Many economists believe that if Latin America’s economies are to grow at 5% a year or more, they need to invest around 25% of GDP.
ATIN AMERICANS are well known for their love of the fiesta and, when they can afford it, their conspicuous consumption. Perhaps that is one reason why they regularly figure in opinion polls as among the world’s happiest people. Yet economists frown when households—and governments—spend with little regard for tomorrow. Latin Americans save much less than the experts think they ought to. Compared with residents of developed countries, and especially those of emerging Asia, Latin Americans stand out for their lack of thrift (see chart).
Foreigners have often been prepared to lend some of their spare cash to Latin America. But foreign capital is not a perfect substitute for local savings. For a start it can be fickle, disappearing just when the region needs it most, as happened in the late 1990s. Second, in some Latin American countries, including Brazil, reliance on foreign savings helped to push up the value of the currency, killing off otherwise viable businesses, points out Augusto de la Torre of the World Bank.
Many economists believe that if Latin America’s economies are to grow at 5% a year or more, they need to invest around 25% of GDP. Some countries came close to that during the commodity supercycle of 2003-13. But now that the commodity boom is over, growth has slumped and so has investment. Not surprisingly, the attention of economists has turned once again to why Latin America saves so little and how it might save more, and thus invest more. The Inter-American Development Bank (IDB) devotes its latest report to this subject.
The IDB identifies three main problem areas: the financial system, pensions and government spending. Although Latin America’s financial systems are more solid than they were in the past and have grown, they remain “small, expensive and inefficient”, the IDB says. On average bank loans to the private sector are equal to only 30% of GDP in Latin America, compared with 80-100% in rich countries or in emerging Asia. No wonder Latin American companies find it so difficult to grow.
The pension problem is severe. Although the population is ageing, only 45% of Latin American workers contribute to any kind of pension scheme, the IDB says. In the 1990s, at the urging of neoliberal economists, many countries wound down their traditional pay-as-you-go pension systems. Instead, they switched to a system of fully funded individual pension accounts, managed by private pension funds (known as AFPs in Spanish) in which workers eventually receive a pension depending on the value of their investment.
There were good reasons for the switch. The old systems were often mismanaged. But the new one hasn’t worked as intended: few workers contribute enough to get a pension. “The AFPs have failed,” says Santiago Levy of the IDB. He favours a small universal pension funded by an earmarked consumption tax, augmented by voluntary schemes.
Another problem is that Latin American governments save too little, and favour current spending over public investment. Subsidies and pay for bureaucrats take priority over transport, energy and water infrastructure.
The region’s low propensity to save has historic roots. Generations of Latin Americans have seen their governments wipe out their savings either through inflation or by simply confiscating them. That is why so much capital has flown the region over the past half-century. Argentina is a notorious example. Its new president, Mauricio Macri, has tried to bring capital back by declaring an amnesty for people who repatriate undeclared foreign savings. Among the first to reveal their foreign nest-eggs were several of his ministers. Another factor in low savings is the prevalence of informal jobs. (Underground employers seldom enroll their staff in penson plans.)
Some economists argue that Latin Americans have developed their own common-sense instruments of saving. They invest in building their own houses and in educating their children. They trust that rental income and family solidarity will provide for them in old age. But this kind of saving does not result in capital that the financial system can turn into productive investment.
Awkwardly, nobody really knows whether higher savings are a consequence or a cause of higher growth (they may well be both). Some Latin Americans might thus object that the IDB is putting the cart (higher savings) before the horse (faster growth). No matter. Better banks, better pensions, more prudent governments and more financial literacy would help the region in both good times and bad, even if they mean fewer fiestas.
The Economist |