SAN­TI­A­GO–Latin Amer­i­ca and the Caribbean faces a sav­ings cri­sis, with fis­cal and de­mo­graph­ic re­al­i­ties mak­ing the out­look worse in the com­ing years, ac­cord­ing to a new study by the In­ter-Amer­i­can De­vel­op­ment Bank (IDB).

The re­gion faces ma­jor fis­cal chal­lenges in the years ahead and the re­port ar­gues that more sav­ings is a key el­e­ment to en­sure both eco­nom­ic growth and re­silience.

The gross na­tion­al sav­ing rate in Latin Amer­i­ca and the Caribbean was just 17.5 per cent of GDP be­tween 1980 and 2014, far be­low the 33.7 per cent for Emerg­ing Asia and 22.8 per cent for ad­vanced economies. On­ly sub-Sa­ha­ran Africa saved less, at 13.8 per cent.

The re­port analy­ses the rea­sons be­hind the re­gion's chron­i­cal­ly low sav­ings by house­holds and gov­ern­ments, and its eco­nom­ic im­pacts, from be­hav­iour­al bi­as­es among in­di­vid­u­als to struc­tur­al in­ad­e­qua­cies in fi­nan­cial sys­tems and fis­cal bud­gets. It al­so looks at in­ef­fi­cien­cies in sav­ings by firms, which in­vest too lit­tle.

On the up­side, the book pro­vides a roadmap for pol­i­cy­mak­ers and oth­er key ac­tors to re­verse the sit­u­a­tion to bring sav­ings rates more in line with suc­cess­ful economies. Even small gains in sav­ings could have big im­pacts. For in­stance, for every 1 per­cent­age point in­crease in na­tion­al sav­ing, do­mes­tic in­vest­ment in the re­gion in­creased by al­most 0.4 per­cent­age points. This means US$20 bil­lion in more mon­ey avail­able to fi­nance vi­tal in­fra­struc­ture projects.

"We can't just shrug off our poor sav­ings rates by say­ing we are bad at putting mon­ey away," said IDB chief econ­o­mist Jos� Juan Ruiz. "This book shows gov­ern­ments, busi­ness­es and even fam­i­lies have it with­in their pow­er to en­sure we have the re­sources we need dur­ing the bad times and the good times, and to care for an ag­ing pop­u­la­tion."

The book Sav­ing for De­vel­op­ment: How Latin Amer­i­ca and the Caribbean Can Save More and Bet­ter is part of the IDB's flag­ship De­vel­op­ment In the Amer­i­c­as se­ries. It lays out the big gaps in the sav­ings sys­tem in the re­gion.

The me­di­an bank­ing sys­tem has grown to pro­vide around 30 per cent of GDP in loans to the pri­vate sec­tor, much low­er than the bank­ing sys­tems of the me­di­an OECD or Emerg­ing Asia econ­o­my, which pro­vide over 80 per cent of GDP in loans to the pri­vate sec­tor.

House­holds, es­pe­cial­ly poor ones, have lim­it­ed ac­cess to fi­nan­cial in­stru­ments to save and face high costs when they do. The prob­lem is com­pound­ed by low trust in for­mal banks, wide­spread fi­nan­cial il­lit­er­a­cy and labour in­for­mal­i­ty. On­ly 16 per cent of adults re­port sav­ings through a bank, com­pared to 40 per cent in Emerg­ing Asia and 50 per cent in ad­vanced economies.

Pen­sion sys­tems are an­oth­er sav­ings con­straint. Less than half the pop­u­la­tion in Latin Amer­i­ca and the Caribbean saves for re­tire­ment through a con­trib­u­to­ry pen­sion sys­tem, a prob­lem that, un­less cor­rect­ed, will get worse as the pop­u­la­tion ages.

The sav­ings cri­sis means the re­gion is strug­gling to find the re­sources need­ed to fi­nance new and much-need­ed air­ports, ports, roads and oth­er in­fra­struc­ture that can boost fu­ture growth. The re­gion must in­crease in­vest­ment by be­tween 2 and 4 per­cent­age points of GDP per year (de­pend­ing on the coun­try) for decades to loosen this bind­ing con­straint to growth, or by be­tween US$100 bil­lion and US$200 bil­lion a year.

