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Chapter 4
SAVINGS AND THE CREDIT MARKET
Saving Rates
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Solow (1956) model states that increasing the
saving rate and decreasing the population growth
rate increases GDP per capita. If pop. grows faster
than the growth in total GDP, then GDP per capita
declines. This is because when pop. grows fast,
there is less capital per worker. This decreases
productivity and output=income per capita.
Saving Rates in the World
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Highest savings rates are observed in SE
Asia. In 1999-2003 period China %42, S.
Korea %31, Japan %27, Malaysia 44%. SE
Asia’s high growth in the post-WW2 is
primarily due to capital accumulation.
Poorest sub-saharan Africa: ~%10
Indonesia %24, Nigeria %25, (Perkins et al.
ch. 10, 2006)
Saving Rates in Turkey
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TR : 1989-2003 period about %20. Before 86,
%10-15. Half of China: very low, why?
Saving Taxonomy
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Components of saving: Fig. 10-3 in Perkins et
al.
Stylized Facts About Saving Rates
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We observe the following patterns:(Perkins et
al. 2006):
1. Within a particular country at a given time, saving
rate tends to increase with household income,
2. Within a particular country over time, saving rates
are roughly constant, more so in developed than
developing countries,
3. Across countries, saving rate is lower for the poorest
countries and higher for middle and higher income
countries. Fig.10-1 in Perkins
Theories on Saving Rates
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Life Cycle Hypothesis of Saving (Modigliani1970)
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Agents save when young, and dissave when old. When
population is growing, there are more young than the old,
so more saving than dissaving. Also, if GDP is growing,
young saves more than the old dissaves. Both points:
growth rate of total GDP positively affects saving rate.
Demographics: The increase of working pop. increases
saving. If below 15 and above 65 (retired) increases,
saving declines.
If life expectancy increases, saving increases because
agents save for old age.
Existence of a well-established, state-sponsored social
security system tends to reduce saving (also reduces
pop. growth).
Theories on Saving Rates

Modigliani says higher (GDP) growth rate
increases saving rate, but the direction of
causality is not clear: others claim that a
higher saving rate increases the growth rate.
Fig. 10-2 in Perkins et al.
Theories on Saving Rates
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Other theories: Keynesian Absolute Income
Hyp.
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The Relative Income Hyp.
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As aggregate disposable income rises, the
national propensity to save increases, propensity
to consume declines.
Cons. and saving does not only depend on
current income but also on previous income and
cons.
Permanent Income Hyp. (Milton Friedman)
Factors that Determine Saving Rates
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Two types: “Ability to save” and “Willingness to Save”.
Factors of Ability to Save are:
 Depends 70% on GDP per capita(Hussein and Thirlwall
1999). If income per capita is small, then basic necessities,
food and clothing occupies most of the budget, hence
saving is small.
 expectations of income growth. If one expects higher
income in the future, today’s saving rate might decline.
 dependency ratio (DR). DR measures following: on
average how many dependents each working person has to
support? High income: 0.5, low income: 0.8. In TR, DR is
falling and recently it is 0.5. In 1960s, DR was above 0.8.
Figure 4.8 in Akin
Factors that Determine Saving Rates
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Factors of “Willingness to Save”
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Real interest rate increases saving up to some
level, but after that level, it does not.
The depth of the financial system, diversity of f.
instruments and confidence in the system
increases saving. Credit volume / GDP
Factors that Determine Saving Rates
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Education:
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Families decrease saving during education of
children. One reason is they depend on govt.
support and in order to get scholarships, they
report smaller savings.
Credit(=Financial) Markets
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Channels funds from savers to borrowers. Critical
for development, starting a business, growing,
education, smoothing consumption.
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Private sector credits / GDP: shows how
deep financial system is.
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low income: %15, middle income: %40
high income: %110
In TR, %15-20 until 1995, since then %15-25
Problems in Credit Markets
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Asymmetric Information (AI): The borrower
has more info. than the lender about risks of
the borrower’s project. AI leads to two
problems:
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Before the loan contract: Adverse Selection:
more risky borrowers tend to apply more for loans.
After the loan contract: Moral Hazard: borrower
engages in actions that make it less likely to repay
the loan. Lender cannot perfectly monitor
borrower’s actions. Borrower could engage in too
risky activities and could default.
Problems in Credit Markets
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To reduce adverse selection and moral
hazard problems?
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Need to collect credit history information about
individuals and firms. If more info. is produced,
credit potential increases because confidence
increases. If cost of info. collection increases,
interest rate and cost of credit increases.(why loan
sharks charge high interest?)
Immigration to cities prevent efficient data
collection.
Problems in Credit Markets
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To reduce adverse selection and moral hazard
problems?
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Reduce underground economy. Firms report smaller
income, wages and assets to avoid taxes like insurance
premiums, corporate taxes or to avoid paying min. wage.
Or they record wealth on relatives or as personal wealth
rather than as firm’s capital. But when firms need to
borrow, they cannot report their actual wealth as collateral.
To Reduce Moral Hazard:
 Credits: Life Insurance, guarantor(s), collateral
 Car Insurance: differing premiums for different risk
groups based on age, marital status, children, discounts
based on accident-free and ticket-free years.
Credit Markets
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Loan Sharks: Underground credit system
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High info. collection costs
Enforcement highly costly in case of default
Oligopolistic markets, not much competition.
Plus cost of evading taxes
Result of all: very high interest rates.
What Could the Govt. Do?
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Must bring the budget into balance: Easier said than
done. A major impediment in credit markets in
developing countries incl. TR is high borrowing
requirement of the govt. If govt. demands so much
credit, completely consumes banks’ credit supply, drives
up interest rates, crowds out private borrowers. If govt.
budget is balanced, interest rates decrease, cost of
credit decreases
What Could the Govt. Do?
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A govt. sponsored social security system tends
to decrease willingness to save. Plus, it
increases govt. budget deficits. Could increase
the retirement age in TR is 50(?). Could
increase working period or link retirement pay &
health services to premiums paid. Could
Promote private pension systems.
What Could the Govt. Do?
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Microcredit systems: Could subsidize credit
to middle&low income group. Could require
banks to lend to these lower income groups.
Possible only if moral hazard problems are
solved?
Non-Governmental Institutions
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Grameen Bank example. Invented by Muhammad
Yunus. Started as a bank in Bangladesh. Makes small
loans to the poor without requiring collateral. 98% of the
borrowers are women.
Bank lends to a group of five borrowers. Each borrower
is a guarantor to the rest. Uses peer pressure to endure
repayment. The system worked successfully and default
rate was less than 5%. Loans for production, not
consumption activities.
Also used in TR. Master thesis by Muharrem Can at
Marmara Uni.
(http://en.wikipedia.org/wiki/Grameen_Bank)
Capital Accumulation in TR
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Figure 4.6: Capital expenditures/GDP ratio is
in %20-25 range in TR. Fell during the crises
of 1994 and 2001.
Private sector credits/GDP (Fig 4.9) is low.
Why?
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Shallow banking: Banks do not transform
deposits into credits (i.e. do “banking”), but only
profit from govt. bonds.
Because govt.’s debt burden and borrowing
requirements are sky high. High interest rates,
crowding out: govt. kicks private borrowers out.
Possible presentation topics
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In TR and many other countries, social
security system is the biggest hole in govt.’s
budget : What could be done?
Could systems like Gramen bank be applied
in TR, or are they already being used? What
are obstacles and could you propose a better
microcredit system?