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Friday, August 25, 2006

The Difference in Saving Rates between China and the U.S.

Robert Shiller explains the difference in saving rates between China and the U.S.:

Growth rate gulf result of opposite approach to saving, by Robert Shiller, Project Syndicate: The saving rate in China is the highest of any major country. China's gross saving rate ..., which includes both public and private saving, is around 50 percent.

By contrast, the saving rate in the United States is the lowest of any major country - roughly 10 percent of GDP. Differences in saving rates must be a major reason that China's annual economic growth rate is a full six percentage points higher than in the US. ... Unfortunately, explaining saving rates is not an exact science.

Ingrained habits probably explain more about China's saving rate. When incomes are growing rapidly, as they are in China, it is easier to save because people are not yet accustomed to a higher standard of living. They also tolerate enterprise or government policies that encourage high saving.

For example, the uptrend in saving in China began at around the same time as its family planning policy was implemented in 1979. This prevented the birth rate from rebounding after the Cultural Revolution of 1966-76. The late Nobel laureate economist Franco Modigliani, in his last major published paper in 2004 (co-authored with Shi Larry Cao), argued that this demographic change explains much of the increase in the saving rate, as Chinese substituted investment in capital for investment in children.

But income growth and demographics do not explain everything. After all, the virtuous circle of high savings and rapid growth operates more strongly in China than in other developing countries where incomes are rising and birth rates are falling. This suggests that there are other, deeper factors that underlie the differences in Chinese and US saving rates.

For one thing, the Chinese trust their government more. According to a recent World Values Survey, 96.7 percent of Chinese expressed confidence in their government, compared to only 37.3 percent of Americans.

Likewise, 83.5 percent of Chinese thought their country is run for all the people, rather than for a few big interest groups, whereas only 36.7 percent of Americans thought the same of their country. With this relatively higher trust, China's government and enterprises are better able to enact and implement strict policies that promote saving and growth.

Moreover, while economic inequality is on the rise in both countries, Chinese and Americans comprehend this very differently. In the US, widely called "the land of opportunity," the shame of being poor is unbearable, and there are no cultural resources to enable such people to maintain self-esteem... As inequality deepens, many who fall behind struggle to save face, consuming in order to maintain the appearance of success.

By contrast, poor people in China mostly view their personal situation as transitional. There is no shame in being poor in China if one reflects that one's children or grandchildren will be successful.

In the US, one's income is a dark secret that one might not reveal even to one's own spouse. In China, people tell each other how much they earn with relative ease.

Especially in Chinese villages, people know how their neighbors are faring. Conspicuous consumption becomes less important when people already know your income.

Of course, Chinese increasingly consume fancy new cars and designer clothes. But there is relatively less pleasure in public displays of consumption at a time when the prevailing national story is one of triumph over adversity.

China will most likely be saving more than the US for years to come. But, as the next generation takes control in China, this will change.

Cultural differences certainly matter, and habit persistence is a factor, but I'm surprised that differences in the financial systems between the two countries isn't given a prominent role in the explanation. Saving is lower when you can easily take out a loan to finance a college education, repair a leaky roof, buy a car, and so on. When the financial system is not as well developed, as in China, saving is necessarily higher to compensate. Differences in health and social security programs are another factor that is important to consider - the relative lack of these programs in China also helps to explain the need for higher saving.

    Posted by on Friday, August 25, 2006 at 08:10 PM in China, Economics, Saving | Permalink  TrackBack (0)  Comments (34)


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