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Cultivating a Saving Culture across Africa: |
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However, the feedback from saving promotion in the post-depression period shows various complaints such as:
“When we have nothing to eat, how can we save?”
“Speed up expenditure to stimulate the economy.”
“Debts create assets.”
“How does one save during a time of low interest rates?”
Background
In general the acceleration in economic growth relies heavily on capital factor in the form of new investment, which is based on domestic saving and foreign loans. The famous Chenery-Strout’s concept in the theory of economic growth points out that in the first step of economic development, the inflow of foreign capitals is necessary because the ability to mobilize domestic saving is not sufficient for domestic investment. However, the highest aim of developing countries is to speed up economic growth by relying on foreign capitals for a certain period in order to raise domestic income and saving, which eventually will lead to the decline in reliance on foreign capitals.
Even though the reliance on foreign capitals remains a necessity that can not be avoided especially for developing countries including Kenya, long-term and heavy dependence on foreign capitals can have an adverse effect on economic stability. For example, when foreign investors’ confidence declines and capital flows out, the currency will come under pressure and may lead to further deterioration of confidence and possibly an economic crisis, as in the case of Thailand in 1984 and 1997.
Factors Affecting Saving
As domestic saving is a major factor in the process of economic stability development, there are a number of survey studies on saving behavior to be used as guideline for setting up saving-policy framework. The studies conclude that household saving behavior depends on six important factors as follows:
- Absolute Income Hypothesis
Keynes introduced a consumption function or short-term saving as “when income increases (under the assumption that other factors remain constant), people tend to increase the amount of their expenditures at a lower proportion compared to the increase in income.” Thus, saving rate will rise when incomes increase.
- Dependency Rate
The number of dependants or non-income earners is another important factor which determines saving behavior. They are burdens on the household, causing the rise in household expenditure. On the other hand, income earners tend to save at a higher rate. This implies that if the proportion of income earner population is high, total household saving will also rise.
- Life-Cycle Hypothesis
The life-cycle hypothesis relates the age structure to saving behavior. In general, a person has low income at the beginning of life and at retirement age when productivity declines. At middle age, however, income increases while consumption remains constant or increases at a smaller proportion. This implies that in the early years a person is a “net borrower”; in the middle years of his life, a “saver” to repay debts and provide for retirement; and in the later years of his life, a “dissaver”.
- Occupation or Income Source
Kaldors’ Hypothesis states that the source of income is also an important factor in determining household saving behavior. Kaldors divides savers into two groups: profit earners and wage earners. In his study, he finds that the marginal rate of saving for profit earners tends to be higher than that of wage earners.
- Geographical Areas
The difference in geographical locations is another important factor because the influential ability, inspiration, and opportunity for people to save are different. The level of consumer market development is also markedly different in urban and rural areas. Studies have shown that the marginal propensity to save in the urban sector is higher than that in the rural sector.
- Education Level
Education level of household members has both positive and negative impacts on saving. Education supports spending discipline, thereby working to increase saving in this respect. On the other hand, education can also raise the “not-saving” motive as a result of career security and low risk of being unemployed compared with the lower education groups.
Conclusion
Even though the Government’s policy is to stimulate the economy by increasing expenditure nation-wide in the short run, a “Saving Culture” has to be created to raise public consciousness in saving, for a high level of domestic saving is necessary to sustain economic growth in the long run.
Sophon Rojthamrong
Information and Public Relations Group
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