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IDB recommends savings for growth

The Inter-American Development Bank warns that individuals, companies and governments in Latin America have not saved enough, limiting the possibilities for growth in the region.

“Latin America and the Caribbean are facing a savings crisis, with fiscal and demographic realities that suggest a difficult future”, highlights the report presented at the beginning of June 2016, in Santiago de Chile.

The national savings rate in the region, between 1980 and 2014, was 17.5% of gross domestic product (GDP), well below the 33.7% recorded in emerging Asian economies and 22.8% in advanced economies.

According to the report, “the region will face significant fiscal challenges in the coming years”, suggesting that “increasing savings would be one of the keys to ensuring both the growth and strength of economies”. It also analyzes the various reasons for the low level of savings, recorded by individuals and governments, their economic impacts and lack of efficiency that limits opportunities for business investment and has a negative impact on corporate savings.

In this regard, recommendations are provided to reverse the situation and increase savings rates, in line with the most successful economies in the world. “Small increases in savings could result in significant impacts. For example, for every additional percentage point of national savings, domestic investment in the region grows by almost 0.4 percentage points”, points out the IDB, which highlights, “This is equivalent to 20,000 million dollars available to finance infrastructure projects or other investments in human capital needed to increase equity and strengthen development.”

José Juan Ruiz, chief economist at the IDB argues: “We cannot justify our low levels of savings simply by saying that we are not good at saving money”.

Although the banking system in Latin America has grown and provides almost 30% of GDP in loans to the private sector, it is well below the average of the Organization for Economic Co-operation and Development (OECD) and emerging Asian economies, which contribute about of 80%. According to the report, the problem is reinforced by the lack of trust in banks, widespread financial illiteracy and high informality of work. Just 16% of adults in the region have bank savings, compared to 40% in emerging Asian economies and 50% in advanced countries.
Pension systems are another constraint, as less than half of the region’s population saves for retirement through a contributory pension system. In this sense, the report warns that, unless this problem is corrected, the situation will worsen as the population ages.

The region will have difficulty finding the resources needed to build airports, roads and other infrastructure projects essential to boost growth. In this regard, investments in the region should increase over the next few decades by between 2 and 4 percentage points of annual GDP (depending on each country) to alleviate restrictions on growth.

Regarding fiscal policies, these also had a major impact on the economy and according to the report “government spending on subsidies is too high and too low on capital investments”.

“Recent economic crises have worsened this situation now that governments have chosen to cut investment costs as a substitute for politically more difficult fiscal reforms,” says the Inter-American Development Bank and identifies in its report the main areas where governments could save more and spend more efficiently.

Social assistance, tax expenditures (tax exemptions) and energy subsidies undergo more prominent “filtration”, meaning they benefit the rich more than the poor to the tune of around $100 billion per year. The lack of efficiency in health and education represents 50,000 million per year.

If these problems are resolved, sufficient funds could be provided to close the infrastructure investment gap that exists between Latin America and advanced economies. Furthermore, governments in the region face difficulties in increasing taxes, with an estimated evasion rate of 52% and a tax structure that penalizes savings.