top of page
BM logo 6.png

The Asian Savings Habit: Growth Fuel or Trap?

BY Nethra Venkatraman / December 06, 2025 
DESIGNED BY Anuya Shindolkar

Examining the dual impact of high saving rates: From Asia’s industrial transformation to the challenges of overcapacity, weak demand and the need to shift focus.

Asian countries have long carried the reputation of being high-saving societies, their prudence being attributed to a blend of cultural values, demographic patterns and deliberate government policies. Savings have always been viewed as the bedrock of development by various economists and theories. Their importance was acknowledged in financing investment in various industries and infrastructure which directly brought about modernisation as well as the stable position it offered a country against external economic shocks. The ‘thriftiness’of Asian societies has played a key role in shaping the region’s economic trajectory. This is observed across different contexts, right from the early stages of postwar reconstruction in Japan, to China’s state-led industrialisation and India’s recent growth path. However, the same tendency that once fueled expansion, is now generating newer dilemmas. A persistent high saving rate can manifest into weak domestic consumption ie. people are unable to spend their income which results in reduced demand, both of which directly have an impact on a nation’s GDP. The result is a deflationary pressure wherein the prices are extremely low and which has a drastic impact on the country’s economy and leads to industrial overcapacity as they are unable to generate revenue.

​

At the same time, countries that have a more consumption-heavy pattern, may enjoy an immediate  growth spike but risk under-investing in infrastructure that is required for long-term development. This saving-consumption paradox raises a critical question: Is Asia’s saving habit still a path leading to prosperity, or has it become a constraint on growth? 

This saving-consumption paradox raises a critical question : Is Asia’s saving habit still a path leading to prosperity, or has it become a constraint on growth ?

unknown via Pinterest (2).png

Illustrated: Unknown, via Pinterest  

Tracing back to some decades ago, where the Great Depression in 1929 had severely affected the entire world. Global production came to a halt, which caused a strong deflationary pressure on the prices of basic commodities. Factories shut down and approximately 30 million workers lost their jobs worldwide. This crisis shattered the classical belief that markets could fully self correct. Economist John Maynard Keynes argued that in such a situation where people stop spending money, economies come to a stand still and an active intervention of the government is essential to restore growth. This fueled a new focus on the deeper dynamics of long-run growth. Roy Harrod (1939) and Evsey Domar (1946) extended Keynes’ insight by asking what would allow an economy to not only recover but expand steadily over a longer period of time. They argued that savings and investment are central to this process. Savings provides the funds for investment. These investments create capital which increases the ability to produce more. In their framework, the ‘warranted growth rate’ depended on how much a society saved and how efficiently the investments translated into output. For countries recovering from war, colonialism or chronic underdevelopment, this provided a compelling recipe: save more, invest more, industrialise faster. 

For countries recovering from war, colonialism or chronic underdevelopment, this provided a compelling recipe: save more, invest more, industrialise faster. 

The influence of the Harrod-Domar Model framework extended well beyond theory. Several Asian countries incorporated their ideas to shape their early development strategies. However, the reason this model was so powerful for Asia was not only its economic logic but also the region’s pre-existing thrift culture. Much of the Asian thrifting habit draws from century-old Confucian traditions which cultivate moral emphasis on frugality, restraint and careful management of family resources, especially in East Asian countries. The core of this culture is a strong risk-averse mindset emphasising foreboding, which directly translates to higher precautionary savings. Practices such as the ‘Doctrine of the Mean’ promote moderation, making households extremely cautious and less willing to take financial risks, preferring to store their wealth securely. 

unknown via Pinterest (20).jpg

Illustrated: Unknown, via Pinterest  

Familism is also an influential aspect, where financial decisions are considered to have impacts on extended families. Expectations of supporting elderly parents, heavy investments in children’s education, and the added pressure of accumulating savings for housing and events like marriage intensify the need to save more. In more modern contexts, this has created patterns of competitive savings where families save more to improve/maintain their family’s social prospects. These cultural habits are also deeply persistent and intergenerational. A research conducted shows that cultural and social norms are root determinants of saving behaviour, shaping household decisions. The study involved a natural experiment involving three generations of immigrants in the United Kingdom. By observing immigrants from different countries of origin but living under the same institutional, fiscal and welfare systems, the researchers were able to attribute differences in saving patterns to cultural inheritance. The result showed that immigrants from a high-saving background saved significantly more than immigrants from countries with a pattern of low-savings, even after living in the UK for decades. Moreover, this effect persisted up to three generations, long after leaving their original environment. This study reinforces that saving behavior is deeply rooted in cultural patterns that have been passed through generations, with parents and grandparents passing down beliefs about thrift, financial responsibility and discipline. (Costa-Font, Giuliano, Ozcan, 2018).

