Saving, Investment and Growth: Catching-up of Central and Eastern European Countries to the EU

Kovacs, Z.A. (2001). Saving, Investment and Growth: Catching-up of Central and Eastern European Countries to the EU. IIASA Interim Report. IIASA, Laxenburg, Austria: IR-01-040

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Abstract

The Central and Eastern European candidates (CEECs) for EU membership are striving to achieve and sustain above EU-average growth rates that is one of the prerequisites of catching-up. This paper follows the empirical literature investigating the relationship between saving, investment and growth, and the main determinants of savings. A special emphasis is being put to identify the role of savings and investments in economic growth and scrutinize the ways how national government and EU policy as well as other non-policy factors can affect domestic saving rates. In the process of transition to a market economy a transition in savings can also be distinguished. In the CEECs it means a dramatic fall in the ratio of savings to GDP from artificially high levels during socialism. This is followed by the stabilization of this ratio at (or in some cases recovering to) more normal (equilibrium) rates that are comparable with those of other market economies at similar level of development.

By now, growth has been restored throughout the region and, with few exceptions, CEECs have achieved investment rates close to or well above EU-average. However, some of the less advanced CEECs still have rather low gross saving rates, well below both EU-average and their investment rates. Large current account deficits evolving in these countries also reflect this trend. The gap between national savings and investments has been increasingly filled by foreign capital inflows (foreign savings), mainly in the form of FDI. However, high sensitivity to worsening investor sentiments can only be reduced by increasing macroeconomic stability and lifting national savings more close to investments.

In the early phase of transition there was a shift in the composition of savings from savings by enterprises and the government to savings by households. Much of the recent improvement in gross national saving (GNS), however, has been the result of better profitability and hence higher savings of the corporate sector. All CEECs still cope with general government deficits that may have a crowding out effect on private investments. To control the growth of expenditures reforms of the social security system cannot be avoided. However, due to high transition costs, pension reform is not likely to result in a noticeable increase in GNS, at least in the sort to medium run. Ongoing financial reform, although has high fiscal costs, is necessary for sustaining economic stability and it can enhance the spectrum of saving instruments. Increasing public saving can be the most direct and efficient way for the governments to lift GNS, however, CEECs have very limited room for maneuvering. In addition to high costs related to economic reforms and restructuring, accession to the EU requires substantial further resources to spend. CEECs, depending on the generosity of EU support, are to accommodate most of these considerable costs. To sustain growth and global competitiveness in the long run, beside investment in physical capital, CEECs should not neglect the importance of investment in human capital and knowledge (R&D), the key growth factors of our age. Saving should constitute an element of a broad and coherent economic strategy. The most certain way of lifting national saving rates of the CEECs seems to be via growth.

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