On the Determinants of Domestic Saving in Ethiopia
Abu Girma Moges
The domestic saving rate in Ethiopia has been too low to sustain robust capital accumulation andeconomic growth in the country. The saving rate has also been declining over time with far reachingimplications on the growth and poverty reduction prospects of the country. This paper examines thetheoretical and empirical issues and forces in the determination of domestic saving in the country. It arguesthat the fiscal and monetary policies, the investment regime, and external factors interact exerting their respective influence on the behavior of economic agents and the domestic saving performance of thecountry.
Key Words: saving, economic policy, growth,JEL classification: D91, E21, E62
The behavior of economic agents in the allocation of economic resources is acritical factor that exerts influence on the growth path of a country. One of suchallocation issues is concerned with the inter-temporal allocation of income between consumption and saving. The behavior and determinants of suchallocation decision are important to understand the mechanisms and interactionsacross aggregate consumption, saving, capital accumulation and growth processes. In fact, economic policies in most countries attempt to influence thelevel and growth of these variables so as to achieve growth in productivity andemployment, macroeconomic stability and efficient resource allocation.
Theefficacy of such policies, however, depends on the nature and degree of influence that policies have on these macroeconomic variables.1.2.One of the areas towards which public policies have been directed is improvingthe domestic saving rate of national economies. The rationale of the policy isthat saving serves as a source of capital formation which in turn influences the productivity of labor and its growth over time. The fact that investment would befinanced either from current or future saving of a national economy coupled withthe imperfect international mobility of capital in general and to developingcountries in particular, implies that improving domestic saving rate is animportant policy target. This lends to the question of what kind of public policiesare effective in encouraging domestic saving.
There are a number of hotly contested theoretical and empirical issues in theanalysis of aggregate saving. There is no one paradigm that can explainaggregate saving behavior across countries and over time. First, the link betweensaving decisions at household level and aggregate saving and the accumulationof productive capital is not well established. The behavior of households in their inter-temporal allocation of resources reflects on national consumption andsaving through aggregation process. The aggregation process can conceal criticalfactors and diversities across households creating a less representative picture of