Tuesday, February 9, 2010

Department of Really Unintended Consequences

One important factor that set the stage for last year's financial crisis was the "global savings glut". Massive savings accumulated around the world, particularly in East Asia, which needed to be invested somewhere--that "somewhere" ended up being the US housing market*. Paul Krugman explains:
"The speech, titled 'The Global Saving Glut and the U.S. Current Account Deficit,' offered a novel explanation for the rapid rise of the U.S. trade deficit in the early 21st century. The causes, argued Mr. Bernanke, lay not in America but in Asia.

In the mid-1990s, he pointed out, the emerging economies of Asia had been major importers of capital, borrowing abroad to finance their development. But after the Asian financial crisis of 1997-98 (which seemed like a big deal at the time but looks trivial compared with what’s happening now), these countries began protecting themselves by amassing huge war chests of foreign assets, in effect exporting capital to the rest of the world."

The Chinese, in particular, provided a lot of capital. This begs the question, "why do the Chinese save so much?" Shang-Jin Wei, writing in VoxEU, has an answer:

"In my recent research paper with Xiaobo Zhang (Wei and Zhang 2009), we hypothesised that a social phenomenon is the primary driver of the high savings rate. For the last few decades China has experienced a significant rise in the imbalance between the number of male and female children born to its citizens.

There are approximately 122 boys born for every 100 girls today, a ratio that means about one in five Chinese men will be cut out of the marriage market when this generation of children grows up. A variety of factors conspire to produce the imbalance. For example, Chinese parents often prefer sons. Ultra-sound makes it easy for parents to detect the gender of a foetus and abort the child that’s not the 'right' sex for them, especially as China’s stringent family-planning policy allows most couples to have only one or two children.

Our study compared savings data across regions and in households with sons versus those with daughters. We found that not only did households with sons save more than households with daughters on average, but that households with sons tend to raise their savings rate if they also happen to live in a region with a more skewed gender ratio. Even those not competing in the marriage market must compete to buy housing and make other significant purchases, pushing up the savings rate for all households."

His thesis makes intuitive sense: if the relative supply of women decreases, they can demand more on the marriage market. Why settle for a man of modest wealth if a wealthier man is just around the corner? So families with male sons have to amass more wealth if they want to marry those sons off.

Unintended consequences are a reality for policymakers. I wonder if the Chinese officials who first devised the "one-child policy" ever thought it would have an impact on the country's savings rate, let alone global financial markets?

* This is not intended to "blame" East Asians for the financial crisis. They did not force anyone to make bad loans or underestimate the risks in the housing market. East Asian savings merely provided the capital necessary for the investment boom.

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