The savings crisis and China's future growth

Chinese Management StudiesThe savings crisis and China's future growthAmir Shoham Miki Malul Mosi Rosenboim

Article information:To cite this document:Amir Shoham Miki Malul Mosi Rosenboim, (2010),"The savings crisis and China's future growth", ChineseManagement Studies, Vol. 4 Iss 2 pp. 154 - 161Permanent link to this document:http://dx.doi.org/10.1108/17506141011053078

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The savings crisis and China’sfuture growth

Amir ShohamSchool of Business Administration, The College of Management,

Rishon LeZion, Israel

Miki MalulDepartment of Public Policy and Administration,

Guilford Glazer School of Business and Management, Ben-Gurion University,Beer Sheva, Israel, and

Mosi RosenboimSapir Academic College, Sderot, Israel and

Guilford Glazer School of Business and Management,Ben-Gurion University of the Negev, Beer Sheva, Israel

Abstract

Purpose – It is very important to understand the current (2007-2009) economic crisis because it is themost severe since the Second World War and is having a tremendous impact on global and nationaleconomic environments. Therefore, the purpose of this paper is to explain the main factors (savingsattributes and cultural factors) that created the crisis and better understand which nations will gain inthe post-crisis era.

Design/methodology/approach – The paper uses descriptive data to explore the global, Chineseand US economic environments prior to the economic crisis. In addition, the paper used an econometricmodel in order to evaluate the impact of cultural variables on savings behavior.

Findings – The data lead us to one main conclusion: the crisis was created by major changes inglobal saving rates during the last two decades.

Originality/value – The paper makes two major contributions: first it describes the opportunity thatthe current international crisis creates for China. The opportunity is an outcome of the high savingrates in China, as compared to the lower saving rates in the western countries. Second it points out thegap in the current academic literature regarding savings, primarily the lack of research on therelationship between savings and culture.

Keywords Economic fluctuations, Savings, China, Culture, United States of America

Paper type Research paper

1. IntroductionWhen considering the current economic crisis and the way the crisis evolved, there is aclear view of the chief real variable that caused the crisis. This variable is the change inthe saving rates, primarily in the USA (Shoham, 2009). Culture is one factor that mightdetermine the level of national savings. The impact of personal and cultural differenceson individuals’ economic and financial decision-making has received attention inthe research literature. Some of the studies compared Asian and western societies(Wright et al., 1983; Yates and Lee, 1995), describing western societies as moreindividualistic, Asian as more collective. Du et al. (2002) contended that because bothChinese and Japanese societies are collective, individuals within them would show

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Chinese Management StudiesVol. 4 No. 2, 2010pp. 154-161q Emerald Group Publishing Limited1750-614XDOI 10.1108/17506141011053078

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similar decision-making tendencies, unlike individualistic cultures such as the USA (seealso Triandis, 1993).

In the next section, we will describe the development of the saving rates in USA andChina, and their consequences. Then, we will examine the relationship between thesaving rates and cultural attributes for a cross-country sample, followed by acomparison of the Chinese and the American economies. In the last section we presentour conclusions.

2. The development of saving rates in China and the USAIf we briefly review the history of the crisis, we see that the first signals of genuineeconomic instability began to appear in the first half of 2007, when a large wave ofsub-prime mortgage lenders in the USA became insolvent. However, the seeds of thecrisis were planted many years before. The USA created a deficit in its current accountthat grew steadily throughout the last decade. The deficit on one side of the ocean createdsurplus on the other side, especially in China. These countries then loaned the surplusback to the USA so that it would be able to continue buying imports. Usually, a currentaccount deficit is highly correlated with a government deficit and the data from yearsbefore the crisis show that the USA is no different (Shoham, 2009).

From a brief review of the crisis we can identify the three real variables that wereunbalanced for a long period:

(1) The US current account deficit.

(2) The US Government deficit.

(3) Private consumption in the USA.

The master variable that made a major contribution to the creation of all three realvariables is the change in the saving rates in the USA. A nation’s savings is theaggregate of the savings of the business sector (SB), personal savings (SP), andgovernment savings (SG). The US Government made a rather large change in its fiscalpolicy at the beginning of the current century. During the last years of the Clintonadministration, the federal government had a budgetary surplus. The highest surpluswas 1.62 percent of gross domestic product (GDP), in 2000. By 2003, this surplushad been replaced with by deficit of 4.83 percent. The federal expenditure was about20 percent of the GDP in 2003. That means a reduction of 32 percent in SG. Severalfactors contributed to the deficit, including the Bush administration’s dual policy ofsimultaneous fiscal expansion and tax reduction. However, the most interesting changein US savings was the sharp and steady decline in personal savings that started in 1984.

