The crucial role of the savings rate in emerging countries

Capital flows to or from emerging countries are very volatile . This ought to hurt emerging countries that have a low national savings rate; when these countries grow and invest, they have a large external deficit due to the low savings rate, and this external deficit is difficult to finance due to the volatility of capital flows. This should normally result in pressure to reduce investment and high exchange rate volatility, both of which are negative for growth and generate major growth fluctuations. We would therefore expect emerging countries with a high national savings rate to have more growth and a more stable economy than those with a low savings rate. Historical observation actually shows that a low national savings rate in emerging countries is associated with low growth, a low investment rate and major variability in growth and exchange rates.