Saving and investment

In mainstream economics, there is an assumption that savings will be equal to investment in an economy.

This formulation is present in the textbooks used in university economics courses. Many people learn the macro- economic models from those textbooks and hardly ever question them. They go out into the world with a very simplistic view of the economy that often blinds them to reality. We often hear the argument that the investment rate in South Africa is relatively low because South Africans do not save.

This statement makes the problem seem so obvious that it has become a truism. According to this view, all South Africans have to do to increase the rate of investment is to stop spending so much and to save. Of course, this statement has very little meaning to the large proportion of poor people living from hand to mouth. Too many people, including the unemployed and the working poor, struggle to buy bread. Yet they are asked by the Reserve Bank and the National Treasury to tighten their belts and to save.

Of course, Tito Mboweni and Trevor Manuel are not directing their appeals for belt tightening to the poorest South Africans – they are appealing to the middle class and the affluent. However, it is Mboweni’s and Manuel’s procyclical macroeconomic policies that have allowed these very people to dig themselves into a deep hole with regard to debt.

In an economy where there is huge poverty and unemployment, and a huge backlog in services provision, government is going to have to use taxpayers’ money to help the relatively affluent members of society to crawl out of their deep debt holes. The banks that earned huge fees by helping people to dig themselves into these debt holes are going to walk away smiling.

An important question we have to ask ourselves is whether a sudden turnaround, where South African households start saving a lot, would change the situation with regard to private-sector investment in South Africa. Will these savings, as mainstream economics teaches, automatically be converted into investment?

Most households do not invest directly when they have savings. Most put their savings into banks or retirement funds. A few will buy stocks and bonds. The first point to under- stand here is that most savers are not investors. The banks and pension fund managers make the investment decisions. We have seen that the entire global financial system is plagued by their poor decisions. The South African government has chosen not to influence the investment decisions of the financial institutions.

Many CEOs of financial institutions will tell you that they are very careful with the money of their clients. Government has prudential regulations that are supposed to ensure that finan- cial institutions do not act imprud- ently. However, the assurances by the CEOs of financial institutions and the prudential regulations do not assure us that our savings will be safe.

We are also not assured that our savings will be used to increase investment in the economy. And, perhaps, most importantly, we have no assurance that our savings will be used on investments that will promote long-term sustainable economic growth in South Africa.

The world is currently suffering a painful lesson about the short- term, selfish, imprudent decision-making of financial institutions when they are not adequately regulated.

An important lesson for South Africa is that our savings will continue to be misallocated and be directed towards inflating speculative bubbles.

Government reforms should ensure that our savings are used for long-term investments that will secure the future standard of living of the savers and, at the same time, build a more equit- able and stronger economy.