China's high savings rate, the one child policy, and its trade surplus
An intriguing column from Prof. Robert Shiller of Yale University (famous for his book Irrational Exuberance which correctly predicted the dot-com bust):
Now to me this is only partly convincing. No doubt it explains part of the reason the Chinese have saved so much, but there must be other reasons as well (e.g. the real rate of return on investing is high in this fast growing economy).
Shiller doesn't spell out the connection to the trade surplus, but we can deduce that one from a simple accounting identity from macro:
Y = C + I + G + X - M now subtract taxes T:
Y - T = C + I + G - T + X - M which implies
Since Saving S = Y - T - C we can re-arrange to get:
(X - M) = (S - I) + (T - G)
The right hand side is savings (=net private savings plus net savings by the government or the budget surplus). Now savings S is not the same thing as net savings, and investment I has been very high, but part of the reason China has a trade surplus (X-M) is no doubt due to the fact that their savings rate is so high.
The low savings rate in the United States also helps explain why our trade deficit is so large.
The saving rate in China is the highest of any major country. China’s gross saving rate (the percentage of GDP that is not consumed immediately), which includes both public and private saving, is around 50%. By contrast, the saving rate in the United States is the lowest of any major country – roughly 10% of GDP.
...the uptrend in saving in China began at around the same time as its one-child policy was implemented in 1979.... economist Franco Modigliani...argued that this demographic change explains much of the increase in the saving rate, as Chinese substituted investment in capital for investment in children.
Now to me this is only partly convincing. No doubt it explains part of the reason the Chinese have saved so much, but there must be other reasons as well (e.g. the real rate of return on investing is high in this fast growing economy).
Shiller doesn't spell out the connection to the trade surplus, but we can deduce that one from a simple accounting identity from macro:
Y = C + I + G + X - M now subtract taxes T:
Y - T = C + I + G - T + X - M which implies
Since Saving S = Y - T - C we can re-arrange to get:
(X - M) = (S - I) + (T - G)
The right hand side is savings (=net private savings plus net savings by the government or the budget surplus). Now savings S is not the same thing as net savings, and investment I has been very high, but part of the reason China has a trade surplus (X-M) is no doubt due to the fact that their savings rate is so high.
The low savings rate in the United States also helps explain why our trade deficit is so large.
Comments
I think the argument that there weren't really a lot of opportunities for "consumers" in China to spend is a significant factor. So really what you have is a government (China) that artificially limits consumption, and, consequently, inflates the savings rates. Lets compare GDP and savings rates first: China's GPD in 2001 was 7.2 trillion while the US was 11.5 trillion. If we accept Prof Shiller's stats then in 20001 China's gross savings would have been around 3.6 trillion while US savings would have been 1.15 trillion. Perhaps a ratio of disposable income vs. purchases would be a better measure of personal savings to compare the differences.
So the difference would be this:
US - (X - M) = (S - I) + (T - G)
_
China - (X - M) = (S - I) + (T - G)
where S was artificially fixed by
_
chinese policy because S = Y - T - C
consumption is limited by government policy. So the surplus exists, no argument about that, but isn't his argument a bit out of context?
George
Such pressures from above are not as strong today as they were then however and some of the reasons for China's very high savings rate must be voluntary. Shiller brings attention to one possibility, but I imagine there are many others that as or more important, not the least of which is the fact that in the transition to private property ownership there are a number of things one might want to save up for (e.g. housing, a vehicle, money to start a business) and in such a fast growing economy the rates of return on investment will be quite high. That is a powerful price mechanism to make one want to defer consumption today to get rich tomorrow.