Factors affecting savings as means of economic growth in Ethiopia

Abstract

This study used co-integration and vector error correction model (VECM) to examine the causal relationship between the growth rate of real Gross Domestic Savings (GDS) and growth rate of real Gross Domestic Product (GDP) for Ethiopia. The estimation was undertaken for the period 1965-2013, using Eview9 software. In the analysis, the time series properties of macroeconomic variables were ascertained by using the Augmented Dickey Fuller (ADF) unit root test procedure. Finally, the long-run relationship between variables was explored by utilizing the Johansen procedure. The ADF test showed that there was unit root after the first difference. The estimated results indicated at most four order of integration or I(4) for the series was considered. From the result, the coefficient of the co-integrating equation indicates that about 73.3 percent of disequilibrium corrected each year by change in aggregate domestic saving with respect to income, money supply and price. Gross domestic savings in Ethiopia are affected by age dependency ratio, real exchange rate, real interest rate, real gross domestic product, foreign capital inflow and money supply both in the short and long run. Elasticity of exchange rate with respect to domestic savings is high and significant in the long run. This implied that continuous depreciation of real exchange rate has a direct impact on encouraging domestic savings. This would improve terms of trade and foreign capital inflow. Addressing institutional (through sensible policies such as formalization of the informal sector) and structural problems (such as infrastructural provision and efficient and relevant education policy) is also noted in the empirical literature as influencing savings mobilization.

Key Words: Co-integration, Growth, Model, Saving, Vector Error Correction

JEL Classification: E21