Do Our Financial Habits Matter for Shaping the Future?

Armenia has been enjoying some very strong economic growth, defying expectations, given the traumas experienced by the country over the last several years. While external factors like rerouted trade flows and the relocation of tech professionals amid the Russia-Ukraine conflict have certainly had an impact, a significant portion of the growth is attributable to domestic drivers. The booming housing sector, government infrastructure investments, and wage reforms and increases in the public sector have collectively fueled this economic upturn.

Economic cycles are a natural occurrence in most countries. When looking at the specifics of current growth, these boom times are not entirely unprecedented. Over the past few years, many government policies and economic reforms should have a long-term positive impact, particularly in creating a more even playing field and promoting spending in education, science and infrastructure. However, there are still important areas that need addressing. These areas could pose challenges to further improvements and create potential risks. As an example, the mix of rising real estate prices, increased construction activity, higher mortgages and consumer credit is a pattern seen elsewhere, often with less than optimal outcomes. This appears to have caught the attention of policymakers.

Improvements in the area of economic structure and investment orientation, particularly savings and investments, need to be addressed. One wouldn’t need to delve deep into economic theory to understand that future economic outcomes depend on current investment propensity. This includes investment in infrastructure, R&D, equipment and sciences.

But, when it comes to investment, Armenia ranks a disappointing 134th on average among countries. This trend has persisted over the last several decades. This number is somewhat misleading, as much of the investment has been supported by capital inflows from the Diaspora and funds allocated by international private and public sector organizations. While these inflows are generally positive, the need for improvement becomes even more evident without them.

As a result, the economy has for many years been mostly driven by consumption and imports. A quick visit to a supermarket reveals the challenge of finding locally produced items. There are even fewer productive capabilities in industries such as chemical and equipment, despite some improvements. And to state the obvious, for any substantial national defense and security efforts, these capabilities are critical.

Naturally, one might ask, why is this the case? Two important factors continuously hinder local production and competitiveness. The first is the local consumption-savings habits, and the second is the exchange rate. I won’t delve into the latter much, but it’s worth noting that the exchange rate has been overly strong for the past two decades. This has not only hindered exports but also made local products largely uncompetitive against imported goods and services.

Spending and savings habits are no less important. Our future is shaped by our current investments, and savings provide the funds to finance those investments. To state the obvious, our savings are either deposited in banks to become investment loans or they directly finance investments through the purchase of stocks or bonds from different companies. In Armenia, these savings often finance innovation and technology startups, a sector of critical importance. Even when  some funds flow out of the country as foreign investments, we benefit from a weaker exchange rate, stronger exports, and future income from abroad through dividends and interest. This approach has been a staple for many countries for years and is even practiced by nations leading in national competitiveness and export rankings.

However, Armenia’s savings performance is weak, ranking 149th globally. On average, we save 8% of our income, with many saving even less due to income distribution across different societal groups.

On the opposite side of the spectrum, countries like China and Singapore have experienced unprecedented development sprints. Eastern European countries and others closer to us have saving rates of 20-25%.

In Armenia’s case, limited savings have resulted in less available capital, higher interest rates, and ultimately, significantly higher hurdle rates for any investment project. Why would anyone invest in a business venture yielding 10%, if they can get a similar rate from a bank deposit?

It’s worth noting that public policy has gradually evolved. For instance, the pension reform implemented about a decade ago was a significant policy action. The anticipated mandatory health reform is another policy direction expected to positively affect both savings, health, and productivity outcomes.

Broader strategies such as increased investments in education and sciences should foster innovation and enhance the competitiveness of local goods. Yet these initiatives require time. It’s crucial to remember that even with greater innovation and productivity within the Armenian economy, it doesn’t necessarily guarantee improvements in local production or exports. Increased productivity could potentially boost consumption and imports due to higher incomes. Some research in consumption oriented countries points precisely in this direction. So financial habits also play a significant role.

This brings us to the main point. To an important extent, the availability of capital and the shape of our desired economy depend on our individual and collective actions. Our daily choices matter. More conscious spending and savings habits not only increase the availability of capital, reducing financing costs and leading to more investment projects and employment, but they also offer personal benefits. These habits go hand in hand with long-term thinking, personal wealth creation, and financial security. Additionally, we can decide which activities to finance and support ourselves.

Apart from data across nations, it’s not difficult to find anecdotal evidence of how social and cultural norms impact financial habits, which in turn affect investment and national welfare. The difference in financial customs is often due to factors such as the prevalence of financial literacy, trust in the financial system, and policymakers’ willingness to incentivize and support long-term investments.

Even so, it would be unfair to assign all responsibility to policymakers and expect them to use methods like tax increases to change behavior. Not everyone agrees that enforcing higher savings rates through increased taxes, which would give more spending power to the government, leads to optimal outcomes. Including financial topics in elementary school curricula is another option. While this is a necessary step, it would take years to see the desired effects.

If we want a stronger economy for ourselves and future generations, it’s more realistic to focus on improving our own financial and investment habits. Many countries provide positive examples of economic development and personal finance outcomes. Surely there is no reason why we should underperform in these areas. 

Economy