Changes in consumption and savings pattern in the west and the east and its impact

Abstract

The recent credit crisis has exposed that the consuming spree by the Western economies like US and UK can‘t go on forever. After the crisis, the easy availability of consumers across the world has dried outsignificantly. The main reason for the consumption boom in the Western economies was the ease with which credit was available and because of this, people in these economies had very little reasons to save. In this study, we try to analyze the shifts in the consumption and spending patterns across the developed Western economies like US and UK and contrast these with the emerging economies in the East (India and China). The main reasons for choosing India and China as the comparison economies to US and UK are that both these economies have experienced high GDP growth ratein past decade, they are home to one third of world populationand from being a closed economythese two nations havegraduallyopenedup their economy to the world. The study shows that the household consumption has seen a huge surge in China and India. With financial reforms initiated by government in these two nations, the GDP has grown and people have more income at their disposal. This has induced greater consumptions by household. On the other hand, in US and UK, the consumption has grown at a constant rate of 5-7% and the trend of high consumption by people in these countries has continued. After the crisis, we see a change in the pattern where due to lack of credit, the consumption in US and UK has reduced dramatically. On the other hand the consumption in India and China has dipped but not as much as in US and UK. The Government spending has also seen an increase in India and China. The reason behind this is that Government has beenspending heavily on developing infrastructure and other developmental projects in these countries. While in US and UK, till crisis the Government spending grew at a constant rate. After crisis, there was an increase in Government spending in US and UK because the Government has to bail out a lot of companies that were on the verge of bankruptcies.The lack of savings by Western economies and excess of savings by developing countries has been a matter of discussion for economists. We observe that the US andUK have very low household savings leading up to crisis while China has seen a huge surge in household savings. In case of India, the household savings have started to see a decline from 1994 but still Indians save a huge proportion of their income. It has to be seen whether the American and English households learn something from the crisis and start saving more as most of the households saw their savings being wiped out by this crisis. Some economists suggest that savings rate may touch 8-10% in US and UK while others are more skeptical on this. They suggest that the income growth may not be that high that people are able to save a lot, even if they desire so. India and China have witnessed a major increase in the corporate savings. This has been propelled by increased profitability of companies in these economies and lack of well developed markets from where money can be raised for funding. In India, savings from corporate have started dominating from 1995.It was during the crisis that the growing imbalances in the world were exposed. Western economies have been heavy consumers while Asian economies have been huge savers and this has created a global imbalance. India and China have also relied excessively on exports to fuel their growth. The slowdown in global economy has affected the export oriented companies. On the other hand, US companies are also suffering because of slow down in domestic consumption. Several companies have registered losses and some companies like GM, Ford have been on verge of bankruptcy because of lack of demand in domestic market.The study suggests that it makes sense to reduce the global imbalances and have more integrated global economy. The companies in US and UK will have to start thinking of China and India more seriously as these will be the future consumption hubs. Also people in these economies are witnessing increase in their incomes and there has been a shift in mindset towards more consumption than savings. On the other hand, efforts have to be made by the Governments inIndia and China to develop financial markets, social security systems etc so that people have lesser need to save and can borrow easily when need for money comes. This should be coupled with increase in savings by household in US and UK. They should realize that in times to come when the economy recovers fully, there will be a change in the way markets function and in future the credit may not be available that easily as before the crisis.