Author:
Peles-Economist
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Date Posted: Fri, Sep 19 2008, 09:25:00am
Larsen, i would like to touch base on the point that you raised about the savings-investment gap. My point was in PNG, on an aggregate level the saving capacity is very low, due to under-valued domestic capacity. That means, net savings of individuals is lessened by low real income.
As you have well pointed out savings=investment, with higher domestic savings it will lead to higher investment, hence when investment increases so as economic growth. I would not think that interest rate plays a very important determining factor in PNG's savings capacity. My view is that it is a capacity factor, that is, is the real income gained in PNG allows people to save? On a micro level, an individual employee does not have the capacity to save because their real income is low, with high inflation and the cost of living in PNG's major cities and towns. Even then, we are talking about 15 percent of the population who can save, but, their real income is only sufficient to take them through to the next fortnight.
Such countries like Japan, domestic savings level is very high because disposable income is much higher and people have net savings. Consequently, Japan has been the main country financinng US budget deficits. One of the largest contributors to financing consistent US budget deficits have been Japan, because, Japanese domestic savings level is very high, primarily due to their net disposable income being very high.
I further agree that interest rate differentials can result in capital out flow. However this can happen, only when financial markets are very fluid. The stock market in PNG is not fluid, meaning buying and selling of stocks in the pomsox is not as is, when is basis, therefore it is not really that fluid, with less capital structure. For PNG, interest rates have averaged around 2-5 percent, while inflation has been around 7 - 10 percent, giving you a negative real interest rates, however, there hasnt been any significant capital flight due to negative real interest rates in the country, because, the savings capacity in the country is low, which is the main drive towards capital outflow, therefore, exchange rates have remained stable. With a flexible exchange rate regime, negavitve real interest rates would allow for capital outflow and further depreciate the currency. In PNG's case, negative real interest rates have not done that, meaning that, it isnt a major threat, because the saving capacity of PNGens, is not sufficient to surge into the financial markets, to threaten exchange rate developments and other important economic indicators.
I would say, the cost structure in PNG is very high as a result disposable incomes of people in the country is very low, hence net savings is also low, resulting in low domestic capacity to invest. Most investments that are driving economic growth is, foreign investment. In order for PNG to move forward, the government has to reveiw all existing cost structures to make sure, disposable incomes of people are increasing, so as their net savings capacity.
peles-economist
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