Casual relationship between gross domestic saving and economic growth in east Africa: evidence from Ethiopia, Uganda and Kenya

Abstract

The paper aimed to analyze the causal relationship between economic growth and savings in East Africa (1981-2014) using Vector Error Correction (VEC) method and Johnson's approach. All statistical data used throughout this paper came from World Bank database. The empirical study confirmed that a significant relationship between domestic savings and economic growth in the case of Ethiopia and Uganda. However, there is no significant relationship obtained in the case of Kenya over the study period by Johnson co-integration approach. The results of Granger Causality between economic growth (GDP) and gross domestic savings indicated the presence of unidirectional causality between economic growth and gross domestic savings in the case of Ethiopia and Uganda. Gross domestic product does Granger cause gross domestic savings; this means that economic growth accelerates gross domestic savings in the case of Ethiopia and Uganda. It is recommended that the countries needs to design a policy which enhances higher economic growth through increasing total factor productivity and, which ultimately increases the country domestic saving level. Moreover, to achieve sustainable growth the government needs to embark on policy measures, which increase saving and investment into the country due to its dual effect.

Keywords: Causation, Domestic Savings, Economic Growth and East Africa