Determinants of Private Saving in Ethiopia: Johansen Co-Integration Approach

Tizita Gebeyehu

doi:10.7176/jesd/10-5-03

Abstract

Saving has its own effect on economic growth and thus needs a more vigorous work being done about. In addition, in the pursuit of studying saving, the core point to be focused will be its determinants. Therefore, the main objective of this research is to empirically examine the main determinants of private saving in Ethiopia for the period ranging from 1971-2015 by using Johansen maximum likelihood co-integration approach. The result shows that level of real per capital income, inflation, urbanization ratio, bank branch and the dummy variable for political instability are significant variables to determine private saving of Ethiopia in the long run. Moreover, level of per capital income, urbanization ratio, bank branch and the dummy variable for political instability have significant positive effect on private saving of Ethiopia. However, inflation rate influencing private saving negatively and significantly. In addition, in the short run only level of per capital income, Urbanization ratio and bank branch at their difference are statistically significant in determining private saving. Gross domestic product per capital income and urbanization ratio have positive effect on private saving whereas Bank branch has negative effect on private saving of Ethiopia in the short run. Since the effects of a change in a given saving determinant are fully utilized both in the long term and short term, measures such as bank branch expansions and improving both the quality and the quantity of export have to be considered by the concerned authorities. Keywords: Private saving, Ethiopia, Johansen Co-integration, Long run equation and Error Correction Model DOI : 10.7176/JESD/10-5-03 Publication date :March 31 st 2019

Highlights

Economic growth is the main target of all countries all over the world including both developed and developing countries
The result shows that the coefficient of the error-term for the estimated private saving equation is statistically significant and negative as expected
Conclusion and policy implications The study analyzed the determinants of private saving in the process of Economic development, in light of the Ethiopian experience during the period 1971 - 2015

Summary

INTRODUCTION

Economic growth is the main target of all countries all over the world including both developed and developing countries. Splitting the available data among the three regimes of Ethiopia during the study period shows that the average saving rate was 13.8% of GDP during the period from 1970/71 to 1973/74, 7% from 1974/75 to 1990/91 and 7.3% from 1991/92 to 2010/11. During the same period, the average for Sub-Saharan Africa countries was 17.2% of GDP This implies how much the saving rates of Ethiopia were too much low even by SSA standards (Wondamo, 2016). Private saving is a very important factor in bringing economic development, its working or efficiency is determined by different socio economic and political factors These different factors have different effects on private saving either in the negative or positive sense. Studies on determinants of private saving on others (not Ethiopia) country cases have been carried out during 1990s and early 2000s

GDP implies Gross Domestic Product 2 EEA

Variable Description

The long run equation

Findings

Conclusion and policy implications