Why Are Savings Patterns So Different?

BEIJING – Ever since the integration of emerging markets into the global economy began in the early 1990’s, three striking trends have emerged: a divergence in private savings rates between the industrialized core and the emerging periphery (the former experiencing a sharp rise, and the latter a steady decline); large global imbalances between the two regions; and a drop in interest rates worldwide. But, while global imbalances have preoccupied many observers, few have sought to explain the divergence in world savings behavior.

In 1988, the household savings rate in China and the United States was roughly equal, at about 5%. Yet, by 2007, China’s household savings rate had risen to a staggering 30%, compared to just 2.5% in the US. The pattern is not uncharacteristic of other industrialized countries relative to emerging markets over the last two decades (Figure 1).

Savings behavior invariably reacts to changes in interest rates, which have fallen steadily over the last two decades to today’s record-low levels. But how can savings patterns be so different – often opposite – in globalized economies that are well integrated into world capital markets?