3d1818f1002234973c17e0e94482d27f.jpg

Illustrated: Juliet Rowe, via Pinterest  

This deep-rooted cultural propensity to save created ideal conditions for the Harrod-Domar model to be implemented in Asian countries. The model’s requirement of generating higher savings for ensuring long-term sustained growth aligned almost perfectly with societies already oriented to spending cautiously and having more responsible financial behaviour. In the decades after World War II, the success of this model became more apparent when countries like Japan managed to generate exceptionally high savings to finance large-scale investments in infrastructure and industries, resulting in Japan’s ‘economic miracle’ (1950s to 1970s). Similarly India’s Five Year Plan, especially the 2nd Five Year Plan channeled domestic savings into heavy and basic industries, focusing on capital accumulation. However, as economies changed and structural contexts shifted, the cultural and institutional environment continued to prioritize high savings. This brought out limitations of the framework to the surface. By treating capital accumulation as the primary engine of growth, the model assumed that every unit of investment added would create proportional gains in the output it helped produce, and public demand for the output produced would also increase. However, in reality, with every additional unit of increase in investment, the amount of gain in output was not proportional, in fact it was lesser, commonly known as diminishing return in output. Moreover, in economies where saving norms remained high, the increased production was not met with an increase in public demand. This practice contributed to what was later known as the ‘Asian Savings Trap’, where the culture that once was the cause of exceptional growth, now began fueling excess investment. This excess investment turned out unproductive, to the extent of causing oversupply and stagnation in some sectors. 

The tension created by the savings-investment imbalance became more visible as Asian economies matured. China illustrated the result of applying the same model at a larger scale. It entered the reform era severely short of modern infrastructure, industrial capacity and urban housing, making large-scale investment essential for national economic revival. These structural roots help contextualize the importance of capital accumulation to China, and why there was imminent need for the country to increase its capital exponentially, through domestic savings. China’s development model has thus always been dependent on investments to finance its expanding industrial base and digital infrastructure. This model also satisfies the broader objective of the state to maintain economic sovereignty and directing resources toward strategic sectors like defence and urban development.

Illustrated: Unknown, via Pinterest  

Through capital accumulation, China is able to achieve economic growth as well as political stability. Another pressure intensifying China’s need for capital is the rapid demographic transition. China’s working-age population peaked in 2013 and has been contracting since majorly due to the One Child Policy it had in place. (Zeng, Knight, Liang, 2013). This implies that fewer workers are entering the labor force and the population growth is rapid. China was forced to transition from a labor-intensive method of production to capital-intensive methods. At the same time, the increasing aging population added to China’s fiscal burden (greater spending on healthcare, pensions, etc.) requiring an increased need for public and private investment. For several decades this model performed exceptionally, the alignment between the populations’ thrifty behaviour and China’s need for capital made China uniquely capable of sustaining the required investment levels for a long time. But, this alignment also created structural vulnerabilities. As the economy grew further, the demand for output did not rise fast enough to absorb the vast quantity of output being produced (Al-Haschimi, Spital, 2024). The state also continued incentivising and rewarding the volume of investment rather than its outcome (OECD, 2019). Cultural norms of saving, combined with the demographic pattern and strategic sectoral investment produced conditions under which China’s once successful savings-driven model began causing imbalances that continue to affect their economy till today.

Cultural norms of saving, combined with the demographic pattern and strategic sectoral investment produced conditions under which China’s once successful savings-driven model began causing imbalances that continue to affect their economy till today. 

