Starting at home – why households are an important piece in the savings puzzle

30 Aug 2019

Dr Adrian Saville

Professor in Economics, Finance and Strategy at GIBS

Examining the main sources of savings reveals that it’s with households where the most impact can be made – indeed, higher savings can lead to higher incomes.

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It’s clear that the South African economy is starved of savings and that this is choking investment. To solve the problem, we need to understand where the bottleneck is.
There are three entities that can save: households, firms and government. The evidence is clear that the problem is not because of South African firms – they already save a substantial amount relative to global peers.
On the other hand, developmental demands and social welfare needs mean that, by its very nature, the public sector in South Africa tends to be a dis-saver.

This leaves us with the household sector. If we really want to lift the saving rate to fuel investment, it stands to reason that we should look to households as the place to search for remedies to the saving shortfall.
 Worryingly, not only is the household saving rate in South Africa low, but it has steadily declined over the last 20 years, stabilising at levels just above zero. 
A saving rate of zero means that, all added together, South African households end each year without having put anything into their collective savings pot. Or, seen another way, for every rand that one household saves, another household borrows a rand.  
By comparison, data from the Organisation for Economic Co-operation and Development (OECD) show that private households in the 36 countries that make up the group consistently saved between 8% and 10% of their disposable income over the last 20 years (Ventura, 2018); and India and China’s household saving rates have averaged around 15% and 20% of GDP since 1990, respectively.

China’s household saving rate as a percentage of GDP since 1990.
One argument that has been made against proposals to lift the household saving rate is that income levels in the country make this almost impossible. However, evidence from other countries suggest otherwise.
In a World Bank Review article, Household Saving in China, Kraay (1997) presented various cases of high savings rates being achieved in low-income countries and environments.
The evidence and examples from these countries suggest that low income levels are not a constraint to elevated rates of saving and, it might be argued, it could be that saving that leads income, rather than income that leads saving.
It goes without saying though, that to begin saving, individuals require a source of income as a launch pad, and then access to viable saving and investment solutions that promote and reward saving behavour.
Given the size of South Africa’s household saving gap, and the evidence from other countries, it’s likely that efforts aimed at the household
sector are where the best results can be achieved in terms of boosting saving behaviour and lifting the country’s saving rate as a basis for driving investment and fuelling sustained and elevated growth.
It’s important to note that this is not just a function of how much a country saves; it is also a function of the manner and effectiveness with which saving is channelled into investment.
If households shift  pending patterns from funding consumption (instant gratification) to instead financing productive investments, then the knock-on effects – in the form of spill over, multiplier and linkage effects – can be powerful. These savings can help build small businesses, promote employment intensity and unwind industrial concentration.
A change in household saving behaviours can lead to positive changes and elevated growth in a way that is inclusive and transforming.

Saving for South Africa

The Savings Index is devoted to stories of transformation and change, stories of countries, communities and families that make the journey from "poor" to "prosperous".


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