Dear reader,
My final English assignment asked me to write a scholarly argumentative paper. And I ended up writing about the "Underestimation of Indonesian Overall Savings".
Here is part one so that you are not bored reading all text. So, enjoyyy and leave some comments below! I will post part two in a couple days.
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Understanding savings in a country is important because they
are a determinant that shows how the economy is doing (Smith 4). As a
developing country in South East Asia, Indonesia has the lowest savings in the
region (Collins 352). However, there are some questions about whether Indonesia
really has the lowest average savings or if Indonesia’s average savings is
understated by researchers. Underestimation of Indonesia’s savings could be a
false indicator of its economy and thus skew the government’s economic policy.
Researchers’ method of analyzing savings is unfair to Indonesia because
Indonesia has many informal savers due to religious constraints and the
traditional nature of its culture. Additionally, disaggregated data shows that
Indonesia’s average savings is understated by some international researchers. Indonesia’s
average savings should be estimated higher by international researchers than they
are currently because of Indonesia’s major religion and informal savers.
BACKGROUND OF SAVINGS,
INDONESIA’S CULTURE AND GEOGRAPHICAL CONDITIONS
It is important to understand Indonesia’s geographical and
cultural background, concept of savings, and researchers’ methods to calculate
savings. As a developing country in South East Asia, Indonesia has more than
65,000 households with population of 205.1 million people, and ninety percent
of the population is Muslim. Sixty percent of the population is living on the
Java islands; the other forty percent of the population is scattered throughout
13,700 islands along Indonesia. The main economies of Indonesia come from
industries (40.7%) and agriculture (15.3%) (The World Bank). It can be easily
understood that because people are so separated, they have retain traditional
ways of saving informally.
After understanding Indonesia’s geographical and cultural
background, it is also important to understand the concept of savings and
international researchers’ methods of calculating savings. The argument in this
paper is related to Indonesia’s average savings, which is calculated by savings
over income. Researchers are using different methods to measure average savings
in a country; for instance, many researchers are using the “wealth cross
section” method (Sabelhaus and Pence 3). The wealth cross section calculates
savings by measuring change in wealth and also active savings, which are
savings in banks (Sabelhaus and Pence 3). A research method that only calculates
these active savings causes the understatement of Indonesia’s average savings.
ANALYZING INDONESIA’S
DISAGGREGATED DATA WITH REGARDS TO AVERAGE SAVINGS
Indonesia’s average savings are understated because of lack
of analysis in disaggregated data and researchers’ method of calculating
savings. The term “understated” means that Indonesian average savings should be
higher than have been researched. Proof of this understatement can be seen from
Collins’ table where Indonesia is ranked the last compared to other South East
Asian countries (353). The table does not make any sense where it compares
Indonesia and Burma. There are two factors that affect saving behavior in
developing countries: income and demography (Deaton 61). Demography is characterized
by dependency ratio, which is defined as the ratio between the non-working age
population and working age population. The fact that Indonesia ranked last on
the table is very inaccurate because Indonesia has higher a per capita income
and smaller dependency ratio compared to Burma (Collins 353). Higher per capita
income and smaller dependency ratio should lead to higher average savings
(Collins 366; Loayza et al. 399). Thus, it is impossible for Indonesia to rank
below Burma. Collins’ table shows that Indonesia’s average savings is
understated by international researchers.
The analysis of disaggregated data explains why Indonesia’s average savings is understated by international researchers. Based on the data from the World Bank, only 68.1 percent of total population saves. Out of 68.1 percent who saves, only 41.8 percent has their own savings account in the bank, and 6 percent is using another’s account. Then the other 18.2 percent is saving informally. These informal-savers are not using bank savings account, they use informal financial institution, land, cattle, and jewelry as their savings method. Since researchers are using the “wealth cross section,” that only measures savings in formal banks, to measure savings these informal savers do not show up in their calculation of Indonesia’s average savings. If we count all savers, including informal savers, Indonesia’s average savings should be 40 percent higher than stated because there are 47 percent of people who are counted but 18 percent are not counted. The claim of understatement of Indonesia’s average savings is supported by disaggregated data and the fact that there are 18 percent of informal savers.
THE EFFECT OF
INDONESIA’S MAIN RELIGION TO AVERAGE SAVINGS
Religious belief, specifically Islam, is a major reason
people save informally, which leads into underestimation of their household
savings by international researchers. Up to 90 percent of Indonesians is Muslim,
and they believe that saving concept is not only residual concept but also
there is “social welfare dimension” for a Muslim’s savings behavior (Jalalludin
75). Islam’s savings concept should lead to a higher average savings in
Indonesia; however, many Muslims do not want to save in formal banks to avoid
“riba or usurious interest” (Mauer 8). Due to their belief that it is a sin to
receive interest from formal banks, many of them are saving informally. The
fact that 41.8 percent of Indonesia’s population has their own bank account
shows that some Muslims in Indonesia do use formal banks. Nevertheless, there
is still a large portion of Muslims who would like to use Islamic banks in
Indonesia. Several Islamic banks have been started recently, and they are
growing fast in Indonesia with the purpose of accommodating these religious
beliefs (Kasri 41). However, at this point, the fast growth of Islamic banks is
not enough to accommodate all Muslims in Indonesia who would like to save
there. Research conducted by Kasri reveals that Islamic banks only contribute
1.8 percent of total banks’ assets in Indonesia (41). Religious constraints
from the major religion in Indonesia could explain why some people are saving
informally thus leading to the understatement of Indonesia’s overall savings by
international researchers.
