Private saving in Mexico, 1980-90

Between 1987 and 1990, Mexico's current account and trade balance deteriorated by more than US$10 billion. Higher investment accounts only partly for this deterioration; nor can it be attributed to the public sector. By conventional (unadjusted) measures of private saving - the total investment not financed by public or foreign savings - private saving did decline sharply between 1987 and 1990. But that diagnosis does not hold true when private, public, and foreign savings are corrected (as they are here) to account for shifts in portfolio composition from foreign to domestic assets, for the effects of inflation on foreign and domestic interest income (the inflation tax), for fluctuations in the real exchange rate, and for other factors. Arrau and Oks provide information about the components of private saving by asking questions such as these: Is consumption more important than disposable income in explaining changes in private saving? What components of consumption and disposable income matter most? The following are among the conclusions: When conventional measures of private saving are corrected, the recent decline in private saving appears less important than it did before. Most variations in private saving between 1980 and 1990 are ascribable to fluctuations in disposable income. The sharp drop in private saving in 1990 was prompted primarily by a decline in disposable income and, less so, by fast-growing consumption.