Five Reasons Why Latin Americans Save Less

Well being and life satisfaction
Financial Economics
Poverty - Inequality - Aid Effectiveness

Are Latin Americans less prone to save? When compared to regions with similar levels of economic development, why does Latin America fare poorly in terms of saving rates? Though several factors shape saving rates, a few are particularly important in generating these gaps at the household level. In particular, past experiences, psychological traits, and even genes or language may say much about the region’s ability to save.

Here are some of the main features particularly characteristic of Latin Americans that may explain our lower saving rates:

1.  Lack of trust in financial systems. The region’s long record of financial crises and bank runs may be one of the main reasons why Latin Americans don’t trust banks. The 2001 crisis is still a vivid memory in Argentina. The same holds true for the 1994 Mexican devaluation, which had huge spillovers across the region. Indeed, according to the Global Financial Inclusion (Global Findex) database, lack of trust in banks is the second most important justification for people in Latin America and the Caribbean not to have a formal savings account; only “lack of money” is cited more often. In fact, the figure below shows that Latin America and the Caribbean, followed closely by Europe and Central Asia, is the region with the greatest distrust in financial systems, especially when compared to East Asia and the Pacific.

Frisancho, 2015

2. Low financial literacy. Developing financial literacy is much needed in Latin America, as its present state is disappointing and may even exacerbate distrust in banks. After all, it is hard to ask someone to trust financial institutions if they understand very little about them and the workings of financial systems. According to a study, the majority of the population in Chile, Colombia, Guatemala, Mexico, and Peru doesn’t understand terms such as “interest rate” and “inflation.”

3. Genetic propensity. Several studies have tried to get to the bottom of the differences in saving behaviors across countries and individuals to understand if there is a natural propensity to save related to genes, for example. A study of fraternal and identical twins in Sweden concluded that genetic differences explain about a third of the variation in individual savings rates. They also find that those who save less are also more likely to smoke or become obese and argue that part of this correlation relates to intrinsic traits such as lack of self-control and difficulties in delaying gratification. If certain genetic traits shape time-preferences, it may well be that the tendency to procrastinate diverges across populations. A new IDB surveys shows that about a third of the urban population in Mexico, Peru and Brazil can be considered hyperbolic discounters: people whose consumption choices today reveal greater impatience than their choices in the future. This time inconsistency is a particularly important factor in long term decisions that involve a compromise today. Hyperbolic discounters in Peru, for example, are 14 percentage points less likely to save than people who show the same degree of patience irrespective of when the decision is made.

4. Language Use? A more recent line of research focuses on “linguistic relativity:” Does the structure of a language affect the ways in which its speakers view the world? Can language influence the way we think and/or our non-linguistic behaviors such as saving? A recent study evaluates whether speakers of languages that disassociate the present from the future have a harder time saving. It finds, for example, that the Chinese mark less strongly the differences between present and future events than Colombians, which tend to make a very clear distinction. It concludes that the degree of future-time references (FTR) intrinsic in each language is highly correlated with the way in which speakers deal with household and individual decisions such as health and saving choices. In fact, in terms of national saving rates, linguistic relativity may play an important role: countries with a strong FTR language save about 5 percentage points less per year than comparable countries with languages that make a weaker distinction between the present and the past.

5. Inertia and lack of attention. These two psychological traits also impact saving choices. For example, when choosing a restaurant to have dinner many people tend to go to the same places or order the same dishes time after time. This preference for the status quo is a safe choice that may lead to the development of habits. If, for whatever mix of reasons, Latin Americans have a lower propensity to save, it may be difficult to break that path and overcome inertia. On the other hand, inertia can be used to promote saving habits among children and youth, as another recent post explained. Limited attention, on the other hand, means that some people may have trouble forecasting their future consumption, or they might overlook details when trying to do so. In Latin America, where people are used to facing more uncertain and riskier situations than in other regions, it can be harder to make forecasts or financial plans for the future.

These are a few of the factors that influence people’s saving behavior in Latin America and the Caribbean. Understanding them is a first step toward attacking the problem of low saving in region.

These are some of the issues that have inspired the Research Department of the IDB to focus the 2016 edition of its flagship publication, Development in the Americas (DIA), on saving.

This article was first published in the Ideas Matter blog, on Diciembre 1, 2015.

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