Americans Should Save More

Howard W. French quotes from Jonathan Anderson's China’s True Growth: No Myth or Miracle at the Far Eastern Economic Review, which in turn cites Alwyn Young's study of the Asian tiger economies showed

...almost all of Asia’s growth outperformance was due to its extremely high rate of capital creation, more than three times faster than in the U.S. or the EU. Simply put, Asia grew faster because it invested more, full stop...

How did Asia manage to generate so much more investment? And so uniformly across countries? After all, the region was a relatively diverse place: large countries, small city-states, some rich, some poor. Japan and Korea depended heavily on state-led banks and repressive financial polices to channel savings into productive investment. Taiwan and Hong Kong had more liberal economic environments. Political arrangements varied enormously. Yet everyone managed to grow at virtually identical rates.

The answer is that Asia invested more because it saved more. In fact, with the possible exception of a common focus on export markets, a high domestic savings rate was the only common element that tied all the fast-growing Asian economies together. Just look at the chart nearby, which shows historical savings and investment ratios for Japan and the Asian “tigers” compared to the United States.

From 1965-95, the U.S. gross domestic savings rate averaged 18% of GDP, and the U.S. economy invested 17% of GDP over the same period. In high-growth Asia, meanwhile, the average domestic saving ratio was an astonishing 32%—and as a result Asia was able to generate sustainable investment rates of 31%, nearly twice as high as in the developed West.

The bottom line finding was an extremely powerful one. Institutions, organizational models, specific ways of doing business, none of these mattered very much at the end of the day. What did matter is savings, and the lesson of Asia is that when you have domestic savings rates of 30% of GDP or more, it’s awfully hard not to grow at 8%.

See the tables, below, from the IMF: