Since Marcus Tullius Cicero spoke of the riches of frugality to our own times, mired by concerns about the lingering effect of the recent financial crisis and the current Eurozone debt problems, savings have always played a fundamental role in the economy.

For African countries the savings rate takes on an additional dimension of importance as it relates to economic growth and, by extension and implication, to development potential and prospects.⁽²⁾ The importance of thrift within the context of an economic analysis pertaining to development in Africa, however, is something that is an oddity as it places greater emphasis on its quantitative resources than qualitative conclusions drawn from disparate or too broad investigations. The result is that the said outputs do not always correlate with the research findings in such a way as to inform policy in a broadly ameliorative way.⁽³⁾ Bringing the state into the development issue is a concomitant goal of this analysis, while enveloping the said issue and the state’s role within the ambit of economics. The reason is that the state’s legitimacy is perceived to be based on its ability to meet economic objectives that contribute to the welfare of its population; however, this is a salient point as the state is a contentious structure in Africa and its legitimacy is often brought into question.⁽⁴⁾

Theoretical links

Economic growth generates new resources that can be funnelled onto social goods and services. The two economic models are the Harrod-Domar and Solow models. The Harrod-Domar model illustrates how actual growth (read “change in real income”) is affected by the propensity to save and the increase in income is caused by each Rand’s worth of investment; in this model, saving-investment equilibrium conditionality determines the level of real income. Then, the Solow model shows how investment is determined by the level of saving in an economy that in turn is determined by real income, which is again determined by investment (or capital stock). In layman’s terms, this means that a high saving rate will engender a high capital stock and a high output; the reverse is thus true for a low saving rate.⁽⁵⁾

There is, furthermore, a correlation between economic growth and saving rates. Theory and evidence have shown that the relationship runs both ways: according to the ‘lifecycle theory of savings and consumption’, changes in the rate of economic growth will affect the aggregate savings rate. The effect of economic growth on saving is, however, subject to the harshness of liquidity constraints.⁽⁶⁾

South Africa has been burdened with a low and ever falling savings rate since the 1980s, resulting in increasing reliance on short term foreign capital inflows.⁽⁷⁾ Low savings will possibly constrain investment as there is a high correlation between domestic saving and investment rates⁽⁸⁾, which is one of the salient policy worries in South Africa at the moment.⁽⁹⁾ Immediately, the decrease in South Africa’s private saving rate is, amongst others, attributed to the relaxation of credit constraints; increased urbanization; the increase in public saving; and an aging population.⁽¹⁰⁾

Health investment and education investment (two social goods) both contribute to the longevity of an individual’s lifecycle. The relationship goes both ways:⁽¹¹⁾ when income is low there is no health investment and conversely, when income grows health investment will become positive and the saving rate will rise substantially, leading to an extended lifecycle and economic growth.⁽¹²⁾

Already at this early stage the role of the state is clear: subsidising health and education spending can bring about higher life expectancy, an increased saving rate, higher welfare and economic growth. Subsidising such social goods may reduce welfare in the short run for poor countries but will lead to an increased lifecycle length, economic growth and higher welfare in future. However, excessive subsidies are found to reduce welfare. Nonetheless, the higher subsidy rates may yield higher welfare compared to cases without any subsidies.⁽¹³⁾

Turning now to another important variable, investment has been constrained by the low saving capacity in South Africa, noting that the shortage of savings has contributed to the relative cost of capital.⁽¹⁴⁾ The scope to increase private savings seems to be limited by structural features of the economy: shifts in demographics, urbanisation, financial sector deepening and ease of doing business. Here is where the state can step in even though it will be a hard slog to change these structural hindrances.⁽¹⁵⁾

Lastly, over the last decade the main impediments to economic growth in South Africa have been the low investment rate, insufficient labour productivity gains, lower openness to trade and slower technical progress relative to faster-growing countries. Underinvestment has significantly slowed growth since 1996. Boosting investment is therefore critical for accelerating growth and ensuring economic development. Bettering the saving rate is a way to directly confront this problem.⁽¹⁶⁾

