Developing countries seeking to follow the successful investment-led growth model blazed by China often run into a problem – high domestic borrowing costs that render infrastructure too expensive to build.
This can push countries to borrow more cheaply from abroad, leaving them potentially vulnerable to a debt crisis if this money is suddenly withdrawn, or, instead, remain mired in poverty.
For many countries, the way out of this dilemma is simply to have fewer babies, at least according to one economist.
“Over half the increase in Chinese household savings since the 1970s can be attributed to the one-child policy,” said Charles Robertson, chief economist at Renaissance Capital, an emerging markets-focused consultancy.
Mr Robertson’s thesis is that, broadly speaking, “people with lots of kids don’t save money”. This is not only because they have more dependants to support and therefore less ability to save, but also because people with fewer children need to save for retirement because they are less able to rely on their offspring to provide for them in their dotage.
As a result, he said there was a “surprisingly high correlation between fertility rates and bank deposits to GDP – a correlation which holds in the 1990s as well as today – and across a great many countries.”
Rencap’s analysis found a 53 per cent correlation between a country’s fertility rate, measured by the number of children per woman, and its bank deposits-to-gdp ratio, as seen in the first chart.
This finding is strikingly similar to that of an IMF working paper published in December that found that in China “demographic shifts alone account for half of the rise in household savings, suggesting that it has been the most important driver”, as the savings rate rose from 5 per cent in the 1980s to 23 per cent today, 15 percentage points above the global average.
China’s bank deposits are equal to 210 per cent of GDP, compared with 33 per cent in Kenya, a typical frontier market country in this regard.
Indeed, a 2018 Bank of England working paper went further still, concluding that demographic change could explain three quarters of the 210-basis point decline in interest rates in advanced economies since the early 1980s.
Higher bank deposits should, everything else being equal, mean an increased supply of loanable funds, which should in theory lead to lower interest rates. Rencap’s analysis suggests this relationship does, indeed, hold across both developed and emerging economies.
The correlation is, admittedly, not particularly strong, yet Mr Robertson said that, barring Vietnam, “all countries with bank deposits above 90 per cent of GDP have low singledigit interest rates and all countries with one-year interest rates above 5 per cent in 2017 have bank deposits below 90 per cent of GDP, so high nominal interest rates that deter investment only occur in countries with a low level of bank deposits”.
Perhaps more importantly, the relationship between bank deposits and real interest rates is somewhat stronger, with those countries with deposit-to-gdp ratios of at least 60 per cent in 2013 having average oneyear real interest rates of 0.9 per cent between 2014 and 2018, compared with 2.1 per cent for countries with deposits of between 20 and 30 per cent, as the second chart shows.
Those states with higher bank deposits have also seen higher levels of investment in the subsequent fiveyear period.
