Countries, just like families, must save and invest more to grow rich

Nyeri is an awesome place with undulating hills, mild weather and friendly people, but when I visited the town some time back, something else also stood out; everywhere I looked, the matatus were branded 2NK Sacco.

The sacco essentially controlled the route with hundreds of vehicles, meaning that it had hired even more staff.

2NK stands for Nyeri, Nyandarua Karatina, so I was told. The sacco began in the early 2000s by matatu owners in the area.

The owners then ploughed back profits to grow the organisation.

INCOME GENERATION

Today, the sacco has grown exponentially and operates not only the Nairobi-Nyeri route but has also extended to Mombasa, Kirinyaga, Nyahururu, Thika, Nakuru and Eldoret.

The Sacco has created wealth for the members and eliminated poverty.

The world over, economists agree that for poverty to be eradicated, there has to be sufficient savings.

Incomes generate savings, savings create investment and investments create jobs; so the cycle goes.

To measure savings, we use the savings ratio; which is a quotient of dividing the national savings with the country’s income also known as the Gross National Product.

Its components are household, corporate and general government savings.

CHINESE ECONOMY
Kenya’s savings ratio currently stands at 14.38 per cent of GDP. With a GDP of about Sh5.7 trillion, this translates to a saving of about Sh800 billion.

Large as it sounds, the amount is still low given the international standard for developing economies.

One of the complex economies to understand is the Chinese economy.

Many studies have been done to trace its growth to tangible economic reasons without much success.

The world is still flabbergasted by the low consumption rate of the Chinese and the subsequent high savings ratio.

SAVING RATIO
According to the World Bank, China’s saving ratio stood at 43.1 per cent of GDP as at 2015. This was not an isolated case.

Its average ratio for the last 30 years has been 50 per cent. Interestingly, the bulk of the savings is from households.

India’s savings ratio is 34 per cent and Russia’s 20 per cent. Closer home, South Africa’s is 15.5 per cent.

Given these are the fastest growing economies globally; it is safe to conclude that a higher savings ratio portends greater economic benefits for a country.

Many economists believe China’s growth is fuelled by its high savings ratio.

A large percentage of investments going into businesses therein comes from the government.

LIVING STANDARDS

The Chinese government is using excess taxes and domestic savings to invest heavily in its economy.

The savings available to the government from investments mainly come from contractual savings; namely insurance and pensions.

Stories like that of 2NK Sacco are replicated across the globe as local savings build enterprises, provide solutions to social problems and foster development.

A higher savings ratio would lead to wealth creation for the household and better living standards.

Corporations enjoy a better cash flow with higher savings and greater financial stability.

NATIONAL SAVINGS
On the flipside, however, a higher savings ratio may result into the paradox of thrift.

The paradox means that a higher savings ratio will lead to a lower demand and lower consumption, which in turn means growth will be slowed down and the economy may shrink.

The USA has a savings rate of 19 per cent, over 20 points lower than that of China.

In return, the country’s growth figures are equally lower than China’s. Bottom line? Savings do more for the economy.

At a time when the stock market is underperforming, the obvious way out for our economy is an improvement on the national savings.

Savings can be increased by improving income or reducing expenditure.

POVERTY ELIMINATION

Incomes are expected to grow significantly by 2020, courtesy of the oil revenues.

On the flipside, the infrastructure development will help households and businesses reduce their expenditure significantly.

There is, however, need for attitude change for expenditure to reduce.

It is worrying that household consumption in Kenya stood at 103 per cent.

That means most Kenyans are spending all the money they earn and borrow some more to spend.

Vision 2030 foresees a rise of the savings ratio to 30 per cent to spur growth and eliminate poverty.

However, consistent Budget deficits do not inspire confidence of achieving this goal. However, stories like that of 2NK can motivate the nation into a better savings culture.

@Odhiamboramogi