Under the Mattress: Saving to be Safe in LAC
Resilience is the ability to return to a predetermined path after experiencing a shock. Households experience many different types of shocks—ranging from illnesses to droughts to severe storms. The ability to recover quickly from shocks is more difficult for poor or vulnerable families, given that they likely have fewer assets on which they can draw during difficult times and thus have less capacity to cope with risk. By recovering quickly, we mean not only returning to previous consumption levels. Resilience also requires being able to protect and rebuild levels of assets that impact the productivity of the household in the long-term. For example, in case of an emergency, a family might forgo preventive healthy behaviors (such as check-ups or the consumption of healthy food) in order to smooth consumption. However, this may come at a cost of deteriorating health—in which case, the household’s vulnerability is in fact increased.
Indeed, millions of families around the world are just one illness away from poverty. Think, for example, of a poor family which relies on agricultural income for survival. If one member suffers an accident and is unable to work on the farm during the planting or harvesting season—this family may lose the primary income source upon which they depend so heavily.
When facing shocks, households adopt strategies to smooth their levels of consumption—so that in periods when they have less, they are still able to meet their basic needs. The extent to which these strategies protect household assets, particularly human capital, is critical for the household’s well-being and resilience in the future. An important way in which households smooth consumption is through savings. However, as this #GraphForThought shows, households in LAC are less likely to use savings in an emergency than households in other regions.
While in Europe, 5 in 10 households rely on their savings in the case of an emergency—in LAC, less than 2 in 10 households do the same. In LAC, rather, the majority of households turn to their family or friends for support. However, in the case of an aggregate shock—such as an earthquake or a hurricane—this mechanism evaporates. One of the primary reasons why so few people in LAC rely on savings in the case of emergency is likely that few people in LAC have any savings to begin with. In LAC, only 37% of individuals were able to save any money in 2016. For the poorest 40% of the population, this number is 28.4%, compared to 43.6% for the richest 60%. In OECD countries, the average reaches 73% of individuals.
What is driving this low level of savings in LAC? While an easy explanation may be that people do not save because they earn too little, the data does not necessarily suggest this is the case. For example, LAC has a far lower rate of savings than poorer regions such as Sub-Saharan Africa—where the share of households that save reaches 54%.
Interestingly, while 37% of individuals save in LAC, only 12% of individuals do so in a financial institution. This is striking considering that in LAC 55% of individuals have a bank account. While this is low compared to OECD countries (where over 94% of households have bank accounts), the question remains why the majority of those who do save are choosing to do so outside of formal financial institutions.
This discrepancy perhaps reflects big a push from governments in the region for financial inclusion by banking the poor. However, as a recent IADB publication explores, while those efforts might have addressed the issue of access, by creating bank accounts for those without them, they might not have addressed some issues which determine whether households use them for savings or not. The publication identifies among the main reasons why these financial inclusion strategies have not resulted in increased savings as: (i) lack of trust and regulation (for example, in Chile—despite being a country with a very developed financial market—almost half of those who do not hold a bank account cite lack of trust as a reason), (ii) high transaction costs (for example, high monetary or labor costs involved in managing a savings account), (iii) information and knowledge gaps (for example, the majority of the population in Chile, Colombia, Guatemala, Mexico and Peru do not understand the term “interest rate”), (iv) social pressure (for example, when extended networks of family and friends impose demands on households’ accumulated stock of savings); and (v) behavioral biases (for example, a lack of self-control or present-biased decision-making).
Additionally, access to formal bank accounts is uneven in LAC. Indeed, the gap in access to banking between the poorest 40% and the richest 60% in LAC is four times higher than in developed economies. While in OECD countries the rich and the poor have bank accounts in virtually the same proportion, in LAC countries there is a 20 percentage points difference between the access of those of at the bottom of the income distribution and those at the top. Moreover, education and labor status also determine who gets included financially.
Policies to promote banking for the poor have succeeded in many countries around the world, such as India and Chile (Pradhan Mantri’s Jan-Dhan Yojana and Cuenta-RUT, respectively). The remaining, and perhaps more difficult, challenge is to actually change savings behavior across LAC. Indeed, there’s considerable room to improve formal savings by incentivizing households to move their money from informal mechanisms (or from under their mattress) to bank accounts. Although this wouldn’t solve the savings problem in the region, which has multiple causes, it could be a first step towards the ultimate goal of building resilience.