International Law

Household Savings Rate in China ? politics vs. economics

By Stan

Very boring post title, but bear with me here for a second. Very interesting article in the FT by Pei Minxin (with co-author Ali Wyne), a very well known China expert at the Carnegie Foundation. He focuses his research and writing on China’s political structure and is a staunch democracy advocate. I usually do not write about that sort of thing and rarely have an opportunity to comment on his stuff.

This column is all about the domestic economy, however, which is squarely within the scope of this blog. In particular, Pei looks at a key problem in today’s imbalanced economy, the lack of domestic consumption as a proportion of total demand. As I’ve written about many times, China is trying to move away from an export (and investment) driven economy to one that is balanced by domestic consumption.

So far, so good. Pei takes it further by looking for some possible explanations as to why China’s household savings rate (the flip side of consumption) has been so high in recent years. Good question — I remember reading a multitude of articles on the subject in grad school. Everyone assumes that the savings rate is directly related to the presence of a social safety net (health insurance, pensions, unemployment, etc.) — the better the safety net, the easier it is for folks to lay off the savings and start spending money.

Unfortunately, no one really knows for sure if a meager social safety net is the only cause, or even I think the proximate cause, of a high savings rate. We all pretend that we know for sure, but this is not the case.

Pei also believes that the cause of a high savings rate is the result of an inadequate social safety net, but thinks that the main reason for this is the country’s political system. Perhaps it is a society’s level of personal/political freedom that has an effect on the savings rate:

In other words, is there a connection between freedom and consumption? Reviewing data on political freedom, civil liberties and household consumption for the years 1985 to 2005, we find two intriguing clues.

First, China is among a small group of countries that has become less free (as measured by Freedom House?s Freedom Index) and experienced a significant drop in their rates of household consumption (defined here as a decline of 20 per cent or more). The others are Venezuela, Kuwait, Lebanon, Bhutan, Swaziland, Iran, Uzbekistan and Saudi Arabia ? not exactly the countries that China should strive to emulate.

Second, although the overall relationship between freedom and consumption is complex, countries that have become freer in the past two decades are more likely to have registered an increase in their consumption rates. Kenya, Rwanda, South Africa, Bulgaria, Hungary, Poland, Romania and Indonesia are some notable examples.

OK, this is certainly interesting. I have a couple of comments, though:

1. I’m not familiar with the Freedom House’s Freedom Index, so I don’t know for sure how they put together this info. I do question any measure that calls China’s society less free in 2005 than it was in 1985. Look, something bad happened in 1989 and led to a lot of crackdowns initially, and sporadically over time. It just so happens that 1985 was a few years before that, so when you use ‘85 as the starting point, I think that tends to skew the results. Timing aside, do they really think that China is less free now? Hard for me to believe.

2. If “the overall relationship between freedom and consumption is complex” then I certainly need to learn more about it. I’ve tried to figure out how that might work in practice. Let’s see, perhaps if you live in a country where there are death squads roaming the countryside, that might make you uncertain about buying that new car or house.

Another possibility, which I suppose is what Pei is really getting at, is the responsiveness of a democracy to the needs of the poor, old folks, kids, etc.

Of the 20 statistically significant countries that became both freer and managed to raise their consumption rates, most are developing economies that underwent simultaneous transitions to democracy and market economics, and built social safety nets to meet the demands of their newly empowered citizens.

This sounds good, but it also assumes that democratic systems cater to the masses. Growing up as I did under Ronald Reagan, George Bush and Bill Clinton, I can tell you from firsthand experience that democracies also have a tendency to be captured by constituencies that have money — and poor folks can’t pool together a lot of cash to pay for campaign ads. Granted, this is more a problem in the U.S. than in other nations, but it does make me think twice about Pei’s conclusions:

The lack of democracy in China not only results in a poor human rights record but also disenfranchises the groups that would otherwise pressure ruling elites to provide the necessary social services.

I suppose a longer article, or a book, would answer my questions. Perhaps Pei has already done this work — I have not read his recent stuff. However, just because there is a correlation between democratic nations and social safety nets does not lead me to believe (as is suggested by Pei) that if China restructured itself politically, this would necessarily lead to a better balancing of the economy.

The U.S. just had a general election. At that time, you would expect that the most pressing needs of the voters would be addressed. Where was discussion of the social safety net at a time when the economy was in tough shape? The plight of poor people? The homeless? Mostly it was about who was a secret Muslim, who owned the most houses — important stuff like that.

The Central Government here has a long way to go, but at least they are talking about the right issues. I’m just not convinced that a new government would deal any differently with social insurance matters.

© Stan for China Hearsay, 2009. | Permalink | One comment | Add to del.icio.us

Full post as published by China Hearsay on April 08, 2009 (boomark / email).