Adjustment of Propensity to Save

In view of the high rates of saving and relatively neutral incentive schemes in emerging Asia, one may conclude that the bulk of Asia's current account surplus does not come from Asia's exceptional success in pushing out exports as much as it does from a high propensity to save and stagnant investment demand. Growth rebalancing should therefore be geared to removing structural impediments to consumption and investment. Such a rebalancing strategy would help improve the allocative efficiency of the economy, while making it less vulnerable to external shocks. The high rate of saving has long been regarded as one of the virtues of East Asian societies. Among Asian countries, the PRC's savings rate has been exceptionally high—close to 50% of GDP—and has exceeded investment, thereby generating a current account surplus year after year (Horioka and Wan 2008). The savings rates of other countries are lower and, in fact, declining, but are still high enough to produce current account surpluses. People in Asia save more than people in other regions not necessarily because they are intrinsically frugal or that they live in cultures that greatly value saving, but that, as a number of studies have shown, in many cases they are forced to save more because of the poor quality or nonexistence of such vital services as public health care, education, and social security that have long been institutionalized in western societies. Another contributing factor is their inability to smooth their consumption over time through borrowing from and lending to financial institutions and markets.

Rebalancing growth therefore entails policy changes and institutional reform that would eliminate structural impediments that constrain households to save more than their counterparts in advanced countries. Although there is a vast literature on saving behavior in emerging economies, variables that are closely associated with changes in the propensity to save tend to differ from country to country. In terms of the rebalancing strategy, some of the reforms that would help induce households to consume more as a proportion of their income include: (i) the establishment of an efficient system of social protection; (ii) the expansion and improvement of the efficiency of public and private pension, public health care, and education systems; (iii) the phasing out of restrictions on consumer credit; and (iv) the creation of financial institutions specializing in household lending.

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