Since the second half of the last century we have seen the success of many emerging market economies. These economies were traditionally labeled the ‘Four Asian Tigers’, and refer to the economies of Hong Kong, Singapore, South Korea, and Taiwan. However, now it seems as if we must add two more economies, namely, China and India. The stories behind the success of these economies are rather well known, also it is well documented that the private saving rates of the emerging economies increase while the rates fall for the developed economies during such booms. This article will take a look at how we can explain the divergence of private saving rates in the emerging economies and the already developed economies.
Although this divergence attracts less attention than the huge global imbalances that we observe while the emerging economies are rapidly growing in the globalised economy, a common anecdotal reason was simply that it was because Asians are culturally more reluctant to borrow, while the westerners in the developed economies don’t mind borrowing too much. Can this simple difference in taste explain such great differences in savings and debt rates? For example in 2007 China’s household saving rate was at 30% while in the US the same rate was only 2.5%. Coeurdacier, Guibaud and Jin’s (2012) new article attributes the aforementioned trend of divergence to household credit constraints.
Firstly the authors note that every economy has both savers and borrowers, and each respective type is naturally divided in the real population by age. It is the classical life-cycle consumption statement. The young, with low current income but rapidly increasing future income (as in the case of the emerging economies we are talking about) should borrow against future income to invest in education. The middle-aged will start saving his/her income as she/he prepares for retirement. Secondly, on top of this life-cycle behavior, the authors examine the importance of credit constraints on aggregate saving rate outcomes.
It is reasonable to assume that the emerging economies have a lesser developed credit/capital market, and therefore are more credit-constrained than the developed economies with fully formed and efficient credit/capital markets. Then the argument is simple, the young in the less credit-constrained economies (the developed economies) have more access to credit and will be able to borrow more than their more credit-constrained counterparts. Hence, if these effects are significant at a aggregate level we should see that the fall in the private saving rates of the developed economies are due to additional borrowing on the part of the young, not so much due to a fall in the savings on the middle-aged. On the other side of the coin, in the emerging economies the increase in savings rates should be due to the increasing savings of the middle-aged, not so much due to the fall in the borrowing of the young.
Indeed this is what Coeurdacier, Guibaud and Jin finds evidence of at a micro-level in China and the U.S. The saving rate of the young fell by about 10% more in the U.S. than in China, whereas the middle-aged in China (35-54) rose by about 17% more in China than in the U.S. Also, in China 60% of the 20.2% increase in household saving rates can be attributed to the increase in the savings of the middle-aged.
If it was historically as easy to borrow for the young in the emerging economies as it is in the developed economies, would we still see such a great divergence in aggregate household savings? Or is it just simply the case that some cultures like to save more than others, or equivalently, more reluctant to borrow than others?
Coeurdacier, N., Guibaud, S. and Jin, K. 2012. ‘Credit Constraints and Growth in a Global Economy’. CEPR Discussion Paper no. 9109. London, Centre for Economic Policy Research. http://www.cepr.org/pubs/dps/DP9109.asp.