pre-set by experts for subordinate staff to follow scrupulously, whatever the specific needs of a given situation are. This has killed all initiative to think and has established an aversion to go outside the beaten track which may involve more risks and certainly more thinking, but which is intellectually rewarding and result oriented.<\/p>\n Economists, central bankers, commercial bankers and other credit providers, accountants and business entrepreneurs are each working in their own bubble where their comfort zone lies. Outside this bubble, there is a vacuum which does not allow consultation and circulation of information. No wonder this leads to dangerous experimentation and spin doctoring, and this is the root cause of our stagnation for the past decade. This is aggravated by periodic ad-hoc catastrophic decisions like promoting growth by consumption in a country where 80% of its supply chain is found outside its shores.<\/p>\n<\/div>The constituents of national savings<\/h3>\n
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The factors influencing creation and destruction of savings<\/h3>\n
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Chronic government budget deficits<\/h3>\n
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Dangerous experimentation and spin doctoring<\/h3>\n
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