Savings-economic growth nexus in east African community

Abstract

The study investigated the saving-economic growth nexus in East African Community (Uganda, Kenya and Tanzania) for the period 1990-2019 using time series panel secondary data extracted from World Development Indicator database. Specifically the study was to investigate the direction of causality concerning savings and economic growth, examine the impact of gross national savings and other macroeconomic variable on economic growth. The study employed Fisher ADF and Fisher PP to test for stationarity of the variables. The unit root test results showed, lending rate (LRATE) foreign direct investment (FDI) and gross domestic product (GDP) were stationary in level, gross national savings(GNS), gross fixed capital formation (GFCF),exchange rate(EXRATE) and trade openness (TRADE) were stationary after first differencing and inflation (INF) become stationary after second differencing. The Vector Autoregressive (VAR) model was used to establish the causal direction between economic growth (GDP) and gross national savings (GNS) and panel least square used to determine the impact of savings and other macroeconomic variables on economic growth. The VAR estimate shows one way causal direction concerning savings and economic growth. The panel least square fixed effect results revealed that gross national savings has a negative but insignificant effect on economic growth which contradicts the priori expectations that savings positively and significantly affect economic growth, foreign direct investment (FDI) and gross fixed capital formation (GFCF) positively and significantly affect economic growth while trade openness (TRADE) and lending rate (LRATE) negatively and significantly affect economic growth. The study recommended adoption of policies that boost investment (GFCFC), policies that reduce lending rate to encourage borrowing for investment, increase foreign direct investment in productive sectors of the economy and export valve added products. Keyword: Vector Autoregressive model, Panel least square fixed effect, Gross national savings, and Economic growth.