Saving for Development How Latin America and the Caribbean Can Save More and Better by Eduardo Cavallo and Tomás Serebrisky

1 Saving for a 
Sunny Day

Why should people—and economies—save? The typical answer usually 
focuses on the need to protect against future shocks, to smooth con-

sumption during hard times, in short, to save for the proverbial rainy day. 
This book approaches the question from a slightly different angle. While 
saving to survive the bad times is important, saving to thrive in the good 
times is what really counts. People must save so they can invest in their 
own and their children’s health and education, live productive fulfilling 
lives, and end their days in comfort and peace. Firms must save so they 
can grow productive enterprises that employ more workers in better 
jobs to produce quality goods for domestic and international markets. 
Governments must save to build bridges, highways, and airports that 
support a productive economy, to provide quality services such as edu-

cation, health, water, and sanitation to their citizens, and to assure their 
senior citizens a dignified, worry-free retirement. In short, countries must 
save for a sunny day—a time when everyone can bask in the benefits of 
growth, prosperity, and well-being.
To have even a chance of reaching that sunny day, this book argues 
that Latin America and the Caribbean must save more and save better. It 
contends that saving in the region is too low and that the savings that do 
exist can be used more efficiently to enhance growth and development. 
The purpose of this book is to raise awareness about the urgent need to 
promote more and better saving to address several of the region’s most 
pressing issues including lackluster growth, low investment rates, and 
the growing need to care for an aging population.
Why should economies care about how much they save? After all, if 
economies can always borrow from abroad, then national saving rates 
should not matter. However, borrowing from abroad may be more costly 
and may raise the risk of crises. Foreign financial flows are fickle, and 
history shows that they dry up just when they are needed most. Latin 

America and the Caribbean is no stranger to the currency and financial 
turmoil generated by external debt. Importing saving from abroad is far 
from a perfect substitute to boosting saving at home.
Given the limits to external borrowing, countries that save more 
also invest more. In other words, there is a positive association between 
national saving and domestic investment (investment in the real econ-

omy, not purely financial investment). From a policy perspective, it is 
useful to understand which drives which: whether higher saving leads to 
more real investment or whether better investment opportunities lead to 
increases in saving. This book argues that causality runs in both direc-

tions. Or more precisely, that Latin America and the Caribbean suffers 
from two reinforcing problems: low saving supply and weak investment 
demand. Solving these problems and breaking the vicious cycle between 
them demands concerted and swift policy action to increase saving and 
investment.
Savings: The Sum of its Parts
National saving is the sum of all the individual saving decisions of the 
agents in the economy: households, firms, and government agencies. 
While a macroeconomic analysis is instructive, in the end saving deci-

sions are made by individuals and reflect the information they have and 
the many real-life considerations that may influence their behavior. To 
fully understand the problem of saving, it is imperative to break down 
and analyze how the savings generated by households, firms, and gov-

ernment agencies is aggregated and channeled to the economy.
The financial system is the middle man: it moves the resources from 
people who save to those who need the resources to invest. Small and 
inefficient financial systems, like those in Latin America and the Carib-

bean, jack up the costs for financial services, which in turn depress both 
saving (by reducing effective returns to savers) and investment (by 
increasing the cost of credit to borrowers). In such contexts, households 
that lack access to good financial savings instruments may opt to save in 
other ways—by accumulating cash or jewelry, by buying durable goods, 
or by investing in the family firm— which may not be the most produc-

tive. These mechanisms reduce the collective efficiency with which the 
existing savings are used. A good financial system not only mobilizes 
savings but also pools them and allocates them efficiently to finance 
the projects with the highest returns. If savings are not pooled within a

Saving for Development How Latin America and the Caribbean Can Save More and Better by Eduardo Cavallo and Tomás Serebrisky