Down to numbers: Trends in South Africa’s saving rate

To achieve economic growth the capital stock of an economy must increase.⁽¹⁷⁾ Gross savings is the total domestic savings of a country, consisting out of net savings plus consumption of fixed capital.⁽¹⁸⁾ Over the last 29 years ‘Final Consumption Expenditure by Households’ remains the largest component of GDP, while ‘Final Consumption Expenditure by Government’ has increased slightly. However, gross savings have decreased considerably over the long run.⁽¹⁹⁾

The healthy gross savings rate of 26.7% all through the period of1979 to 1984 was largely due to huge profits from the mining sector.⁽²⁰⁾ However, from the 1990s the average was 16.3% and reached its lowest point of 13.6% of GDP in the third quarter of 2007.⁽²¹⁾

Personal (or household) savings increased steadily until 1992 after which it began its downward trend, reaching negative digits in 2006, and currently at ZAR 5,665 million. Government savings and corporate savings are always inversely related: as economic conditions worsen a government will spend more while receiving less taxes, subsequently saving less to stimulate the economy – this while the corporate sector will save more of its disposable income during tough times.⁽²²⁾ Households are also receiving less disposable income, consuming less and saving less, yet household debt has surged.⁽²³⁾

Number of hours worked, the tax rate and unemployment (the number one policy priority of the Zuma administration) are factors that influence the disposable income of households. Alongside the changes in disposable income during the 1980s there has generally been a decreasing trend in the amount of disposable income available to households in the 1990s and 2000s. The South African Reserve Bank (SARB) views an increase in layoffs and less hours worked as the reason for this decline while it is also believed that the increase in the direct tax burden on households has had an effect.⁽²⁴⁾

Households in South Africa face an increasing debt problem; concomitantly almost no income is saved. From the first quarter of 2006 up to 2009 the ratio of household savings to disposable income was negative. This indicates four years of dissaving.⁽²⁵⁾ When dissaving occurs credit must be used to finance excess expenditure which leads to debt, which means South Africans are living beyond their means and are spending too much. There is no culture of saving, which is something the state can aid in.

Government saving, on the other hand, is calculated as the difference between ‘Current Income’ and ‘Current Expenditure.’ Government has not contributed to the South African economy’s savings for the past 27 years. Constant government dissaving has plagued the economic landscape and peaked in 1994 at 7.2% as a result of huge budget deficits. This trend continued until around 2003, after which the economy was characterised by an average annual growth figure of 5% that enabled government saving as a percentage of GDP to increase from -0.1% in 2004 to 3.3% in 2007.⁽²⁶⁾ Two most significant reasons that explain the above is a too high current expenditure and too low capital expenditure.⁽²⁷⁾

Social grants are another problem area.⁽²⁸⁾ While other countries have been cutting back on social spending South Africa has been expanding, introducing a new child grant in 1998. To the detriment of the economy the total number of beneficiaries has more than doubled from 1997 to 2003.⁽²⁹⁾ That figure has again doubled from ZAR 6 million in 2003 to almost ZAR 13 million in 2009.⁽³⁰⁾ This figure continues to rise as a result of increased public awareness of eligibility for grants, placing an ever greater burden on current expenditure.⁽³¹⁾

By 1994 capital expenditure was a meagre 15% of GDP.⁽³²⁾ At the same time foreign direct investment (FDI) was very low, signalling the fact that returns on investment were not very rewarding. Negative saving figures resulted in capital becoming increasingly expensive making capital expenditure all the less likely.⁽³³⁾ By 2003 matters started to improve: capital expenditure as a percentage of GDP amounted to 25%.⁽³⁴⁾ However, this is still relatively low but not surprising given the correlation between domestic saving and investment rates. The low savings rate is thus constraining investment.⁽³⁵⁾

