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Saving in Poor Countries

Tom White

28th September 2014

In Economics, saving offers something of a puzzle. From some viewpoints, savings are a leakage from the circular flow of income, reducing multiplier effects. And if we all saved - in a determined effort to repay our debts (which sounds like a great idea) – the level of aggregate demand (AD) and economic activity would take a serious hit. This is the famous paradox of thrift.Yet economies do need saving as a fund for business investment. The Harrod-Domar model is used in development economics to explain an economy's growth rate in terms of the level of saving and productivity of capital (see above). But many economies have a savings gap.Yet I've been reading that adults in developing countries are half as likely to have an account at a formal financial institution as those in the rich world. Only 18% of people in the Middle East and north Africa do, compared with 89% in high-income countries. This makes saving even harder. So economists would like the world's poorest to save more. That would help them to pay for big or unexpected expenses, such as school fees or medical treatment. It could also boost investment and thus accelerate economic growth.

According to the article, getting people to save is hard. One reason is psychological: the failure to give adequate weight to future benefits over immediate pleasures. And for those people in absolute poverty the problem is still worse. They are almost too poor to save. For many, the answer is to tie up money in livestock, or to join an informal savings society. But these mechanisms are far from perfect. A survey in Uganda found that 99% of people using informal savings schemes had at some point lost some of their savings. Livestock get sick and die.

The article describes a growing enthusiasm for “commitment-savings accounts" (CSAs), which tie people in to saving and those who open an account typically cannot withdraw funds until a certain date, or until they have deposited a certain amount. Apparently CSAs have a surprisingly big effect. In one experiment in the Philippines, those offered a CSA boosted their savings by 82% relative to a control group in just a year. In Malawi, farmers who were offered CSAs saw their savings rise prior to the planting season. That allowed them to buy 48% more fertiliser and seed than farmers who were not offered a CSA.

But – perhaps for obvious reasons, the schemes aren't popular. They might be too strict. One account, offered by a Kenyan bank, ties up money for at least six months, with no withdrawals allowed. Yet according to one Harvard economist, “people in poverty often need access to their cash at short notice, whether for a medical emergency or to take advantage of a business opportunity". There's evidence that looser rules are needed. It's perhaps surprising that it's the world's poorest people who need much improved access to a range of financial products and services.

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