Fundamentals: The Macroeconomic Environment, Savings, Investment and the Financial Sector

Abstract

Prudent macroeconomic policies that lead to a stable macroeconomic environment (along with a competitive real exchange rate) can help foster productivity-enhancing investments in machinery and equipment in the tradeable sectors of the economy (of which manufacturing is the most prominent). Policies that bring about a higher level of saving and financial development in the economy can help sustain a country’s export drive, both by supporting a higher investment rate and also by increasing the efficiency of that investment. In this chapter, we describe the experiences of a sample of six East Asian countries – Korea, Indonesia, Malaysia, Singapore, Taiwan and Thailand – and India with respect to the macroeconomic environment, savings, investment and the financial sector. In our discussion of the performance of these countries in the areas of savings and investment (and to some extent in the stability of the macroeconomic environment), we find that a common element that emerges is the markedly superior performance of the East Asian countries in these areas as compared to that of India. This is not the case with financial sector development, where Korea and Indonesia lag behind Malaysia, Singapore, Taiwan, Thailand and even India. The observed outcomes of these studies are then related to the respective policies followed by the countries, in our sample, during the same period.