What is savings?

We all know what it is at a personal level: I get 100$ check and might save 20$ out of it

But what is savings in the aggregate? Say for the world as a whole?

That's where it gets tricky.

e.g. people talk about a "global saving glut". But can we measure it?
Not really - at least not in a direct sense

The reason is that when a person (say Adam) "saves", someone else (say Eve) uses that saving, i.e. "dissaves", by borrowing it and spending it for one purpose or another

So, aggregate total saving is always exactly zero!
Now you might say, that according to the world bank worldwide saving is about 25% of GDP historically.

What is that number about?

Well it is just an accounting convention!
Someone somewhere decided (for some good reasons at the time), that if Eve spends Adam's savings on capital goods (i.e. "investment"), then we will not count it as dissaving.

So what you get is an accounting identity:

Saving = Investment
What the world bank data is telling us is that historically Eve borrows and spends about 25% of GDP on investment goods.
Now imagine something starts to change

Adam starts to save more and more, call it his "saving glut"

He needs Eve to borrow his additional savings

He convinces her to do that, but only after making it cheaper for her to borrow by lowering his interest rate
However, Eve is not interested in spending her additional borrowing on capital goods, or investment

Instead Eve decides to "consume" it - throws a party, goes on vacation, that sort of stuff

The accounting convention will start counting Eve's additional spending as dissaving
What this all means is that even though Adam *is* saving a lot more than before, total saving measured by our accounting standards will remain the same.

Yes, there is a "saving glut" - But aggregate national accounts will not show it!
So if you really wanted to see the saving glut, you will have to see it indirectly

You will see it as a rise in total credit (remember Eve is borrowing more and more), as a fall in interest rate, and as a rise in Adam's personal savings
I think this is the world we actually live in now

Adam is the top 1%

And I have no idea why Eve does not invest more, but consumes her additional borrowing
ps: in recent years government has been borrowing and spending on Eve's behalf ... but same thing more or less

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More from @AtifRMian

2 Sep
Afghanistan is experiencing the mother of all "sudden stops"

i.e. economic collapse resulting from a sudden stop of foreign money that was financing a large trade deficit

Afghanistan was financing a trade deficit of ~ 25% of GDP
How large is 25%? It is about 3 times as large as the largest sudden stops in recent history such as east asia, southern europe, mexico etc.

And it gets even worse

~9B$ of their reserves have also been frozen, and there's no other credit line
So what happens when there's a sudden stop?

in the absence of foreign money, the only way left for the economy to balance its imports is to contract, i.e. GDP falls so demand falls, so imports fall

exchange rate devalues a lot too to cut imports
Read 5 tweets
24 Aug
This op-ed argues that Fed should tighten monetary policy to fight rising wealth inequality

That is not quite right - we shouldn't mistake the symptom for the disease

I'll explain my thoughts a bit more ...

bloomberg.com/opinion/articl…
Yes, it is true that low interest rates disproportionately help the wealthy

The value of assets, especially long-lived assets like land and large corporations, rise as interest rate falls

In fact the value rises even faster as interest rate falls from already low levels
Since it is the very rich who own most of the assets, a fall in interest rate makes them richer -

and this effect *really* snowballs as interest rates get near zero
Read 11 tweets
23 Aug
Some broad takeaways for development from 20 years of Afghan economic experience

The Afghan economy stalled in 2012 after foreign aid started receding from a high of about 50% of GDP.

The big injection of foreign money did not translate into sustainable growth. Why?
Because foreign money artificially raised domestic spending power - artificial in the sense that it was not associated with increased domestic productivity

We can see this in Afghan trade statistics. Imports rise three-fold, while exports are stagnant.
There was a temporary spending boom, that vanished when foreign flows dried up.

The spending boom is actually harmful when it is artificial, because it hurts exports via real exchange rate appreciation and other misallocations

It's a story that is unfortunately not atypical
Read 6 tweets
8 Aug
Is child care infrastructure?

The answer matters, because spending that is "infrastructure" should be seen as an "investment", i.e. spending that expands the overall size of the economy in the future -

and hence infrastructure spending should be prioritized
So is child care infrastructure?

We live in a knowledge based economy where required skills are constantly changing - prolonged periods away from one's profession naturally lowers their productive capacity
So making it easier for people, esp women, to stay connected to their profession helps us all - we will not lose valuable talent

The other side of child care is the child of course
Read 5 tweets
6 Aug
What is the role is tax policy in development?

Often people think of tax policy largely as a revenue generating exercise - this is not quite right

A very important element of tax policy is its *design* that shapes incentives and the overall macro balance. Some examples ...
The consolidated tax code should be sufficiently progressive

By consolidated i mean including all taxes - e.g. local, provincial, federal etc.

Progressive means consolidated tax rate should rise sufficiently for wealthier households
e.g. Pakistan collects very low tax revenue as share of GDP, but another problem it has is that it relies excessively on indirect taxes -

various forms of consumption taxes that tend to be very regressive in nature.
Read 7 tweets
5 Aug
Is the executive/PM in developing countries constrained by "talent pool" for top leadership positions?

Not really. The market for top talent is global, and as such there is little excuse for incompetence at the top.
One reason for failure to attract competence is environment - it's not about the money: the opportunity to work at the "country level" is super attractive

But executive needs to create the right environment, e.g. delegate properly, that is her job.
The more important reason perhaps is that discovering the right top talent for the right job is a very difficult problem -

this is why there are large "head hunter" firms dedicated for this job.
Read 4 tweets

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