India represents a different aspect of the thrift paradox. India’s post-independence development strategy was built around the recognition that the country suffered from an acute shortage of physical capital. After decades of colonial extraction, India was left with a weak industrial capacity, limited infrastructure, low productivity in agriculture and almost no domestic manufacturing base. Capital accumulation became extremely essential for the country to progress further. The Nehruvian state-led model solely focused on investments made in heavy industries, transport, electricity and steel, through the Bombay Plan (1944) and the Five Year Plans. Growth was further aided by prioritising capital goods  production and incentivising national savings.

Illustrated: Unknown, via Pinterest  

The struggle of India was however not caused by an inadequate saving rate, but the sheer volume of investment required to modernise an economy suffering from decades of neglect, enough to now become self-sufficient. The saving patterns of Indian households has been roughly between the high-20 and low-30 percent of the overall GDP over the recent years, while also exhibiting more volatility than a straight upward trend (World Bank, n.d.). The increased savings is a result of cultural expectations, lack of a social safety net, expensive education, and healthcare. However, this positive rate masks the persistent conversion gap where the available funds do not fully translate into completed infrastructure, financed factories or expansion of industries. This weakness manifests in several aspects of India’s systems. A large share of public and private projects face long delays, with cost and time overruns or stalled implementation, which holds up investment flows and committed capital (MoSPI, 2009). At the same time, the financial system that is supposed to channel household savings into long-term projects does not function smoothly. When the IL&FS group  (Infrastructure Lending & Financial Services) collapsed in 2018, there was a severe lack of funding for non-bank lenders almost overnight. These lenders played major roles in financing roads, mid-sized firms, and housing, so the shock created a sudden credit shortage across these sectors. India’s financial system often struggles to turn household savings into productive investment. Large data gaps, delays and inconsistent reporting across banks, NBFCs, cooperatives, insurers and capital-market institutions make it difficult to track household financial assets accurately and to direct them efficiently into productive investment. This aspect is precisely where India diverges from the H-D model logic. The model considers it implicit that when a country saves more, all those savings automatically turn into investment, which in turn always assures growth. The outcome of this is that India cannot fully realise its growth rates as predicted by this saving-investment model. This also connects to the broader paradox of thrift. If households keep saving more out of fear, uncertainty or cultural habits, but the economy cannot convert those savings into productive investment then the high savings can have a reverse effect on growth, slowing down the process.

The outcome of this is that India cannot fully realise its growth rates as predicted by this saving-investment model.

In the case of another major Asian country. Japan entered the post-World War II period as a country with severely damaged infrastructure, and minimal industrial capacity. The bombings had destroyed nearly half of all factories, transport networks were broken, coal and steel output had collapsed and inflation was out of control. At the same time, Japan had a large, young population returning for war, increasing the demand for jobs, and housing. With the loss of substantial infrastructure, Japan also lost the external sources that once supported its industrialisation. The only viable option to rebuild the economy was massive internal capital formation financed by domestic savings. The government of Japan thus actively shaped a system that channeled household savings into productive investment, using the postal savings system, directed credit, and industrial policy to funnel funds into priority sectors like steel, ship-building, automobiles and electronics. Over time, the economy matured and the easy gains from capital accumulation were exhausted. When the financial crisis hit in the 1990s, GDP growth collapsed from an average of 4-5% to nearly 1%. Japan’s population was ageing sharply, causing a rapid shortage in the labor force and softening the consumer demand. Firms collected large cash reserves but lacked areas of investment that were profitable. In such an environment, even extremely high savings cannot sustain growth. These structural effects meant that from 1990 onwards, growth slowed, and Japan entered the ‘lost decades’ period of stagnation. Through analyses conducted by the IMF and OECD, it can be pointed out that there is a pattern to how matured economies with high past savings struggle when the pace of productivity, consumption demand or population growth slows down.

Illustrated: Unknown, via Pinterest  

These structural effects meant that from 1990 onwards, growth slowed, and Japan entered the ‘lost decades ’ period of stagnation.

The stagnation Japan faced in the late 1990s, highlights the blind spots of the Harrod-Domar model being the failure of demand, demography and productivity. Households, firms, and the government, were saving at the same time, through times of contracting fiscal policies, the total spending in the economy fell. Normally, the central bank would equalise the effect through reducing interest rates to stimulate demand again, however the interest rates were already low. This made it impossible to offset the fall in consumption and investment. Japan’s trajectory showcases the initial power and eventual limits of the Harrod-Domar model, but also brings to light the impact when a culturally persistent behavior collides with the limits of monetary policy, leading to eventual stagnation of the economy.

