Factors Affecting Savings as Means of Economic Growth in Ethiopia

Savings have always figured prominently in both theoretical analysis and policy design in both developed and developing economies. This prominence emanates from their assumed direct theoretical link to future economic growth and current expenditure levels via its link to consumption. Early theories of economic growth emphasized the role of savings as a source of capital accumulation and, hence, growth. Similarly the aggregate demand-based theory of Keynesian economics also focused on aggregate expenditure, which has a direct implication to savings. Due to their pre-occupation with short-term macroeconomic adjustment and stabilization policies, the emphasis on savings was relatively neglected in the 1980s in many African countries. But the focus on economic growth and, hence, on savings seems to have resurfaced in the 1990s and afterwards. This interest is partly due to the belief that one of the reasons for slow growth in sub-Saharan Africa is the low rate of savings relative to other developing regions. The objective of this study was to examine the factors affecting domestic savings in Ethiopia to draw policy lessons that are particularly relevant to the Ethiopian economy. The remainder of the paper is organized as follows: Section Two focuses on GDP, savings, credit, exchange rate, and investment trend and their measurement issues in Ethiopia. Section Three presents the theoretical determinants of savings. Section Four presents data and methodology. Section Five presents estimation and results. Finally, Section Six presents summary and the policy implications of the results examined in the paper.