Does dependency rate really impede savings? Some Sub-Saharan African evidence

Abstract

This study examines whether the age dependency ratio exerts a negative effect on the domestic savings rates. We test this issue for 16 African countries using annual data. The empirical analysis was conducted using the bounds test of cointegration of Pesaran et al. (2001) and the modified Granger causality test due to Toda and Yamamoto (1995). The advantage of using these two approaches is that they both avoid the pre-testing bias associated with standard unit root and cointegration tests. The bounds test indicates evidence of cointegration for 11 countries. Further, results from causality analysis reveal that dependency ratio causes savings rate negatively in nine countries, and positively in two countries. Overall, our findings support the view that changes in non-working population size are important in explaining the future path of the domestic savings rate in Africa. Key words: Savings, dependency rates, bounds testing, cointegration, granger causality.