Tuesday, 23 February 2010

Why - “It’s the economy, stupid” - doesn’t work to explain the current crisis

We’ve spent a lot of time on this blog talking about society’s progress, well-being and gender equality, while much of the rest of the world has been focused on society’s failure, financial crisis and economic downturn. If you haven’t been living under a rock for the last two years, you’ve probably asked yourself why we’re in the deepest recession since the 1930s, why Lehman Brothers went bankrupt so quickly and why terms like “sovereign and corporate default” are now common topics of daily conversation? I am more than willing to bet the answers you’ve come up with relate more or less exclusively to economics and finance. In this blog entry, we argue that we should dig much deeper into our societies to understand the often irrational motives underlying people’s choices. Goodbye, Homo Economicus, hello, Homo Sociologicus??

What’s the story: A big argument these days in newspapers like the Financial Times and the Economist surrounds the question of who is to blame for “global imbalances.” Simply put, one part of the world saves too much, while another part consumes too much. These “global imbalances” leave a huge pile of savings in the east and deep holes of debt in the west, making everybody worse off and leaving the world economy exposed to the types of massive re-adjustment currently underway in the present economic crisis. The conventional medicine suggested by economists and finance folks suggests there should be more social spending and domestic consumption by the big savers, while the big spenders should consume less and take fewer risks.

However, according to a new paper on Chinese savings we may be missing one important point. Research by Shang-Jin Wei and Xiaobo Zhang shows that in the case of a big saver like China it is actually son preference that may be at the root of the excessively high Chinese savings rate. Centuries-old traditions mean that Chinese families' have long preferred a male child. Today, in a China that has both prenatal ultrasound technology, and a strict one-child policy, parents can actually make their choice happen. With fatal consequences: a huge amount of sex selective abortions are skewing the sex ratio at birth, which today counts 122 boys born for every 100 girls in China (see more on Missing Women). As these boys grow into men, one-fifth of them may be unable to find a wife. The preference for baby-boys creates scarcity of future women and potential wives, leading to higher bride prices, which results in higher household saving rates. Put simply: the more money a household can put aside today, the higher the likelihood of finding a wife tomorrow. While this is of a particular concern in the vast Chinese hinterland, China is by no means alone. For example, India has a tradition of son preference and also has elevated savings rates. In fact when looking at son preference and savings across 74 countries using OECD data, we see that those countries that exhibit son preference are much more likely to have higher savings rates. The association between degree of son preference and saving rates implies that questions of global financial stability require more than the standard macroeconomic prescriptions to solve.

What does this all mean now for progress and the financial crisis? Well, it shows that reducing a complex phenomenon like “global imbalances” to a purely economic or financial problem, risks treating only symptoms, while not dealing with root causes. “It’s the economy stupid”, might help to win elections, but it is not a good recipe for addressing our world’s most pressing challenges and problems.

JJ & Chris

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