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

In 1988, the household savings rate in China and the United States was roughly equal, atabout 5%. Yet, by 2007, China’shousehold savings rate had risen to a staggering 30%, compared to just 2.5% inthe US.The pattern is not uncharacteristic of otherindustrialized countries relative to emerging markets over the last two decades(Figure 1).
Savings behavior invariablyreacts to changes in interest rates, which have fallen steadily over the lasttwo decades to today’s record-low levels. But how can savings patterns be sodifferent – often opposite – in globalized economies that are well integratedinto world capital markets?
The answer may be that creditmarkets are more developed in advanced economies than they are inemerging countries, particularly in terms of the degree to which households areable to borrow. Of course, one might argue that Asianthrift and American profligacy merely reflect asymmetric demands forcredit: Asians are intrinsically morereluctant to borrow. In that case, however, the vast differences in householddebt (Figure 2) – ranging from 25% of GDP in emerging Asia (Southeast Asia,China, India, Hong Kong, and South Korea) to more than 90% in the US and otherAnglo-Saxon economies (including Australia, Canada, Ireland, New Zealand, andthe United Kingdom) – would reflect only a dissimilarityin taste.
A more plausible explanation is that institutional differences in the ability to borrow dictate to some extent the disparity in savingsrates across countries. The argument is simple: All economies have both borrowersand savers, and changes in the cost of borrowing (or the return to saving)affect them differently. When interest rates decline, borrowers are able toborrow more. Savers, on the other hand, may be compelled to save more in theface of shrinking interest income.
At the macro level, a less credit-constrained economy (witha large mass of effective borrowers) could then experience a fall in thesavings rate as borrowing rose. However, in a country with a large mass ofeffective savers, the savings rate can rise, rather than fall. This asymmetry in savings patterns might thus reflectthe simple fact that credit-constrained economies are less sensitive to dropsin the cost of borrowing relative to less constrained economies.
In jointresearch with Nicolas Coeurdacier and Stéphane Guibaud, we show thateconomic data supports this view. Borrowers and savers are naturally grouped byage. The young normally face low, current wage income, but faster growth infuture income, and would ideally borrow against future income to augment consumption today and to invest ineducation. The middle-aged, preparing for retirement, are likely to be theeconomy’s savers. If asymmetric creditconstraints are indeed important, young borrowers and middle-aged savers willdisplay distinct patterns in constrained versus less-constrained economies.
In fact, there was a remarkable contrast in savingsbehavior across age groups in Chinaand the USin the period 1992-2009. For young Americans (those under 25), the borrowingrate rose by ten percentage points more than the borrowing rate of youngChinese, while the savings rate of the Chinese working-age population (ages35-54) rose by about 17 percentage points more than the savings rate of theirAmerican counterparts.
Another implication of this view is that the steep rise insavings in Chinais largely driven by a rise in the savings rate of middle-aged Chinese (ratherthan a fall in the borrowing rate of the young). Conversely, the fall insavings in the USis largely due to higher borrowing by the young (rather than a fall inmiddle-aged Americans’ savings rate).
Indeed, of the 20.2-percentage-point increase in aggregatehousehold savings (as a share of GDP) in China from 1992 to 2009, themiddle-aged cohort accounted for more than60% (the remainder was largely attributable to the elderly). In the US, whichexperienced a 1.8-percentage-point decline in aggregate savings as a share ofGDP, the savings-to-GDP ratio among the young declined by 1.25 percentagepoints, whereas the figure for middle-aged savers actually increased byabout 1.5 percentage points.
Apart from accounting for the global divergence in savingsrates, tight credit constraints in Chinamight explain the country’s high, and rising, savings rate – especially as thelarge rise in national savings is attributable mostly to household savings.This would mean that China’smuch-publicized effort to boost domestic consumption might in fact call forappropriate credit-market reforms.
US Federal Reserve Board Chairman Ben Bernanke’s notion ofa “global savings glut” is a commonly citedexplanation for falling world interest rates.Credit constraints in fast-growing developing economies may be thereason why the glut emerged in the first place.