In discussions about saving behaviour in Latin America and the Caribbean, a common critique is that the region saves little. Indeed, the data support this statement – in terms of GDP, the region saves 10-15% less than the most dynamic countries of emerging Asia.
Figure 1 National saving rates by region (average 1980-2014)
Source: IMF World Economic Outlook database 2015.
The low saving rate in Latin America and the Caribbean is a puzzle that has been studied by economists for decades (see Edwards 1996, Loayza et al. 2000, and Grigoli et al. 2014, 2015).
In a recent book, we shed new light on the topic (Cavallo and Serebrisky 2016). We argue that the saving problem is twofold: first, saving rates are low; and second, a significant portion of the savings that are generated in the economy are not formally and efficiently intermediated. The two problems are connected and reinforced by the financial system – the set of institutions through which resources are channelled from savers in the economy to investors.
To start with, low saving in Latin America means that only a small flow of funds becomes available to firms and individuals that need to invest. This limited supply of loanable funds, in turn, limits the growth of the financial industry, resulting in high unit costs to channel funds between lenders and borrowers (the process of financial intermediation). High costs compound other distortions in financial markets, such as the poor quality of credit information and weak protection of property rights. As a result, the available savings in the economy are misallocated. For example, the firms that receive credit from banks are not necessarily the most productive ones, or the ones with the greatest productive potential, but rather those that can pledge collateral. The inefficient use of resources in the economy, in turn, is a main determinant of the region’s low productivity (Pagés 2010). Finally, low productivity is the other side of the coin of low returns to investment and saving. Not surprisingly, given the low returns to saving that prevail in the region, savings—and the financial intermediation of available savings—are also low. The circle ends where it began – Latin America and the Caribbean is a region of low saving with undeveloped financial systems. Breaking this vicious circle requires concerted policy actions.
Figure 2 The vicious circle of low saving and inefficient financial intermediation
Source: Cavallo and Serebrisky (2016).
In our book, we identify six strategic goals for households, firms, and governments.
- First, governments must create an enabling environment for saving.
This should become a high priority in the region’s policy agendas. The ‘saving glut’ in other parts of the world will not make up for the saving deficit in the region, because foreigners cannot be expected to invest for the long term in countries where their own citizens are not confident enough to save.
- Second, governments across the region can generate more saving by spending more efficiently.
In fact, during difficult economic times, targeting public expenditures may be the only politically viable way to increase public saving in many countries, because it avoids the unpleasantries of traditional fiscal tightening such as raising taxes or cutting expenditures.
- Third, governments should promote and facilitate the development of financial systems that offer a full range of saving and investment instruments for households and firms.
Banks can support these efforts by reaching out to more people with better financial instruments.
- Fourth, governments, pension regulators, supervisors, and public and private sector managers must collaborate to fix broken pension systems.
Population aging poses a great threat to economic stability and prosperity. Pension systems across the region must become sustainable, equitable, and more inclusive.
- Fifth, people in Latin America and the Caribbean must develop a saving culture. Saving is difficult because it involves sacrificing current consumption.
If people do not internalise the benefits of saving more, it will be hard, if not impossible, to overcome inertia. Right now, too many people across the region fail to see the benefits of saving. A culture is built from the bottom up. Starting early in life with financial education on the role of saving is a critical element for success.
- Sixth, saving more will not be enough to support development.
The additional saving must be put to good use. The investment distortions that plague the region and that weaken investment demand must be eliminated. These distortions include inefficiencies in financial markets, high informality in labour markets, a lack of adequate and predictable regulations, and special tax regimes. These distortions squander economic resources and impede productivity growth, which in turn feeds low investment demand and reduces saving.
In the end, measuring success in achieving these goals boils down to creating an environment where everybody shares the vision that more saving, and a better use of existing savings, is the solution to the region’s economic woes – and the path to a stable and confident region in which any aspiration is possible.
Cavallo, E, and T Serebrisky, (2016), Saving for Development: How Latin America and the Caribbean Can Save More and Better, Development in the Americas series, Washington DC, Inter-American Development Bank and New York, Palgrave Macmillan
Edwards, S (1996), “Why Are Latin America’s Savings Rates So Low? An International Comparative Analysis”, Journal of Development Economics 51, 5-44
Grigoli, F, A Herman, and K Schmidt-Hebbel (2014), “World Saving”, IMF Working Paper 14/204
Grigoli, F, A Herman, and K Schmidt-Hebbel (2015), “Saving in Latin America and the Caribbean: Performance and Policies”, IMF Working Paper 15/108
International Monetary Fund (2015), “World Economic Outlook”, Database, Washington DC
Loayza, N, K Schmidt-Hebbel, and L Servén (2000), “What Drives Private Saving Across the World?”, Review of Economics and Statistics 82 (2), 165-181
Pagés, C, (2010), The Age of Productivity: Transforming Economies from the Bottom Up. Development in the Americas series, New York, Palgrave Macmillan and Washington DC, Inter-American Development Bank