Home » Business » Cultivate a National Culture of Saving [column]

An economy is composed of three economic agents households, firms and the Government.

Each of these agents has got a role to play in economic development with their ability to save being of outmost importance as explained below.If households fail to save sufficiently to cover future expenses, the outcome is very simple: they will not have sufficient funds to cover planned future big expenses andor they will struggle financially during retirement. They will eventually become dependent on others or the Government.

If firms do not save sufficiently, they will not have the capital available to finance replacement or expansionary investment. This will put a damper on the company’s efficiency and growth potential, as well as its ability to employ more people.

If Government does not save, it simply means it will have no money available for fixed investment in social infrastructure (schools, hospitals, low cost housing, etc) or physical infrastructure (roads, bridges, airports, etc). The implications of underinvestment in people and infrastructure is easy to understand and need no further explanation

In sum, if the above three economic agents of an economy such as that of Zimbabwe fail to make meaningful savings the end result will be diminishing economic growth and development with far wide implications on the ability of the country to achieve the targets set out in economic blue prints such as the ZimAsset.

Over the long term the only real solution to our capital needs is to provide it ourselves through a higher level of savings.

Indeed, experience elsewhere around the world, especially in Asia, has shown that high savings rates typically tend to be associated with higher economic growth and employment and less cyclical economic volatility.

As the Asian experience has shown, saving is important to the economic progress of a country because of its relation to investment.

If there is to be an increase in productive wealth, some individuals must be willing to abstain from consuming their entire income. Progress is not dependent on saving alone there must also be individuals willing to invest and thereby increase productive capacity.

Our experience as a country has also shown that we cannot indefinitely rely on a large volume of foreign capital as a key source of financing local investment. Foreign investors tend to disappoint at critical junctures and any bit of bad news or concern over the health of the economy or worries about future policy direction can result in a sudden withdrawal of these funds.

The total amount of foreign capital has been declining on the perception that the local operating environment was not conducive hence putting into jeopardy the various investment initiatives that country had embarked on.

It is in light of such developments that the various economic agents should develop a culture of savings so that we are covered on a rainy day. Along the same lines, it is important to understand that what we term lines of credit, foreign capital etc. are basically savings that have been generated in other jurisdictions hence we cannot indefinitely rely as a country on foreign savings.

These foreign savings strictly speaking should come to complement locally amassed savings for economic development. The Asian tigers have really shown that it is possible for the country to develop on the basis of their own savings and as Zimbabweans it is high time we pursue similar strategies.

Given the sensitiveness of international flows they become unpredictable hence cannot be the basis for the long term development of the country. There is need for the country to generate sufficiently high rate of domestic savings so as to void the risks associated with international credit flows into countries.

Domestic savings are hence a hedge against the uncontrollable risk from the world economic crisis which might cause havoc in the countries that might be too exposed because of relying on external inflows.

Countries with low internal savings rates must borrow from abroad, which results in a debt service burden but currently this is not possible for Zimbabwe because of the huge debt overhang. The challenge with borrowing externally is that there is a reciprocal obligation to repay at some point in time which is only possible through savings.

Inability of an economy to repay the foreign obligations leads to the country being blacklisted as a risky country.

Resultantly any borrowing that the country can attempt to make comes at a punitive interest rates meant to cover for the risk profile and various stringent conditions of servicing of the obligations becomes difficult hence falls in a circle.

In sum domestic savings mobilisation is important to sustain economic growth in Zimbabwe especially using domestic financial resources. Domestically, the ability of the various economic agents to save will make the Zim Asset programme a success as it is hinged on using mostly domestically available resources.

In the spirit of this programme domestic resources should anchor the program with foreign assistance coming to complement the savings mobilisation by the various economic agents in the country.

Sanderson Abel is an Economist. He writes in his capacity as Senior Economist for the Bankers Association of Zimbabwe. For your valuable feedback and comments related to this article, he can be contacted on abel@baz.org.zw or on numbers 04-744686 and 0772463008.

Source : The Herald