Inability to save hampers development

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Johannesburg - With Christmas gone and the new year approaching and bonuses paid to many workers, retailers are once again smiling all the way to the bank.

And while consumers may spend with abandon, once the festive season is over, they are likely to struggle to comprehend how to make it through January, much less actually purchase essentials, equip school children for a new year, and put aside money as a precaution for tough times.

And as is the case every year, newspapers have dedicated much space to cautioning consumers against over-spending, and encouraging prudence and savings. Much of this is likely to fall on deaf ears.

Much rhetoric abounds about the “need to save”, and certainly, responsible financial behaviour is a skill to foster, but this rhetoric falls short of acknowledging the limited capacity to meet daily needs, much less saving in situations of dire poverty.

Novel thoughts on how to structure a society’s savings and insurance frameworks are frequently met with opposition based on little more than favouring what already exists because it is known.

The level of savings forms part of the process of nation formation and social cohesion because its key function – internally funded economic growth – is what contributes to the development of a more prosperous society. South Africa’s present culture of low savings must be seen as a critical obstacle to the country’s development, and the reasons underpinning this impediment to growth need to be scrutinised.

Saving is impossible for some, who don’t earn sufficient money to meet basic living standards. For others, saving is only done begrudgingly because most people over-value immediate gratification.

Compulsory saving schemes (such as provident and pension funds) and stringent government policy exist for this reason. Wealth and income determine the potential to save and one’s use of credit. Credit is useful but poses risks, particularly in an environment where consumer protection is not effective. Regulation is inadequate to ensure individuals are left with a living wage because of debt collection through employers.

The emergent black middle class has an asset deficit, which fuels consumption. According to the Research Group on Socio-Economic Policy (Resep) at Stellenbosch University, their expenditure habits are not pathological. It is irresponsible use of credit that poses huge risks to individual livelihood and prosperity if one is flirting with bankruptcy and insolvency.

In line with the Mapungubwe Institute for Strategic Reflection’s (Mistra) objectives of spearheading new thinking, the institute’s research project on savings sought to contribute towards a better understanding of economic, social and institutional factors that contribute to the low saving rate South Africa is experiencing. The research, which is being concluded for release early next year, examined the savings behaviour of South African households and companies; the differing challenges savings poses to various segments of the South African population to obtain credit; and the state’s role in savings and income security and the incentives it provides through either policy or legal intervention.

The project explored three aspects: the individual’s interaction with financial and social institutions represented by the credit market; the welfare state; and the linkages between South Africa’s internal financial market and the global market. Taken together, these aspects help build a story around the future-orientation of our nation and how this orientation is being shaped.

A key finding of Mistra’s study is that income and wealth determine whether one saves. Both formal and informal saving – through banks or collective savings schemes, also known as stokvels – is best predicted by a household’s income and assets. Loans, vehicle finance, and credit utilisation are also strongly associated with saving. In other words, wealth and income buy financial integration, the potential to save, and the potential to borrow.

We live in a country where income is exceedingly unequally distributed, and the potential to save for a great number is practically impossible. The pressure of middle-class aspirations for individuals with little to no wealth is also significant. The rise in unsecured lending poses a significant risk to certain individuals as they try to close the gap in consumption between poor and rich.

Regarding the utilisation of unsecured lending, Finscope’s 2013 survey presentation highlighted a number of individual stories about the use of loans. It becomes apparent from this study that the “irresponsible use of credit” and the need for “consumer education” should not be used to dismiss the plight of individuals who utilise prohibitively expensive debt to finance day-to-day needs, and expenditure on things such as children’s education as well as durable goods.

And while consumer protection legislation exists to reduce harm to vulnerable consumers, it is costly to exercise these rights. Furthermore, Bobby Godsell, former AngloGold Ashanti chief executive, recently brought the issue of salary deductions for debt collection (garnishee orders or emoluments) to prominence in relation to the uprising at Marikana. This fuels discontent.

If employers were not allowed to collect debts on behalf of lenders, it might shift some of the responsibility back to lenders to assess risk accurately.

The Stellenbosch research group also derived some insight into the behaviour of the emergent black middle class. These households tended to be educated and affluent black households, with fewer assets (homes, vehicles and other durable appliances) than counterparts of other races.

Needing to furnish homes and get around, the newly established members of the middle class have an asset deficit to overcome. The researchers posited that this explains lower spending on categories such as holidays and insurance in comparison to the established class.

It seems that notions of irresponsible consumption spending are not entirely applicable to these emerging households. But the difficult position they find themselves in as a function of historic material disadvantage poses a significant risk to individuals utilising unsecured credit. With the dismal performance of consumer protectors, particularly the National Consumer Commission, it seems only the individual can mitigate the risk of the consumer credit binge.

* Kannemeyer is a researcher in the Mapungubwe Institute for Strategic Reflection’s Faculty of Political Economy.

Sunday Independent


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