The sharp decline in federal savings during the last decade plus the ongoing declinein personal savings from 1984 to 2006 caused the deficit in the US current account. Thisled to a very highly leveraged economy in the USA, which actually made it veryvulnerable to shocks in the economy. Table I presents the saving rates in the USA andChina.

At the opposite end of the scale we see China, which has a high rate of savings. TheChinese saving rates are traditionally one of the highest in the world and in some yearsthe highest. As can be seen in Table I, this phenomenon intensified in the years prior tothe crisis.

China’s high saving rates have, in part, caused the high and increasing surplus in itscurrent account.

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Table I.USA and China grossdomestic savings

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This has put China in an excellent position in the global arena, primarily because thefinancial crisis caused both short and long-term global liquidity problems. The highlyleveraged nations and companies that global economic standards allowed prior to thecrisis are faced with dramatically diminished leveragability in the global economy arenaas it is currently developing. Nations that accumulated liquidity in the past, like China,can now use it to expend economically and politically. The ratio of China’s currentaccount surplus has increased in recent years. The average increase of approximately10 percent in the real GDP during these years means that there was a relatively highincrease in the total amount. The main question is how the Chinese nation andgovernment will manage these surpluses. As can be seen in Table II, China’s outwarddirect investment has increased significantly in recent years.

Table II shows that between 2004 and 2007, China’s outward foreign directinvestment (FDI) grew by 1,250 percent. From China’s point of view, outwardinvestment creates additional positive value beyond its direct benefits. The two mainadded benefits are:

(1) Diversification of investment portfolio. Diversifying investments decreases therisk level of China’s investment portfolio.

(2) Access to natural resources. Through outward investment, China can acquireownership of natural resources, including natural gas, oil, etc. (Shoham andRosenboim, 2009).

The secured inflow of national resources would help the future growth of China.The current international crisis creates an opportunity for China to continue its

investment strategy. The recession pushes the prices of assets down, creating anopportunity for countries with sufficient resources to invest in the world economy.The cumulative surplus in China’s current account allows it to take advantage of therecent recession in order to expand its outward FDI strategy. This strategy could bean engine for future growth and development of the Chinese economy.

To conclude, it seems that the recent crisis requires a new way of thinking andmanaging economies in global markets. For the US economy, the low saving rates(government and private) that lead to huge deficits in the current account have to changedirection toward higher rates of savings (for example, by lowering the federal deficit);this is especially true because of demographic changes expected in the US population.Higher saving rates might lead to a more stable economy in the US in particular andin the world in general. As for the Chinese economy, it seems that the recent crises createsa huge opportunity for further development, especially via persistent outward FDIin global markets, using the accumulated surplus built up in its current account overrecent years.

2001 2002 2003 2004 2005 2006 2007

FDI outward 6,884 2,518 2152 1,805 12,261 21,160 22,469

Note: In US$ millionSource: World Investment Record 2004-2008, Annex B1

Table II.China’s FDI patterns

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It is clear from the analysis presented in the previous section that understanding thesaving rates patterns is critical; however, conventional economic variables fail atexplaining cross-country differences, as well as time-series patterns of savings.Therefore, we believe that expanding the analysis of saving rate patterns using a varietyof cultural variables is crucial, because cultural differences affect the way people thinkand react (Hofstede, 1980; 1983). This is not important just as a post factum analysis butalso for looking towards the future; it may be helpful for formulating different, creativepolicies to stimulate savings.

3. Method3.1 SampleOur sample includes 36 countries for which there are scores on culture variables in theHouse et al. (2004) GLOBE study of 62 societies and saving data. We left out countriesthat had two scores, like South Africa which had separate scores for its black and whitepopulations. The sample is very diverse and contains countries from all continents andwith all types of wealth.

3.2 The variables3.2.1 Dependent variable. Our dependent variable is the gross saving percentage ofGDP. The source for the dependent variable (savings) is World Development Indicatorsstatistics from the World Bank.

