Household Savings Decisions and Institutional Development: The Case of Rural Households in China

Abstract

Household savings decisions are key factors in determining the stability and development of an economy. Higher household savings contribute to stable macroeconomic development, particularly in the transition process from a planned economy to a market economy. Institutional settings essentially determine whether or not stability can be accomplished. In China’s planned economy, economic surplus was strictly controled by government planning and the living standard of households were kept artificially low. Households could only afford marginal expenses, and household savings decisions did not work. Those systems were maintained by state-owned enterprises (SOE) in urban areas and by peoples’ communes in the rural regions.