Sliding Savings Rate

Households Hit by More Spending With Dwindling Income

It has been often said that consumption is a virtue in a capitalistic society. All the goods are made for consumption. It goes without saying that there is no production without consumption.

But, in the 1980s when the nation achieved rapid industrialization and brilliant economic growth, South Koreans had been advised to save more than they spent in order to prepare for their future. We still cannot forget an adage that a penny saved is a penny earned.

No one can deny that the driving force behind what is Korea now was the high household saving rate. The country had succeeded in creating a virtuous cycle of saving more, investing more and producing more for the export-oriented economy. The nation's savings rate reached the world's highest of 25.2 percent in 1988. But the rate has continued to drop since then. In 2000, the figure fell to 10.7 percent, edged out by Belgium that recorded 14 percent.

The saving rate slid further to 6.4 percent in 2001, when the figure tumbled below the 10-percent mark for the first time in 20 years. And the rate hit the lowest point of 2.1 percent in 2002 when the country was battered by the worst credit card default crisis. The downward march was attributed to the fact that people increased their spending at a faster pace than their income growth. That is, consumers had less room for saving money due to soaring costs for housing and private tutoring for their children.

According to a report by the Organization for Economic Cooperation and Development (OECD), South Korea is likely to record a savings rate of 3.2 percent next year. The figure is the lowest among the 17 OECD member states. It is the same as that of Japan. The rate is in stark contrast with the United States and other advanced Western countries in which consumers have been increasing savings since the outbreak of the worldwide financial and economic crisis in September 2008.

The low savings rate is certain to have a negative impact on the economy as it is feared to reduce resources for investment and thereby put downward pressure for economic growth on the long-term basis. Thus, it is necessary for households to keep a balance between spending and savings in a bid to improve their financial structure and contribute to providing more capital for economic growth. It is time to revive the virtuous cycle of increased savings, boosted investment and robust economic growth.