Savings mobilization is critical for individual and societal welfare. At the individual level, savings help households smooth consumption and finance productive investments in human and business capital. At the macroeconomic level, savings rates are strongly predictive of future economic growth.
Yet barriers to saving exist for many, particularly the world's poor. Market frictions, including transaction costs, lack of trust, and regulatory barriers, hinder the supply of savings products. Only 22 percent of adults worldwide report having saved at a formal financial institution in the past 12 months, and 77 percent of adults living on less than $2 a day report not having an account at a formal financial institution (Demirguc-Kunt and Klapper, 2012). Mounting evidence also suggests that various demand-side constraints depress saving even among those with access. Social claimants, lack of knowledge, and/or behavioral biases may lead to sub-optimal saving.
Despite these barriers, evidence suggests that the poor have substantial (latent) demand for savings. Household surveys indicate that the poor do have some surplus that they use for non-essential expenditures (Banerjee and Duflo, 2007). Similarly, detailed “diary” studies document complexity in poor households' financial portfolios and highlight the demand for small irregular flows to be aggregated into lump sums for household or business investment (Rutherford, 2000; Collins et al., 2009). Even when formal savings products are unavailable or unaffordable, the poor often save under mattresses, in informal groups, and/or in livestock. These patterns do not square easily with classic poverty/liquidity trap explanations for persistent poverty.
Does removing barriers to saving produce tangible benefits? Microfinance institutions (MFIs) and many donors and policymakers are betting that the answer is yes, in a (double-)bottom-line sense. Microfinance institutions are often broadening their initial focus on microcredit to now include the provision of savings products.1 MFIs have 72 million microsavings clients to date, compared to 94 million microcredit clients (Microfinance Information Exchange, 2012). The recent literature measuring the impacts of savings access starts with Burgess and Pande (2005), which uses a natural experiment on bank expansion (i.e., both credit and savings) in India from 1977 to 1990 to identify a 2.22 percentage point reduction in rural poverty per 1 percentage point increase in the share of savings held by rural banks. More recently, field experiments are producing a growing body of evidence on impacts (Ashraf et al., 2006a, 2010; Brune et al., 2013; Dupas and Robinson, 2013a, 2013b; Prina, 2013). These studies show large positive impacts on various outcomes from improvements in access to and usage of formal savings, and hint at more transformative impacts than found thus far in similar evaluations of microcredit (Banerjee, 2013).
Although savings is becoming a priority in the development agenda, it is not clear a priori that under-saving is a widespread problem and that everyone should save more, at least in the form of additional financial assets or investment. Policymakers and practitioners often overlook the possibility that the best route to saving more is to pay down existing debt. In other cases the utility benefits of current consumption are high. On balance, several studies in more-developed countries have found that people get their savings and consumption decisions about right over the life-cycle (Scholz et al., 2006), although debate continues to rage on this question (Poterba et al., 2013). Despite widespread interest in, for example, “nudging” people to save more, it is not clear whether, where, to what extent, and for whom such nudges would be desirable.
We group potential explanations for “undersaving” into five categories. By “undersaving” we mean a lower level of savings than one would have in a world with perfect markets (perfect information, zero transaction costs, and perfect competition amongst financial institutions) and fully attentive, fully rational, fully consistent, etc., decision-making. The five categories of frictions are as follows: transaction costs, lack of trust and regulatory barriers, information and knowledge gaps, social constraints, and behavioral biases. We review theory and evidence on each in Section 2. These categories are not meant to be exhaustive, or even mutually exclusive; rather they are meant to organize our thinking about what could go wrong in markets for savings vehicles, and about how to fix any inefficiencies or inequities that would motivate (policy) intervention.
We largely restrict the review in this paper to the literature from studies in developing country sites, with footnotes pointing readers to relevant related work from the U.S. or other more-developed countries. In certain cases we highlight studies from more-developed nations, when we think they offer novel insights into the design of interventions or directions for future research.
We focus our review on less-developed countries (LDCs) for several reasons. First, from a humanitarian perspective, the potential social impact from solving market problems is likely greater, given starker poverty and market imperfections (e.g., less competitive formal markets for savings products). Second, development economics has a deeper recent literature, using experimental methods to establish causality, on the relative effectiveness of different financial products.2 This empirical focus on attribution often allows more precision in terms of testing theories of consumer behavior. Our focus is on just that: using experiments to help test across theories of consumer choice and financial decision-making over time. This often results in the study being embedded inside what one may call a “product test.” The LDC focus also includes a broader range of inquiry; for instance, credit market frictions and social claimants, which are less likely to be relevant in the U.S. and other more-developed countries. We emphasize, however, that we do not argue that LDC denizens are fundamentally more “behavioral” than their counterparts in richer countries (although they may be more subject to scarcity impinging on decision-making along the lines of Shah et al. (2012) and Mani et al. (2013), as we discuss below).
Section 3 synthesizes a few key patterns from the body of evidence collected so far on savings constraints, and the impacts of relaxing them, in developing countries. Section 4 discusses measurement and methodological issues involved in accurately estimating impacts of expanded access to and usage of savings products. Section 5 outlines a way forward, compiling a set of open questions from our detailed reviews in the previous sections. We focus on identifying needs and opportunities to improve products offered by the supply side and choices by the demand side, in order to improve long-term welfare.
Throughout, our approach to applying research to policy development is principally one of “diagnose and treat.” We seek to develop evidence on what might be failing in markets for savings products—whether those failures are supply-side, demand-side, and/or policy-side—and to flesh out the implications of that evidence for future research and policy. We think this approach is more justifiable, on ethical grounds, than a paternalistic presumption that people should save more. It is also more likely to produce cost-effective solutions than a “ready, fire, aim!” approach to pursuing policy objectives that makes strong (often implicit) assumptions about the causes of particular problems and the best ways to solve them. With this diagnose and treat approach in mind, we now dive into our five classes of constraints/potential failures.