Wednesday, June 24, 2009

Malaysia's Problems VI: National Savings

There is a general misunderstanding over the national savings of Malaysia.

The layperson thinks in terms of income that is not consumed but kept aside. In macroeconomic terms, the layman concept applies exactly to the closed economy.

In an open economy, however, there is an additional component that is exactly the same as the current account on goods and services in the Balance of Payments. The current account is added to the layman concept of savings.

So, the "huge" gross national savings rate of 30% to 40% for Malaysia that is often quoted should contain a sizeable "external trade surplus" that is attributable the corporate sector - in Malaysia, this would mostly be palm oil plantations and tourism (who is making the huge income from tourism?)

From the Final Estimates of the GDP by Income Approach published by the DOS, I only have at hand data up to 2004.

The gross national savings rate for Malaysia was estimated at 42.3% comprising 22.6% (closed economy) plus 19.7% (current account component).

It is therefore logical that when the National Accounts are redone by Institutional Sectors, we will find most of the surplus to go to the corporate sector.

The estimates by DOS by Institutional Sectors produced a different set of estimates for the gross national savings rate of 36.1%.

This statistical discrepancy is normal in the business because of the different sets of data used. There is nothing we can about it - but try to see beyond the precision and look at what the order of magnitude tells us.

Gross national savings rate (36.1%)
Corporate sector (33.5%)
Non-financial corporate sector (28.8%)
Financial sector (4.7%)
Government sector (2.0%)
Household sector (0.5%).

The data show that the corporate sector is the largest contributor in national savings while the household sector is tiny.

I have, in my last post, gave the data for the rate of gross savings for the respective sectors - against their respective incomes.

Corporate sector (80.4%)
Non-financial corporate sector (80.0%)
Financial sector (83.2%)
Government sector (24.2%)
Household sector (1.1%)

The household income includes not only wages and salaries, but also entrepreneurial (or profits) and property incomes (which flow from the corporate sector to the government and households.)

While it is correct to say that the gross national savings rate is high at 30% to 40%, it is not correct to conclude that, therefore, households must consume more.

Instead, the correct conclusion is that the corporate sector should invest more.

Investment is a challege for the corporate sector - to diversify in the local economy (the multiplier effect of job creation) or to venture abroad (where we create jobs outside the country).

Whether investment is forthcoming in Malaysia is not a function of the interest rate or bank's willingness to lend, for the corporate sector as a whole is flushed with funds. It is a problem of ideas, as well as that of intermediation of financial resources. While the old firms may be stuck in their agro-based industries, new firms in other sectors (manufacturing and services) may be under-resourced.

7 comments:

Andy said...

Very interesting analysis. What specifically is the source of the structure of national savings where you argue that most of these savings are accrued by the corporate sector and only a miniscule amount by the household sector??

How are we supposed to square this argument with the stock of savings at the EPF --the bulk of which is derived from the savings of ordinary folks?

etheorist said...

DOS report on the Distribution of Incomes (I think).

Andy said...

What about the huge sum of EPF funds... if these reprsent individuals' retirement accounts, how can we conclude that corporate and not household savings are the driver of Malaysia's gross national savings?

In other words if household sector contributes only 0.5% of gross national savings, how come EPF (which accumulates individuals savings) has so much assets ? According to March '09 mthly bulletin of stats from BNM (tbl 3.1, pg. 92), 11.36 million individuals in malaysia had EPF acounts aggregating to RM223.5 billion in accumulated contributions.

etheorist said...

EPF savings are a stock, accumulated over many years. GDP or income is a flow within a year. So when we talk about the savings rate, we are talking about savings during a year over income over a year. If we want to compare EPF savings over many years, we may have to compare those against the accumulated debts of households.

macondo said...

Hello,
THanks for this interesting post. I've been trying to obtain recent information on Malaysian household savings as a % of GDP, but am not finding anything in my searches. Do you have any idea of which government reports would provide this information?
Thanks for your help!
Stefan

Tom said...

This old post showed up on Google and turned out to be helpful in my research, so I thought I'd post an update and a clarification on the EPF issue.

The report is called "Distribution & Use of Income Accounts and Capital Account". Go to the DOS web site, Economy & Business, Economic Indicators. It still lags years behind - latest as of this writing is for 2009.

Contributions to the EPF are not counted as part of household savings. They are subtracted from disposable income, just like taxes. That treatment makes Malaysia's numbers more internationally comparable with countries where a social security tax plays more or less the same role. I believe the net addition to the EPF's investments (contributions less benefits and overhead) must be treated as public financial company savings, though I didn't see that spelled out anywhere.

There are two figures presented in the report: gross savings and net lending/borrowing. The gross savings number is not balanced by any borrowing; the net lending/borrowing number is. Neither have capital consumption subtracted.

Tom said...

PS Ooops, I should have said, gross savings has subtracted from it credit spent on consumption, whereas net lending/borrowing has subtracted from it all credit.