National saving in developing and reforming countries

Abstract

The ultimate purpose of this paper is to evaluate likely developments in national saving in three of the former socialist countries (Czechoslovakia, Hungary and Poland) currently in the process of introducing reform policies. There are several reasons for focusing on saving as a principal component of the transition to a market economy:

• it is generally accepted that a precondition for a successful transition is that monetary and fiscal policies be kept sufficiently restrictive to prevent excess demand pressures from occurring. During this transitional phase the appropriate stance of fiscal policy very much depends on private sector saving. If, for instance, the private sector saving propensity falls compared with the pre-reform period a balanced budget may not be sufficient, whereas when the reform process induces saving incentives which previously did not exist, a balanced budget is likely to be too restrictive;

• in the longer run, which is the focus of this paper, developments in saving determine the domestic resources available for capital formation. Indeed, when comparing various projections of investment needs in Eastern Europe with assessments of likely capital inflows, it is obvious that a major part of the new investment will have to be financed from domestic sources.

I am indebted to W. Fritz, E. Koch, I. Madsen and, especially, P. Dittus for comments on an earlier draft of this paper. The views expressed are strictly those of the author and are not necessarily shared by the BIS.