Study warns of savings crisis in the Caribbean

Latin America and Caribbean countries are being warned that they face a savings crisis, with fiscal and demographic realities making the outlook worse in the coming years.

The warning is contained in a new study released here by the Inter-American Development Bank (IDB) that is also cautioning that the region faces “major fiscal challenges in the years ahead.”

The report notes that more savings is a key element to ensure both economic growth and resilience and that the gross national saving (GNS) rate in Latin America and the Caribbean was just 17.5 per cent of gross domestic product (GDP) between 1980 and 2014, far below the 33.7 per cent for emerging Asia and 22.8 per cent for advanced economies.

The report noted that only sub-Saharan Africa saved less, at 13.8 per cent.

The report analyzes the reasons behind the region’s chronically low savings by households and governments, and its economic impacts, from behavioural biases among individuals to structural inadequacies in financial systems and fiscal budgets.

It also looks at inefficiencies in savings by firms, which invest too little.

On the upside, the report provides a roadmap for policymakers and other key actors to reverse the situation to bring savings rates more in line with successful economies.

Even small gains in savings could have big impacts, the IDB said, noting that for instance, for every one percentage point increase in national saving, domestic investment in the region increased by almost 0.4 percentage points.

This means US$20 billion in more money available to finance vital infrastructure projects, the IDB said.

“We can’t just shrug off our poor savings rates by saying we are bad at putting money away,” said IDB chief economist José Juan Ruiz.

“This book shows 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 aging population.”

The book, 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 lays out the big gaps in the savings system in the region.

The report says median banking system has grown to provide around 30 per cent of GDP in loans to the private sector, much lower than the banking systems of the median Paris-based Organization for Economic Cooperation and Development (OECD) or Emerging Asia economy, which provide over 80 per cent of GDP in loans to the private sector.

Households, especially poor ones, have limited access to financial instruments to save and face high costs when they do, says the report, adding that the problem is compounded by low trust in formal banks, widespread financial illiteracy and labour informality.

The report says only 16 per cent of adults report savings through a bank, compared to 40 per cent in Emerging Asia and 50 per cent in advanced economies.

The report says pension systems are another savings constraint.

The study identifies key areas where governments could save more and spend in smarter ways.

It says social assistance, tax expenditures and energy subsidies suffer from high “leakages,” meaning they end up benefitting the rich more than the poor, to the tune of US$100 billion per year.

The report says inefficiencies in health and education account for another US$50 billion in potential lost savings per year.

“The magnitude of leakages is so important that they can provide sufficient funds to bring the region’s infrastructure up to par with advanced economies,” the report noted.

Antigua Observer