This blog has written extensively about how the global macroeconomic imbalances have contributed to the ongoing economic crisis, and the need for fundamental structural shifts in the global economic attitudes and patterns to remedy these imbalances. For the emerging economies, especially those of Asia Pacific, this means sharply increasing their domestic consumption and deepening and widening their domestic financial markets. The former will ensure that they spend more and save a little less, and also consume more of what they produce instead of just exporting them. The latter will provide the required breadth and depth to provide safe, liquid and remunerative investment opportunities at home for their massive domestic savings.
In this context, the graphic below captures the massive scope for increasing domestic private consumption in these economies. Compared to global average of 61% of GDP (and 72% of GDP in the US), the household consumption expenditure among the East Asian economies range between 40% to 50% of GDP, with China coming in at a shockingly low 33% and Japan at a slightly higher 57%. India too has a low figure of 54%. The scope for boosting domestic consumption is therefore considerable, especially in China.
However, many challenges lie ahead if these objectives are to be achieved. The deep uncertainty about their economic prospects and low consumer confidence makes households in these Asian economies culturally inclined to save more so as to secure the economic future of themselves and their children. The ongoing economic crisis, with its impact on exports and decline in jobs in export-oriented sectors, may only reinforce the resolve of people in these economies to save more and consume less, thereby deepening the paradox of thrift.
Interestingly, the poorer nations of South Asia (excluding India) has a higher than global average in household consumption expenditure. Similarly, the household consumption expenditures are high among all the second generation of East Asian tigers - Vietnam, Cambodia, Philippines, and Indonesia. The high share of private consumption in these economies can be partially explained by the relatively smaller disposable incomes with their citizens. This in turn means smaller amount of savings to draw for both private business and government spending and investments. However, as national incomes rise, their savings rates are more likely to converge upward towards those of their richer neighbours. In case of the more advanced East Asian economies, the higher net incomes and resultant increased disposable incomes are saved (instead of consumed) at the margins.
The cultural and contextual inclination towards savings and reflected in their frugal consumption habits cannot be overcome easily. It can only be hoped that as a new generation of consumers come up, relatively free from the entrenched cultural legacy of their parents and with less uncertainties about their economic future, the aforementioned habits give way to those more suited for the modern capitalist economy.
This process can be facilitated by the development of vibrant financial markets that enable consumers and citizens to hedge their risks, smoothen their consumption needs, and invest their savings in safer and liquid investments. Development of a vibrant market in consumer finance and housing mortgage loans, and other measures to facilitate easier access to credit, will facilitate consumption. Lower interest rates, besides lowering the cost of capital for businesses, also expedites the development of a consumer finance market. Refraining from currency manipulation (to keep exports competitive) will help by keeping imports cheaper and more attractive for domestic consumers.
In an NBER working paper, Shang-Jin Wei and Xiaobo Zhang trace the high and increasing savings rate in China during 1990-2007 to competitive savings motive "as the country experiences a rising sex ratio imbalance, the increased competition in the marriage market has induced the Chinese, especially parents with a son, to postpone consumption in favor of wealth accumulation. The pressure on savings spills over to other households through higher costs of house purchases."
Economist explores the possibility fo Asian consumers replacing Americans as engines of global economic growth.