Corporate saving makes up the majority of total savings. It is therefore perturbing to see that corporate saving as a percentage of GDP has decreased from 6.6% in the 1980s, to 5.6% in 1990s, to only 3% from 2000 to 2008. The high cost of capital, labour market inflexibility, and high corporate taxes, go furthest in explaining this decrease.⁽³⁶⁾ The amount of tax paid by corporations is the most disheartening factor amongst the listed causes, in which the state has a hand in determining. The ratio of taxes to gross primary income has increased by 25 percentage points between 1996 and 2007. The increase in corporate tax had the inevitable effect of transferring the duty of saving from the corporate sector to the public sector. Simultaneously, an increase in corporate dividend payments exerted downward pressure on corporate savings causing retained earnings to drop by 21 percentage points between 1996 and 2007.⁽³⁷⁾

Economic growth in South Africa has been severely hampered by under investment since 1996. This low level of investment is preceded by low domestic savings rates, a trend that has been going on for too long in South Africa. The state, once again, has the ability to intervene and affect changes through policy. Government is seeking external sources of revenue to finance gross capital formation while households are increasing their debt due to a lack of disposable income and savings. Simply put, more investment in capital stock is required for economic growth. To finance gross capital formation, domestic and foreign savings are required.⁽³⁸⁾ When domestic savings are not enough to supplement investment, foreign savings are required and are indicated as a deficit on the current account. This must be financed by an inflow of net capital movements from the rest of the world.⁽³⁹⁾

A possible roadmap for the future: The role of the developmental state

Regarding actual measures to be taken, one can start with the most controversial, namely stricter credit constraints: consumers will have less debt and thus less interest payments. The amount that is saved by not having to pay interest on outstanding debt can now be utilised for investing in funds or insurance policies.⁽⁴⁰⁾

In order to boost gross savings the disposable income of households must be increased. While decreasing the income tax rate will increase disposable income it is doubtful whether it will increase gross savings. However, instead of households saving their extra disposable income they should rather pay off their debt. This will lead to dissaving in the short run but in the long run debt free households will be able to positively contribute to gross savings. Household debt, thus, not household savings can be construed as a more immediate problem; as long as households are severely in debt they will not contribute to gross savings. The state has a role to play in the education of the public regarding credit, spending and saving.⁽⁴¹⁾

If corporate enterprises and government start to save excessively in times of recession then the ‘paradox of thrift’ occurs, meaning that aggregate demand falls and total saving in the economy is lowered because of the dampened consumption and economic growth. However, South Africa should not be concerned about the paradox of thrift at the present time. The state has a role in shoring up domestic saving rates by cutting back on current expenditure, more specifically transfer payments. Special attention should also be paid to the capacity constraints that inhibit economic growth: instead of having a large current expenditure side the funds might be directed at capital expenditure. Also, as long as capital inflow volatility remains, corporate saving will remain important.⁽⁴²⁾

Still concerning the corporate sector, corporate taxes need to be lowered in order for more funds to be released (for investment) and thereby also saved.⁽⁴³⁾ Although tax rates have been decreased in the last decade there is still room for improvement; by expanding the tax base and making tax collection more efficient the tax burden on corporate entities can be lightened. Taxing companies on their profit after savings have been deducted should also be explored. When savings are deducted from profits before tax there is a greater incentive to save a larger portion of the profit.⁽⁴⁴⁾

Generally, factors that will lead to an increase in the growth rate and saving rate will be higher openness to trade, increase in labour productivity, financial liberalisation, stimulating the investment rate and faster technical progress. Besides these factors, implementing a culture of saving and paying more attention to savings will also lead to an increase in South Africa’s savings rate. It is equally important for the state to realise that it must most urgently be involved in affecting structural amelioration which will increase the saving rate in general.⁽⁴⁵⁾