3.2.2 Independent variables: the cultural variables. In our analysis we used thefollowing cultural dimensions.

Uncertainty avoidance index (UA). Common to GLOBE and Hofstede, UA assessesthe degree to which a society’s members are able to cope with the unpredictability ofthe future, and the resulting ambiguity (de Luque and Javidan, 2004; Hofstede, 1980).Cultures high on uncertainty avoidance would tend to have high savings so they couldcope with an unpredicted decline in income and wealth in the future. Conversely,the lower a country’s level of uncertainty avoidance, the higher the level of uncertaintyindividuals in the society are willing to bear and that means a lower savings average.

Power distance index (PDI). A dimension identified by both GLOBE and Hofstede, isthe degree to which power and authority are expected to be distributed and expressedequitably or inequitably (Carl et al., 2004; Hofstede, 1980). A high power distanceranking indicates that inequalities of power and wealth have been allowed to growwithin the society. These societies are more likely to follow a caste system that doesnot allow significant upward mobility of all citizens. A low power distance rankingindicates that the society de-emphasizes the differences between its citizens’ power andwealth. In these societies, equality and opportunity for all are stressed. We assume apositive correlation between PDI and saving rates because in a high power distancesociety the only way to move upwards in the social hierarchy is through accumulatedwealth.

Collectivism/individualism index (CI). This has to do with the extent to which theself or, alternatively, the group, is the prime social identifier (Hofstede, 1997). Weused “institutional collectivism” that focuses on societal and organizational levels.In individualist cultures, job specialization, personal achievement, personalaccountability, and performance-based evaluation are pronounced, with peopleconsidering themselves as independent and autonomous; while in collectivistic

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cultures emphasis is placed on group coordination (Very et al., 1996). We can expect thatin collective-oriented cultures, higher savings will be found. It could be argued that whenpeople consider themselves as independent and autonomous, they can dare and initiatenew ventures, and undertake the risks incorporated in new business creation uponthemselves.

On the other hand, however, an opposing line of thought could make the counterargument. According to the cushion effect, a collectivist society provides the individualwith a safety net; as a result, this individual will be less risk averse. Thus, Hseeand Weber (1999) compared the risk preferences of American and Chinese individuals ininvestments and medical and academic decisions. They found that Chinese peopleare more risk-seeking than Americans when investing, and claim that the differencebetween the risk attitudes of the two groups is a result of the cushion effect.

In spite of the contradictory logic, we hypothesize that collective values can beexpected to be more related to saving activities.

4. AnalysesTable III presents the descriptive statistics of the independent variables.

The ordinary least squares regression was used to analyze the data and weconducted a Kolmogorov-Smirnov goodness-of-fit test on the dependent variable(percent GDP saved). The results showed that the variable was normally distributed,so we assumed that the errors distribute normally. Table IV presents the outcome of theregression.

5. ResultsThe results indicate that the culture variables explain about 30 percent of the variationin the savings rate:

UA PD CI Savings (percentage of GDP)

Mean 4.24 5.13 4.29 26.48Std. 0.63 0.39 0.45 8.43Max 5.37 5.64 5.22 49.90Min 2.88 3.89 3.25 13.40

Table III.Descriptive statistics

Coefficient t-value

Constant 279.718 22.501 *

UA 6.029 2.292 *

PD 9.277 2.238 *

CI 7.666 2.670 *

Adjusted R 2 ¼ 0.283, F ¼ 5.859

Note: *p , 0.05

Table IV.Dependent variable:

gross saving aspercentage of GDP

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. We found that as the uncertainty avoidance (UA) is higher, savings are higher,as expected, because individuals who want to reduce uncertainty will save more.

. The rate of savings increases as the power distance (PD) increases. In countrieswith high PD, where the mobility between classes is low, each class will “over”save in order to insure a better this result. This is consistent with Chui andKwok (2009) who found that in societies with high power distance, consumptionof life insurance is high. Finally, we found that as the collectivism of the societyincreases, the savings rate is higher because people in societies that are collectivebetter internalize the positive externalities as well as the long-term impact ofnational savings. Therefore, the rates of saving will be higher in these societies.

One implication of our results for policy is that in societies characterized by lessuncertainty avoidance, less power distance and less collectivism, the government shouldbe more aggressive about intervening to increase saving rates; for example, by offeringhigher subsidies for savings.

The results are consistent with our assumptions and reinforce the importance ofcultural differences for the different rates of savings in China and the USA. If we lookat the culture differences (Figure 1), we can see that Chinese society is characterizedby significantly more uncertainty avoidance, power distance, and collectivism.The savings patterns in these two major economies correlate with our regression model.

