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What Drives Private Saving Across The World?

What Drives Private Saving Across The World?

Norman Loayza, Klaus Schmidt-Hebbel, Luis Servén


World Bank


An analysis in 2000 of 30 years’ data from 150 countries shows what seems to really matter if improving savings is a national objective. Growth seems important but private reactions are slow to appear. Faith in the good sense of citizens also probably matters.

PensionReforms’ summary and comments

This 2000 paper looked at the relationship between private and national saving rates across different types of economy. The paper reports on 30 years of data (1965-1994) from 150 countries in both industrial and developing countries. It also “provides alternative saving measures (for the nation, the central government, the public sector, and the private sector separately; unadjusted and adjusted for inflation-related capital gains and losses).” Finally, data from some countries and for some periods was excluded as the authors found “inconsistencies in basic National Account, fiscal and financial data.”

The main findings are as follows:
“• Private saving rates show inertia, that is, they are highly serially correlated even after controlling for other relevant factors…..

• Private saving rates rise with the level and growth rate of real per capita income. The influence of income is larger in developing than in developed countries…..The overall implication is that policies that spur development are an indirect but effective way to raise private saving rates.

• The predictions of the life-cycle hypothesis are supported in that dependency ratios have a negative effect on private saving rates..…..

• The precautionary motive for saving is supported by the finding that inflation – conventionally taken as a summary measure of macroeconomic volatility – has a positive impact on private saving, holding other factors constant.

• Fiscal policy is a moderately effective tool to raise national saving. An increase in public saving by, say, 4% of GNDI [Gross National Disposable Income] will raise national saving by 2.8% of GNDI within a year, but only by some 1.2% of GNDI in the long term. The evidence points against full Ricardian equivalence.

• The direct effects of financial liberalization are largely detrimental to private saving rates.”

PensionReforms notes that the initial mover of saving seems to be first development, followed by growth in private incomes that then leads to what the report calls “a virtuous cycle of saving, capital accumulation, and growth.” Also, it seems that “the urbanization ratio and the young and old dependency ratios, have a significantly negative impact on the private saving rate.”

The words “tax incentive” or “compulsion” did not rate even a mention in the report.

Taken purely at face value, if a country wants particularly to raise private saving rates it should not liberate financial markets and discourage growth in cities; the government could make sure of the saving by doing much of it itself and then let inflation rip a bit. It should import young workers to improve the dependency ratio and then sit tight and wait, perhaps for some years.

However, apart from immigration, none of that will really help the seemingly most important element of all - encouraging growth in per capita incomes. That may mean letting citizens have more say in the things that matter and having the courage to assume that, in aggregate, their individual decisions might also be in the country’s best overall interests.

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