The saving rate is not a panacea. Serious structural issues pertaining to labour, investment, unemployment, infrastructure and tax issues remain. However, on certain levels the state can influence the saving rate in such a way as to further economic growth, which by implication and extension contributes to development. Specifically, policy (public saving; encouraging private saving through lower tax rates on capital; tax-exempt retirement accounts; replace income taxation with consumption taxation; doorstep collection or savings commitment schemes) can influence the saving rate (a policy that alters the growth rate of per person real income has a broader growth effect), while it should also be concluded that a higher saving rate by itself raises the level of real income per person.⁽⁴⁶⁾

NOTES:

(1) Contact André Dumon through Consultancy Africa Intelligence’s Finance and Economy Unit (finance.economy@consultancyafrica.com).
(2) Lawrence, P., 2010, ‘The African Tragedy’, in The Political Economy of Africa, pp.24, 140.
(3) Fine, B., 2010, ‘From the political economy of development to development economics’, in The Political Economy of Africa, pp.60, 70; McKay, J. ,2004, ‘Crises in Africa, Asia and Latin America’, in Key Issues in Development, p.154.
(4) Economist, 2010. ‘South Africa’s economy: how it can do even better’, in The Economist, http://www.economist.com; Fine, B., idem, p. 75; Gallagher, K., 2005, ‘Globalisation and the Nation-State: Reasserting Policy Autonomy for Development’, in Putting Development First: the importance of policy space in WTO and IFIs; Gallagher, K., idem, p.5; Sherbut, G., and Padayachee, V., 2009, ‘Ideas and power: academic economists and the making of economic policy’, in The Poverty of Ideas, pp.226, 236; Simutanyi, N., 2006, ‘The state and economic development in Africa: Challenges for post-apartheid South Africa’, Harold Wolpe Memorial Trust Eastern Cape Lecture Series, pp.1-2; Stiglitz, J., 2005, ‘Development Policies in a World of Globalisation’, in Putting Development First: the importance of policy space in WTO and IFIs, p.15.
(5) Mankiw, G., 2007, Macroeconomics (7th edition), pp.195-196; 186-213; 216-235; 249; 456; 470; 224-234.
(6) Nagatani, K., 1972, ‘Life Cycle Saving: Theory and Fact’, in The American Economic Review, 62(3): 344-353, p.344; Romm, A.T., 2003, The Relationship between Savings and Growth in South Africa: An Empirical Study, University of the Witwatersrand, pp.3-4.
(7) Aron, J., Muellbauer, J., 2000, Personal and Corporate Saving in South Africa, Econometric Society European Meeting, p.1.
(8) Lawrence, idem, p. 24; Montalto, P., 2011, ‘SA will be an economic battleground next year’, in Business Day, http://www.businessday.co.za.
(9) It has been posited that corporate and private saving has much to do with households piercing the figurative corporate veil. The implication is that households rationally reduced their savings because of the increase in corporate savings; in response to changing inflation and tax rates that in turn raised the value of equities held by households. Linked to this is financial liberalisation, which has allowed South African households to raise debt to income ratios and which may account for the higher corporate saving rate. However, corporate saving rates have also decreased over the past few years. This can be attributed to the increase in the amount of tax paid by corporations.
(10) Aron, idem, p.29. (11) Zhang, J., Tang, K., 2005, Health, Educationand Life-Cycle Savings in Different Stages on Development, pp.1, 3-4, 18.