6. ConclusionsThis paper contributes to the current literature by offering a comprehensive analysisof the role of cultural attributes in the recent economic crisis. Cultural traits are onefactor that influences the savings rates in a particular country. We found, for example,that the level of saving increases when a society has higher uncertainty avoidanceand that higher collectivism in a society and power distance also lead to higher ratesof saving. This can be demonstrated by comparing China and the USA. The savingrates in China are much higher than the saving rates in the USA and might beexplained by the cultural differences because Chinese society has much higheruncertainty avoidance, power distance, and collectivism than the USA.

Figure 1.Culture differences: Chinavs USA 3.00

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References

Carl, D., Gupta, V. and Javidan, M. (2004), “Power distance”, in House, R.J., Hanges, P.J.,Javidan, M., Dorfman, P.W. and Gupta, V. (Eds), Leadership, Culture, and Organizations:The GLOBE Study of 62 Societies, Sage, Thousand Oaks, CA, pp. 513-63.

Chui, A.C.U. and Kwok, C.C.Y. (2009), “Cultural practices and life insurance consumption:an international analysis using GLOBE scores”, Journal of Multinational FinancialManagement, Vol. 19 No. 4, pp. 273-90.

de Luque, M.S. and Javidan, M. (2004), “Uncertianty avoidance”, in House, R.J., Hanges, P.J.,Javidan, M., Dorfman, P.W. and Gupta, V. (Eds), Leadership, Culture, and Organizations:The GLOBE Study of 62 Societies, Sage, Thousand Oaks, CA, pp. 602-53.

Du, W., Green, L. and Myerson, J. (2002), “Cross-cultural comparisons of discounting delayed andprobabilistic rewards”, The Psychological Record, Vol. 52, pp. 479-94.

Hofstede, G. (1980), Culture’s Consequences: International Differences in Work-related Values,Sage, Newbury Park, CA.

Hofstede, G. (1983), “The cultural relativity of organizational practices and theories”, Journal ofInternational Business Studies, Vol. 14 No. 2, pp. 75-89.

Hofstede, G. (1997), Culture and Organization: Software of theMind, McGraw-Hill, New York, NY.

House, R.J., Hanges, P.J., Javidan, M., Dorfman, P.W. and Gupta, V. (2004), Leadership, Cultureand Organizations: The Globe Study of 62 Societies, Sage, Thousand Oaks, CA.

Hsee, C.K. and Weber, E.U. (1999), “Cross-national differences in risk preference and laypredictions”, Journal of Behavioral Decision Making, Vol. 12, pp. 165-79.

Shoham, A. (2009), “The savings crisis and international business”,AIB Insight, Vol. 9 No. 2, pp. 7-9.

Shoham, A. and Rosenboim, M. (2009), “China’s new approach to ODI in Africa: a model for agovernment seeking natural resources”, in Alon, I., Chang, J., Fetscherin, M., Lattemann, C.and McIntyre, J.R. (Eds), China Rules: Globalization and Political Transformation, PalgraveMacmillan, Basingstoke, pp. 216-30.

Triandis, H.C. (1993), “The contingency model in cross-national perspectives”, in Chemers, M.M.and Ayman, R. (Eds), Leadership Theory and Research Perspective and Directions,Academic Press, San Diego, CA, pp. 167-88.

Very, P., Lubatkin, M. and Calori, R. (1996), “A cross-national assessment of acculturative stressin recent European mergers”, International Studies of Management &Organization, Vol. 26No. 1, pp. 59-86.

Wright, G.N., Phillips, L.D. and Wisudha, A. (1983), “Cultural comparison on decision makingunder uncertainty”, in Deregowski, J.B., Dziurawiec, S. and Annis, R.C. (Eds), Expiscationsin Cross Cultural Psychology, Swetz & Zeitlingear BV, Lisse, pp. 387-402.

Yates, J.F. and Lee, J.K. (1995), “Chinese decision making”, in Bond, M.H. (Ed.), Handbook ofChinese Psychology, Oxford University Press, Hong Kong.

Further reading

House, R.J. and Javidan, M. (2004), “Overview of GLOBE”, in House, R.J., Hanges, P.J., Javidan, M.,Dorfman, P.W. and Gupta, V. (Eds), Leadership, Culture, and Organizations: The GLOBEStudy of 62 Societies, Sage, Thousand Oaks, CA, pp. 9-28.

Corresponding authorAmir Shoham can be contacted at: [email protected]

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