The Determinants of Saving

In my inbox today, from the NBER (abstract):

The Determinants and Long-term Projections of Saving Rates in Developing Asia
Charles Yuji Horioka, Akiko Terada-Hagiwara

In this paper, we present data on trends over time in domestic saving rates in twelve economies in developing Asia during the 1966-2007 period and analyze the determinants of these trends. We find that domestic saving rates in developing Asia have, in general, been high and rising but that there have been substantial differences from economy to economy and that the main determinants of these trends appear to have been the age structure of the population (especially the aged dependency ratio), income levels, and the level of financial sector development. We then project future trends in domestic saving rates in developing Asia for the 2011-2030 period based on our estimation results and find that the domestic saving rate in developing Asia as a whole will remain roughly constant during the next two decades despite rapid population aging in some economies in developing Asia because population aging will occur much later in other economies and because the negative impact of population aging on the domestic saving rate will be largely offset by the positive impact of higher income levels.

East Asia is well known for having high national savings rates, and this paper investigates the reasons. The biggest impact appears to be demographics – since population growth (and thus the ratio of the working population to the population as a whole) has been increasing from the early part of the sample period (1960-2007), that would tend to support higher savings. Intuitively, both a higher number of children and the elderly within a population implies lower savings, since both cohorts require consumption without generating earnings. And so it proved – national savings rates has tended to increase in Asia over time.

But that implies the high savings rates seen in Asia is primarily structural and not a matter of policy per se, which pokes holes in the West’s view that excess savings is a deliberate consequence of policy – recall that a trade surplus indicates an excess of savings over consumption within an economy. That also means that American angst over China’s exchange rate policy might be misplaced (to be fair, China’s savings rate appears to be higher than could be explained by the variables used in the model used in the paper – evidence suggests this is due to China’s population gender imbalance). Conversely, the general tendency towards consumption over savings in the West is also structural in nature, and not a cultural predilection towards excess consumption.

Obviously there’s always some exceptions to the rule – Germany and Japan for example both run external trade surpluses, despite relatively aged populations. Yet the general results still hold – within a demographic transition period, savings rates increase, then level off and decrease as populations start aging.

The paper also tests for higher income (which as expected, also generally increases savings) and financial sector development. The latter is interesting in that the relationship is non-linear – which means, as financial sectors develop and access to credit improves, savings first increases then decreases. That’s due to the incentive to save for a rainy day – past a certain point, if credit is easy to obtain, you’ll worry less about having to set aside cash.

Also of note are the projections for savings into the future. Some of the countries in the sample tested are already undergoing population ageing, like Singapore’s – these countries will start showing declines in national savings over the next twenty years.

Malaysia? We’re still in the early part of the demographic transition, and our savings rate is expected to continue to increase for at least the next twenty years.

Technical Notes:

Charles Yuji Horioka, Akiko Terada-Hagiwara, "The Determinants and Long-term Projections of Saving Rates in Developing Asia", NBER Working Paper No. 17581, November 2011