Analysing China, India and Japan, a crucial pattern emerges. The Harrod-Domar Model works best in economies having a labor surplus, scarce capital and large unmet demand. Once these conditions fade, saving-led growth can be seen to reduce growth and have an opposite effect. In early stages of development, physical capital has high marginal returns, but as societies urbanise incomes increase and industries mature, growth increasingly depends on productivity, innovation, skills and demand rather than the number of assets. This shift is central to understanding why Asia’s saving habit no longer clearly results in economic growth. The original model assumes that capital accumulation is the main engine of development. However, today, the engines of growth are very different - digital platforms, software, data, intellectual property, artificial intelligence, research and development, and human capital. Not only do these factors have large impacts on the economy, but being intangible assets, they do not follow the same depreciating pattern as physical assets. These assets often in fact, generate increasing returns and scale rapidly even without proportional investments (McKinsey & Co., 2013).

As growth in the 21st century shifts towards innovation and intangible assets, the effectiveness of saving-led strategies inevitably declines.

Asia’s long standing culture of thrift undeniably fuelled the region’s early breakthroughs, but its limitations have become increasingly visible as economies have matured. The experiences of China, India and Japan show that high savings alone cannot guarantee sustained growth when demand slows down, populations age or financial systems become flawed. As growth in the 21st century shifts towards innovation and intangible assets, the effectiveness of saving-led strategies inevitably declines. The paradox for Asia, thus, is to preserve the stability that savings provide while ensuring those savings are actually channeled into productive, transformative investment.

Illustrated: Unknown, via Pinterest  

Keywords 

​

​Asian Savings Habit, High Savings, Paradox Of Thrift, Harrod Domar, Capital Accumulation, Weak Demand, Overcapacity, Thrift Culture, Precautionary Savings, China Investment Model, India Savings Gap, Japan Stagnation, Ageing Population, Innovation Economy, Intangible Assets, Economic Transition

​

​References​​​

 

  1. Bhattacharya, P. B., & Sahoo, P. (2019). Fiscal deficit and government debt in India: A fresh perspective (Working Paper No. 271). National Institute of Public Finance and Policy. https://www.nipfp.org.in/media/medialibrary/2019/06/WP_271_2019.pdf

  2. Boianovsky, M. (2015). Beyond capital fundamentalism: Harrod, Domar and the history of development economics (CHOPE Working Paper No. 2015-12). Center for the History of Political Economy (CHOPE), Duke University. Beyond capital fundamentalism: Harrod, Domar and the history of development economics

  3. Costa-Font, J., Giuliano, P., Ozcan, B. (2018). The cultural origin of saving behavior. PLoS One, 13(9), e0202290. https://doi.org/10.1371/journal.pone.0202290 

  4. Council of Economic Advisers. (1958). The Japanese Economic Miracle: Lessons for Developing Countries [Article]. IMF Staff Papers, 6(1). https://www.elibrary.imf.org/view/journals/024/1958/001/article-A002-en.xml

  5. Dalgaard, C-J., Erickson, L. (2006, December). Solow versus Harrod-Domar: Reexamining the aid costs of the first Millennium Development Goal (IMF Working Paper No. 06/284). International Monetary Fund. Solow Versus Harrod-Domar: Reexamining the Aid Costs of the First Millennium Development Goal

  6. East Asia Forum. (2013, April 19). China’s declining working-age population. East Asia Forum. China’s declining working-age population | East Asia Forum

  7. Easterly, W. (1999). The ghost of financing gap: How the Harrod-Domar growth model still haunts development economics (Policy Research Working Paper No. 1807). Washington, DC: World Bank. The ghost of financing gap

  8. Economics Discussion. (n.d.). The Harrod-Domar Economic Growth Model (With Assumptions). The Harrod-Domar Economic Growth Model (With Assumptions)

  9. European Central Bank. (2024). The evolution of China's growth model: challenges and long-term growth prospects. The evolution of China’s growth model: challenges and long-term growth prospects.