Fis­cal pol­i­cy has al­so im­pact­ed sav­ings. Gov­ern­ments spend too much on cur­rent ex­pen­di­tures such as sub­si­dies, and too lit­tle on cap­i­tal in­vest­ments. Re­cent eco­nom­ic down­turns have made this worse as gov­ern­ments have opt­ed to cut in­vest­ment spend­ing.

The book iden­ti­fies key ar­eas where gov­ern­ments could save more and spend in smarter ways. So­cial as­sis­tance, tax ex­pen­di­tures and en­er­gy sub­si­dies suf­fer from high "leak­ages," mean­ing they end up ben­e­fit­ting the rich more than the poor, to the tune of US$100 bil­lion per year. In­ef­fi­cien­cies in health and ed­u­ca­tion ac­count for an­oth­er US$50 bil­lion in po­ten­tial lost sav­ings per year. The mag­ni­tude of leak­ages is so im­por­tant that they can pro­vide suf­fi­cient funds to bring the re­gion's in­fra­struc­ture up to par with ad­vanced economies.

In ad­di­tion, gov­ern­ments are strug­gling to col­lect tax­es, with eva­sion es­ti­mat­ed at 52 per cent of po­ten­tial tax col­lec­tion in Latin Amer­i­ca.

The book out­lines how to in­crease sav­ings in ways that are sus­tain­able, but stress­es six im­por­tant steps that should be tack­led first.

�2 Gov­ern­ments need to ad­dress bro­ken pen­sion sys­tems, look­ing be­yond whether sys­tems should be based on in­di­vid­ual ac­counts or pay-as-you-go, but rather by rec­ti­fy­ing the un­der­ly­ing de­fi­cien­cies in each op­tion.

�2 Gov­ern­ments need to fo­cus on in­fra­struc­ture and cap­i­tal spend­ing, in part by de­sign­ing fis­cal rules and tar­gets that di­rect a high­er share of to­tal ex­pen­di­tures to pub­lic in­vest­ment, and work­ing to re­duce leak­ages in trans­fer pro­grammes that end up ben­e­fit­ting those that don't need it.

�2 Tax poli­cies need to be bet­ter tar­get­ed, by avoid­ing dou­ble tax­a­tion of sav­ings, first when they are gen­er­at­ed by the firm and then when dis­trib­uted to house­holds as div­i­dends, and en­sur­ing tax­es on in­come, cor­po­ra­tions and oth­er ac­tors work to in­crease the tax base and fall in line with in­ter­na­tion­al stan­dards.

�2 Gov­ern­ments (and banks) need to pro­mote house­hold sav­ings by ad­dress­ing the mul­ti­ple bot­tle­necks that dis­tort sav­ings, in­clud­ing tai­lor­ing sav­ing prod­ucts to the de­mand of po­ten­tial clients, cre­at­ing in­cen­tives to use the for­mal fi­nan­cial sys­tem, and en­sur­ing gov­ern­ments pay so­cial trans­fers through bank ac­counts, and us­ing tech­no­log­i­cal in­no­va­tions to help save, among oth­er mea­sures.

�2 Re­search shows that in­cen­tives to save are high­er when pro­duc­tiv­i­ty grows faster. One way of pro­mot­ing pro­duc­tiv­i­ty growth is by elim­i­nat­ing dis­tor­tionary tax­es and reg­u­la­tions that gen­er­ate small, in­for­mal and un­pro­duc­tive firms. This would en­sure that sav­ings are chan­neled to pro­duc­tive in­vest­ment op­por­tu­ni­ties.

�2 Banks need qual­i­ty in­for­ma­tion about po­ten­tial bor­row­ers, and the high cost of en­forc­ing fi­nan­cial con­tracts needs to be re­duced.

"The agen­da to get coun­tries to save more can seem over­whelm­ing, re­quir­ing us to act on many fronts," said IDB lead econ­o­mist Ed­uar­do Cav­al­lo, one of the book's co-or­di­na­tors and ed­i­tors. "It may seem more con­ve­nient to re­ly on for­eign­ers to pro­vide us with their sur­plus sav­ings. The book shows this is not a vi­able op­tion any­more. Sav­ing more and bet­ter will al­low us to stand on our own two feet and pro­vide re­sources for peo­ple to achieve their as­pi­ra­tions."