(12) Nagatani, idem, p.344.
(13) Corrigan, P., Glomm, G., 2005, ‘AIDS, Crisis and Growth’, in Journal of Development Economics, 77(1): 107-124, pp.121-123; Zhang, idem, pp.4, 18-20
(14) Eyraud, L., 2009, Why Isn’t South Africa Growing Faster? A Comparative Approach, IMF Report, p.9; Eyraud, L, et al., 2008, ‘Constraints on Growth in South Africa: Lessons from a cross-country comparison’, in South Africa: Selected Issues, IMF Report, p.26.
(15) Doing Business 2010: reforming through difficult times, World Bank Report, pp.100, 152; Lawrence, idem, p.24; Remenyi, idem, pp.138, 140; Porter, idem, pp.302-303; Zilibotti, idem, pp.336-337.
(16) Eyraud, idem, pp.8-9; Montiel, J., Servén, L., 2009, Real Exchange Rates, Saving and Growth: Is There a Link?, Commission on Growth and Development Report, Paper: 46, pp.10-11.
(17) Mankiw, idem, pp.64-66.
(18) Mohr, P., 2007, Economic Indicators, pp.40-43.
(19) Matlakala, P., 2009, ‘Credit crisis may improve SA’s savings rate’, in The Times, http://www.thetimes.co.za.
(20) Eyraud, idem, p.11.
(21) Prinsloo, J.W., 2000, The saving behaviour of the South African economy, South African Reserve Bank: Paper 14, p.9.
(22) Prinsloo, idem, pp.13.
(23) Doneva, S., 2009, ‘Shopping beats recession blues’, http://www.fin24.com.
(24) Prinsloo, idem, p.22; South African Reserve Bank, 2009, Quarterly Bulletin – September 2009 (no.253), http://www.reservebank.co.za, pp.9.
(25) Prinsloo, idem, pp.4.
(26) ‘Local Outlook: March 2009’, in Liberty Life, http://www.liberty.co.za.
(27) National Treasury of Republic of South Africa, 2007, ‘Savings: A Macro Perspective’, http://www.econrsa.org.
(28) ibidem; Stone, S., 2011, ‘SA needs to simplify delivery of social grants to save costs’, in Business Day, http://www.businessday.co.za.
(29) Woolard, I., 2003, Impact of Government Programmes Using Administrative Data Sets: Social Assistance Grants, South African Regional Poverty Network: Project 6.2 of the Ten Year Review Research Programme, p.11.
(30) Zuma, J., 2009, ‘Social Grants are Temporary’, in Black Sash. News Today, http://www.blacksash.org.za.
(31) Woolard, idem,p.11.
(32) Mboweni, T., 2009, ‘Where South-Africa is failing’, in Times Live, http://www.blogs.timeslive.co.za.
(33) International Monetary Fund, 2009, World Economic Outlook: Sustaining the Recovery, http://www.imf.org, pp.9.
(34) Mboweni, ibidem.
(35) International Monetary Fund, ibidem.
(36) National Treasury, Republic of South Africa, ibidem.
(37) International Monetary Fund, idem, pp.14.
(38) Mohr, idem, pp.25-26.
(39)Prinsloo, idem, pp.5.
(40) Aron, idem, pp.29-31.
(41) Eyraud, idem, pp.11; Hazelhurst, E., 2010, ‘Rate of economic growth’s decline a surprise for analysts’, in Business Report, pp.1; Porter, idem, pp.303; Prinsloo, idem, pp.32-33.
(42) Aron, idem, pp.29-31; National Treasury of Republic of South Africa, ibidem.
(43) Lall, S., 2005, ‘Rethinking Industrial Strategy: the role of the state in the face of globalisation’, in Putting Development First: the importance of policy space in WTO and IFIs, pp.33.
(44) Eyraud, idem, pp.31; National Treasury of Republic of South Africa, ibidem.
(45) The Economist, ibidem; Lall, ibidem, pp.51-53, 60; Romm, idem, pp.5.
(46) Aron, idem, pp.30; Fine, idem, p.75; Gallagher, idem, p.8; Padayachee, V., Hart, K., 2010, ‘Introducing the African Economy’, in The Political Economy of Africa, pp.34; Pickworth, E., 2010, ‘OECD report frankly assesses SA’s problems’ in Mail and Guardian, http://www.mg.co.za; Stiglitz, idem, pp.27-30; Zilibotti, idem, p.325.

Written by André Dumon ⁽¹⁾