  10. International Monetary Fund. (2012). Financial reforms and capital flows in emerging market economies (Working Paper No. 12/277). https://www.imf.org/external/pubs/ft/wp/2012/wp12277.pdf

  11. International Monetary Fund. (n.d.). The mobilization of savings for growth and development in developing countries. Retrieved October 29, 2025, from https://www.researchgate.net/publication/5104945_The_Mobilization_of_Savings_for_Growth_and_Development_in_Developing_Countries

  12. Lv, Y., Yang, L., Xiao, A., Zhong, N. (2025). Confucian culture and household financial asset allocation: Based on a biomechanical mechanism perspective. Molecular & Cellular Biomechanics, 22(3), Article 1141. https://ojs.sin-chn.com/index.php/mcb/article/view/1141/845 

  13. McKinsey Global Institute. (2014). The internet's sweeping impact on growth, jobs, and prosperity (SSRN Abstract No. 2422988). https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2422988

  14. Ministry of Statistics and Programme Implementation. (n.d.). Statistical year book India (Chapter 7: Basic Economic Data). Government of India. https://www.mospi.gov.in/sites/default/files/Statistical_year_book_india_chapters/ch7.p

  15. Modigliani, F., & Cao, S. L. (n.d.). The Chinese saving puzzle and the life-cycle hypothesis. The Chinese Saving Puzzle and the Life-Cycle Hypothesis

  16. Organisation for Economic Co-operation and Development. (2019). OECD economic surveys: China 2019.OECD Economic Surveys: China 2019

  17. Patra, B., & Das, P. (2018). Analysis of trends in gross domestic and household savings and its components in India. Journal of Commerce and Management Thought, 9(2), 227–250. https://doi.org/10.5958/0975-5942.2018.00018.6

  18. Pettis, M. (n.d.). China’s problem isn’t excess capacity, but insufficient demand. Financial Times.China’s problem is excess savings, not too much capacity

  19. Press Information Bureau, Government of India. (2009). Report of the High Level Committee on Estimation of Saving and Investment. https://www.pib.gov.in/newsite/erelcontent.aspx?relid=48297&reg=3&lang=2

  20. Rosete, V. R., & Vandenberg, H. V. (2019). Extending the Harrod-Domar Model. American Review of Political Economy, 11(2). Vandenberg | Extending the Harrod-Domar Model | American Review of Political Economy 

  21. Sherry, B. (n.d.). Global Great Depression. OER Project. Global Great Depression.

  22. The Berkeley Economic Review. (n.d.). The Japanese economic miracle: Interpreting it from today's perspective. The Japanese Economic Miracle

  23. Vandenberg, H. & Rosete, A. R., (2019) “Extending the Harrod-Domar Model”, American Review of Political Economy 11(2). Vandenberg | Extending the Harrod-Domar Model | American Review of Political Economy 

  24. World Bank. (n.d.). Gross domestic savings (% of GDP) - India [Data set]. World Bank Open Data. Gross domestic savings (% of GDP) - India

  25. World Bank. (n.d.). GDP growth (annual %) - India [Data set]. World Bank Open Data. GDP growth (annual %) - India

  26. Yoshioka, S., & Kawasaki, H. (2016). Japan's high-growth postwar period: The role of economic plans (ESRI Research Note No. 27). Economic and Social Research Institute, Cabinet Office, Government of Japan. Japan’s High-Growth Postwar Period: The Role of Economic Plans

DISCOVER MORE STORIES
unknown via Pinterest _edited.jpg

The Reliance Blueprint: From Petrochemicals to Digital Empire

DECEMBER 01

BY AVNI VIJAYWARGI

FreepikviaPinteresr (1)_edited_edited.jpg

Mongolia's Dutch Studies: A case study

NOVEMBER  25

BY SNEHA DEKA

Davide Bonazzi via Pinterest .jpg

Monetising Memory: When Identities become Assets 

NOVEMBER  15

BY NETHRA VENKATRAMAN

The views published in this journal are those of the individual author/s and do not necessarily reflect the position or policy of the team behind Beyond Margins, or the Department of Economics of Sophia College for Women (Autonomous), or Sophia College for Women (Autonomous) in general. The list of sources may not be exhaustive. If you’d like to have the complete list, email us at beyondmarginssophia@gmail.com

© 2025 by Beyond Margins. Department of Economics, Sophia College (Autonomous)

bottom of page