Thread by @AtifRMian

It has long been said about many developing countries that they have a "low saving rate problem"

But this is not a helpful diagnosis and in fact can give a very misleading interpretation

Growing up, I heard people say this about Pakistan as well. But it's wrong ...

The basic point is that Saving=Investment is an accounting identity that we impose

So if rate of investment is low, obviously "saving" will be low as well - *by construction*

The more interesting is the horse vs. cart question: Is saving constrained by investment decision?

i.e. is "saving rate" being kept low because the economy is unable to make investment happen?

The answer most-often is YES in the context of countries like Pakistan

e.g. consider agriculture, often a dominant sector in such countries

if we were to consider agriculture as an entire economy, the saving rate would appear to be very low

but that just reflects the fact that farmers are not investing much in agriculture

the real question is not "low saving", but "why are farmers not investing more?"

e.g. cotton farmers may get less than 1 ton per hectare in yield when yield can easily be doubled or tripled by using better seeds, more efficient watering, laser leveling etc

So the real question is, why are farmers not investing in these technologies to make more money?

The reason for this lack of investment is almost always structural. For example,

there may be a missing rental market for leveling or seeding technology that most individual farmers cannot afford to out-right own

Large feudal landlords may be hoarding land for political rents rather than agricultural efficiency

There may be a lack of local research facilities that can experiment with new technologies so local farmers can adopt them without a high-level of risk

etc. etc.

The bottom line is: don't call it a "low saving rate problem", as if people are just over-consuming.

Instead, think of it as an "under-investment problem" that requires solving bottlenecks and market failures, and building public institutions.