I knew it…

The decision to consume your income or save it for future use is one of the most fundamental decisions in the world. Economic theory tells us that I = S, i.e. that the sum total of all investments must equal the sum total of all savings. If nobody saves, there is no money to invest (one day I will write a post about why this assumption might be flawed, but let’s assume it is true for now).

China’s economic growth is fuelled by investments that surpass 40% of GDP. And these investments can only be financed as long as savings ratios of Chinese households are very high as well. The World Bank estimates the gross savings rate of Chinese households to be 46%. Meanwhile, the global average savings ratio is 25%. But there are large differences from country to country. Germans and Swiss are famously frugal, achieving savings rates of 29% and 35%, respectively. Meanwhile, their British cousins across the pond have one of the lowest savings rates in the world at 13%. And why are the savings rates of neighbouring countries that have a lot in common sometimes very different? Just look at Kenya with a savings rate of 10% and neighbouring Tanzania with a savings rate of 31%.

Savings rates around the world

Source: World Bank.

For a variable that is so fundamental to all economic activity, we know astonishingly little about it. In the 1980s and 1990s, studies showed that it is impossible to explain national differences in savings rate with variables such as labour market participation, education, level of interest rates etc. But the typical outcome was that these differences could not be explained or just to a very small extent.

As a German who is married to an American, my favourite explanation for differences in attitudes to money are cultural in nature, but these cultural dimensions are hard to test in practice. Joan Costa-Font, Paola Giuliano, and Berkay Ozcan seemed to have managed to isolate cultural differences in savings behaviour by looking at immigrants in the UK. Using the data from the Understanding Society surveys in the UK, that asks a large sample of UK households about all kinds of daily activities (among them their savings behaviours) and tracks their cultural backgrounds as well. The good thing about the UK is that it has immigrants from a large number of countries (thanks to people from the commonwealth moving to the UK for decades and people from Europe coming for at least two to three decades).

It turns out that while all the survey respondents live in the same environment determined by the UK economy and regulations, their cultural backgrounds differ. With different cultural backgrounds, their attitudes towards spending and saving differ as well. The chart below shows the amount saved (in logarithmic scale) of different immigrant groups relative to the savings rate of their home countries. In this chart, only foreign-born immigrants to the UK are considered.

Propensity to save and savings ratios of immigrant countries of origin: First generation

Source: Costa-Font et al. (2018).

The correlation shown in the chart is quite strong and it remains strong when other variables like income, education, etc. are controlled for. The researchers could show that the influence of the cultural background on savings decisions is about half as strong as the influence of income levels but about twice as strong as the influence of education.

What is interesting (and maybe a bit surprising) is that these attitudes towards savings can be traced to the 3rd generation of immigrants (i.e. those people who themselves together with both parents were born in the UK, but who have at least one grandparent born outside the UK). While the relationship weakens from generation to generation, it is still remarkably strong even for the third generation.

Propensity to save and savings ratios of immigrant countries of origin: Third generation

Source: Costa-Font et al. (2018).

Hence, advisers who deal with clients from different backgrounds should take cultural differences in attitudes towards savings and consumption seriously. They are important, as I can attest from many discussions about spending behaviour in my own household…