Sat, Aug 26, 2006 page9

• Sublime to the ridiculous: savings rates in China and the US

  The Chinese have a gross saving rate 40 percent higher than the US, but this is likely to drop as younger people grow accustomed to living in a consumer society

  • By Robert Shiller
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  The saving rate in China is the highest of any major country. China's gross saving rate (the percentage of GDP that is not consumed immediately), which includes both public and private saving, is around 50 percent. By contrast, the saving rate in the US is the lowest of any major country -- roughly 10 percent of GDP. Almost all other countries fall between these two extremes.

  Differences in saving rates matter a lot, and must be a major reason that China's annual economic growth rate is now a full six percentage points higher than in the US. If people are saving half their income, their investments in capital have the potential to propel the economy at a rapid pace. Saving in China is in part a virtuous circle: rapid economic growth leads to high saving, which in turn sustains rapid growth.

  The difference between Chinese and US saving rates has been growing for decades. In the early 1980s, China's saving rate was twice as high. Now it is five times higher. Why are these trajectories so different?

  Unfortunately, explaining saving rates is not an exact science. Some patterns across countries are obvious. Oil-rich countries tend to save a lot. Countries with serious internal crises or conflicts tend to save little. But neither of these patterns tells us anything about the difference between the US and China.

  Some part of the high saving rates in China since the early 1980s might be due to the decline in public confidence about health care, retirement benefits, education and a weakened sense of job security. However, the same factors seem to be working in the same direction for saving in the US, too.

  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 and are willing to accept maintaining a lower one for a while longer. They also tolerate enterprise or government policies that encourage high saving.

  For example, the upward trend in saving in China began at around the same time as its one-child policy was implemented in 1979. This prevented the birth rate from rebounding after the Cultural Revolution from 1966 to 1976.

  demographics

  The late Nobel laureate economist Franco Modigliani, in his last major published paper in 2004 (co-authored with Shi 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 -- factors that reflect different life experiences and how these experiences are filtered through the two countries' cultures.

  For one thing, although the Chinese don't elect their leaders, they trust their government more. According to recent World Values Surveys, 96.7 percent of Chinese expressed confidence in their government, compared to only 37.3 percent of people in the US.

  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 people in the US 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.

  inequality up

  Moreover, while economic inequality is on the rise in both countries, the Chinese and people from the US 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, especially when the country is so successful overall.

  As inequality deepens, many who fall behind struggle to save face, consuming in order to maintain the appearance of success. At the same time, those who rise from low economic status revel in their newfound wealth by engaging in spectacular displays of personal spending.

  By contrast, poor people in China mostly view their personal situation as transitional. People still remember the Cultural Revolution and view themselves as survivors of a shared traumatic experience, underpinning a commitment to collective sacrifice in order to rebuild the country.

  There is no shame in being poor in China if one reflects that one's children or grandchildren will be wealthy and successful. On the contrary, as in postwar Germany, it is a matter of pride that one is working hard through a difficult situation that will be remembered as a historic transition.

  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. More vivid in people's minds are the stories they will one day tell their grandchildren about their travails and their economic heroism.

  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. Today's children will not view their own life stories from the perspective of the difficulties China has experienced. As this change unfolds, the enormous willingness to save, and to tolerate high-saving government policies, will fade.

  Robert Shiller is professor of economics at Yale University and chief economist at MacroMarkets LLC, which he co-founded.

  Copyright: Project Syndicate
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