Project Syndicate, September 2012.
Since the integration of emerging markets into the world capital markets in the
early 1990s, the world economy has witnessed three striking trends: (1) a
divergence in private savings rate between the industrialized core and the
emerging periphery--the former seeing a sharp rise in savings rate and the latter
a steady decline; (2) large global imbalances between the two regions; (3) a
steadfast decline in the world interest rate over the last twenty years.
Issues surrounding global imbalances have captivated many, though few strive
to explain the puzzling divergence of world savings behavior. In 1988, the
household savings rate in China and the U.S. were roughly level at about 5
percent. By 2007, China’s household savings rate rose to a staggering 30% while
the U.S’s fell to 2.5%. The pattern is not uncharacteristic of other industrialized
countries compared to emerging markets over the last two decades (figure 1).
Savings behavior invariably reacts to changes in the interest rates, which have
steadily fallen over the course of two decades to today’s record-low levels. The
conundrum is why savings patterns can be so different---often opposite--- across
globalized economies well-integrated into world capital markets? ‘Thrifty Asia’
set against ‘debt-ridden’ US reflects this popular curiosity.
Until now, few have appealed to the gaps in credit markets to explain these
global puzzles. Credit markets are more developed in industrialized economies
than in developing countries---one distinction being the degree to which
households are able to borrow. The astute observer may argue that ‘thrifty’
Asians and the ‘profligate’ Americans reflect not so much large differences in the
supply of credit from financial markets as asymmetric demands for credit--- the
Asians being intrinsically more reluctant to borrow. Yet arguments to that effect
would have to contend that the vast differences in household debt (Figure 2)---ranging from 25% of GDP in Emerging Asia to over 90% in the US and AngloSaxon economies1 ---is only a matter of a dissimilarity in taste. A more plausible
explanation is that to some extent institutional differences in the ability to
borrow dictate some of these large discrepancies across countries.
How does this basic feature of credit constraints at the individual level lend itself
to explaining puzzling features at the macro level? The argument is simple. Since
all economies have both borrowers and savers, changes in the cost of borrowing
(or the return to saving) would affect these agents differently. When the interest
rate declines, the borrowers are able to borrow more as it is cheaper to borrow.
Savers, on the other hand, may be compelled to save more in face of a shrinking
interest income. At the county-level, a less credit- constrained economy----with
the large mass of effective borrowers--- could then see a fall in the savings rate as
the borrowing rate goes up. In a country with a large mass of effective savers, the
savings rate can rise, rather than fall. The asymmetry in savings patterns may
1
This includes Australia, Canada, Ireland, New Zealand, the U.S., and the U.K.
then reflect the simple fact that constrained economies are less sensitive to
drops in the cost of borrowing, as compared to less constrained economies.
In joint research with economists Nicolas Coeurdacier and Stephane Guibaud, we
show that data is supportive of this view. A natural grouping of borrowers and
lenders is by age. The young normally face low current wage income but a faster
growth in future income, and would ideally borrow against future income, to
augment consumption today, and to invest in education. The middle-aged,
preparing for retirement, are likely to be the savers in the economy. If
asymmetric credit constraints are indeed important, young borrowers and
middle-aged savers will display distinct patterns in constrained versus lessconstrained economies.
Data demonstrates a remarkable contrast of savings behavior across age groups
in China and the U.S, over the period 1992-2009. Young Americans’ (ages less
than 25) borrowing rate rose by 10 percentage points more than the borrowing
rate of young Chinese, while the saving rate of Chinese working-age population
(ages 35-54) rose by about 17 percentage points more than their counterpart
Americans.
Another implication of this view is that the steep rise in savings in China is
largely driven by a rise in the savings rate of the middle aged (rather than a fall
in the borrowing rate of the young), and conversely, that the fall in the savings
rate in the U.S. is largely due to an increase in borrowing of the young (rather
than a fall in savings of the middle-aged). Indeed, of the total 20.2 percentage
point increase in aggregate household savings (as a share of output) in China, the
middle-aged contributed to more than 60 percent (the remaining largely
attributable to the old). In the U.S., which saw a 1.79 percentage point decline in
aggregate savings-to-GDP, the young’s savings-to-GDP declined by 1.24
percentage points, while the middle-aged total savings-to-GDP actually increased
by about 1.51 percentage points.
Apart from accounting for this global divergence in savings rate, tight credit
constraints in China may then be an explanation for the country’s high and rising
savings rate, especially as the large rise in national savings is mostly due to
household savings.2 This would mean that the agenda on ‘restructuring’ the
economy via domestic consumption promotion in China might in fact call for
appropriate credit market reforms. Bernanke’s popularized notion of a ‘global
savings glut’ is a commonly-referred-to explanation for falling world interest
rate. Now, credit constraints in fast growing economies may be just the reason
why the glut emerged in the first place.
For the complete argument of why asymmetric credit constraints can explain
facts (1)-(3), see Coeurdacier, Guibaud, and Jin (2012).
2