THE BREAKDOWN OF THE INFORMAL SAVERS –
PROOF OF SAVERS WHO ARE NOT COUNTED
Researchers’
method that does not include informal savers in their calculation causes
underestimation of Indonesia’s average savings. Indonesia has two unique
informal savings methods, “arisan” and “koperasi,” that are available almost
everywhere. The term informal saver is defined as a person who is not using a
formal institution to save money. This group can save their money to any
informal financial institution or save their money by buying land or cattle. World
Bank data mentioned that only 52 percent of Indonesians have access to formal
financial institutions. The rest of the population only has access to informal
financial institutions. Seibel and Schrader emphasized in their paper that
“arisan” is one of the informal savings methods in Indonesia (53). “Arisan” is
a form of savings that includes usually more than five households. “Arisan” is
not included in the household overall savings by international researchers
because it is not a form of formal savings, but it is active in almost every
part of Indonesia. Another form of informal savings is “koperasi,” or
cooperative, that mostly supports farmers in rural areas with their savings to
buy seeds and fertilizers in the harvest season (Suradisastra 1). As mentioned
before, almost 16 percent of Indonesian economy is based on agriculture, and
farmers who save in cooperatives are not counted by international researchers
because they save in informal financial institution. The large number of “arisans”
and cooperatives has proved that many Indonesians are informal savers. If
international researchers develop some method to count these informal savers,
Indonesia’s household average saving must be higher than stated.
COUNTER ARGUMENTS – INDONESIA’S HOUSEHOLD AVERAGE
SAVING IS NOT UNDERSTATED
Some people argue
that Indonesia’s household saving is not understated because 13.33 percent are
under poverty line and 64.25 are living in rural areas (The World Bank).
Indonesians who are under poverty line could not afford to save, and those who
are living in rural areas do not have access to formal financial institutions.
Thus, Indonesia’s household average saving is really low due to these two
facts. These two facts mentioned are true; however, cooperatives are mostly in
rural areas and those who save in cooperatives are not counted in the
calculation of average savings by international researchers. Therefore, the
Indonesia’s average saving should be higher than appear in research papers. Some
people also believe that if Indonesia’s average savings is understated, then
all developing countries’ average savings are also understated. Therefore,
Indonesia will remain as the lowest savings among South East Asian countries.
However, the counter argument is invalid because not all developing countries
have the same geographical, cultural, and economic background as Indonesia. The
fact that Indonesia has the largest Muslim population in the world shows that
Indonesia has the largest number of informal savers compared to other countries
in South East Asia region (The World Bank). Assuming that researchers include
informal savers in their calculation, Indonesia will be the most understated
country in terms of household average savings.
CONCLUSION
Indonesia’s
household average savings is understated by international researchers due to
lack of availability of disaggregated data, Islam’s standing as Indonesia’s
main religion, and the existence of many informal savers in Indonesia.
Disaggregated data proves the existence of informal savers that do not show up
in the researcher’s calculation. These informal savers are the result of restriction
from Islam as the main religion and Indonesia’s geographic condition that
affects citizen access to formal financial institutions. People who either do
not want to or cannot save in the formal banks use “arisan” and “cooperative”
as their savings methods. As many as 18 percent of Indonesians are using
informal methods to save their money, and about 47 percent use formal methods.
If the researchers include informal savers in their calculation, Indonesia’s
household average saving will increase by almost 40 percent. If researchers
could develop some methods to calculate these informal savers, Indonesia’s
average savings will be higher and thus will help Indonesia’s government create
effective economic policies.
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Work Cited:
Collins, Susan. “Saving Behavior in Ten Developing Countries.” National Saving and Economic Performance (1991):
349-376. NBER. Web. 5 Feb. 2013.
Deaton, Angus. "Saving in developing countries: Theory
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Jalaluddin, A.K.M. “Savings Behavior in Islamic Framework.” Economic Bulletin Persatuan Ekonomi, Kajian
Perniagaan dan Pengurusan, Shah Alam 2.3 (1992): 71-85. Web. 2 April 2013.
Kasri, Rahmatina A. “The Determinants of Islamic Banking
Growth in Indonesia.” Journal of Islamic
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Loayza, Norman et al. “Saving in Developing Countries: An
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Mauer, Bill.
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Seibel, Hans
Dieter, and Heiko Schrader.” From Informal to Formal Finance: The
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Apr. 2013.
Smith,
Roger. “Factors Affecting Saving, Policy Tools, and Tax Reform: A Review.” Staff Papers – International Monetary Fund 37.1
(1990): 1-70. JSTOR. Web. 12 Feb.
2013.
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