A new study released earlier this month by the Inter-American Development Bank (IDB) has put countries in Latin America and the Caribbean on notice that they are confronted with a savings crisis that might do damage to their economies in the years ahead. The study is also warning of “major fiscal challenges in the years ahead”.
The IDB report estimates that a gross national savings rate in the Caribbean and Latin America of just 17.5 per cent of gross domestic product between 1980 and 2014, falls far below the 33.7 per cent for emerging Asia and 22.8 per cent for advanced economies.
The report surmises that the reasons behind the chronically low savings by households and governments repose in what it says are behavioral biases among individuals and structural inadequacies in financial systems and fiscal budgets. It also alludes to inherent inefficiencies in savings by firms, which invest too little.
In providing a road map for policymakers to bring savings rates more in line with successful economies the IDB report says that even small gains in savings could have big impacts, noting that every one percentage point increase in national savings increases domestic investment in the region by around 0.4 percentage point.
“We can’t just shrug off our poor savings rates by saying we are bad at putting money away,” said IDB Chief Economist Jose Juan Ruiz. “Governments, businesses and even families have it within their power to ensure we have the resources we need during the bad times and the good times, and to care for an ageing population,” Ruiz said.
The IDB publication, ‘Saving for Development: How Latin America and the Caribbean Can Save More and Better’ is part of the IDB’s flagship Development in the Americas series. It sets out starkly the significant gaps in the savings system in the region.
According to the report, while the regional banking system provides approximately 30 per cent of GDP in loans to the private sector it is still underperforming. Organization for Economic Cooperation and Development (OECD) and emerging Asian economies provide over 80 per cent of GDP in loans to the private sector.
Households in the region, especially poor ones, have limited access to financial instruments to save and face high costs when they do, the report says, adding that the problem is compounded by low trust in formal banks, widespread financial illiteracy and labour informality.
According to the report, only 16 per cent of adults report saving through a bank, compared to 40 per cent in emerging Asia and 50 per cent in advanced economies. It also says that social assistance, tax expenditures and energy subsidies suffer from high “leakages” insofar as they benefit the rich more than the poor to the tune of US$100 billion per year while inefficiencies in health and education account for another US$50 billion in potential lost savings per year.
So significant is the extent of the leakages, the IDB says, “that they can provide sufficient funds to bring the region’s infrastructure up to par with advanced economies.”