The savings-investment imbalance 

Most emerging economies have a structural imbalance between saving and domestic investment. In the CEEC, the renewal of the production apparatus in particular requires a great investment effort, which is not covered by domestic savings. The prospect of a higher capital yield in these economies then attracts foreign savings. How will this imbalance evolve?

Weak domestic savings as opposed to high investment needs.

Whereas, during the communist period, households found themselves in a situation of forced saving (up to 40% of GDP in Poland and 28% in Bulgaria in 1989), this saving fell sharply at the beginning of the transition period, mainly due to the erosion of real incomes, the increase in the consumption of imported goods and, in some cases, banking crises. The trend then stabilised and in 2002 the savings rate stood on average at around 20% of GDP.

Still noticeably lagging behind in the capital accumulation process, the countries of the region invest more than the current EU member states, on average around 25% of GDP. However investment remains insufficient in Lithuania, and especially so in Bulgaria and Romania, which are not so far advanced in transition and where FDI remains low. In Poland, investment fell sharply in 2001 and 2002 (-9% and -7% respectively) following over-investment in the services sector, and in a context of high interest rates and stagnation of activity.

Overall, a correlation can be observed between the levels of GDP per capita, investment and domestic savings. In the Czech Republic and Slovenia, relatively richer countries, the savings rate accounts for 25-26% of GDP whilst at the opposite end of the scale it does not rise above 18% in Lithuania, and especially in Bulgaria and Romania, where the GDP per capita in PPP only reaches one quarter of the EU average. The public sector contributes quite substantially to the saving-investment imbalance. Public investment is high (3-4% of GDP) because of the need to improve infrastructures, whereas revenues hardly cover current expenditure excluding interest charges (which defines public saving). In 2002, there was even negative public saving in the Visegrad countries. In Bulgaria, the heavy burden of debt imposes a high level of public saving, with the probable effect of crowding out private saving, which at 7% of GDP is by far the lowest in the zone.

How is the savings deficit financed?

The excess of imports over exports, their counterpart, implies financing by foreign capital. Until now, the inflows of capital mainly took the form of FDI, which on average covered more than 90% of the imbalance over the period 1999-2002. Apart from their role as a source of finance, including for the imports of capital goods which accompany them, FDI have been a driving force for investment (one quarter of the total in Hungary and Estonia over the period 1994-2000).

In Slovakia, Latvia, Estonia and Bulgaria however, the financing requirement remains high compared to what is generally regarded as a sustainable level in the medium term (approximately 5%) and the maintenance, or even the progression of the current level of inward FDI, remains an important issue.

In the medium term, the partial resorption of the imbalance between saving and investment would, in the least advanced countries, come about via a rise in private saving, together with an improvement in living standards, and in the Visegrad countries, a rise in public saving by means of an inevitable tightening of the budget.

For more analyses, see the

enlargement website of DREE