Gross Domestic Savings, Household Consumption, and Inequality in Africa: A Panel Analysis

Gross Domestic Savings, Household Consumption, and Inequality in Africa: A Panel Analysis

Shafiu Ibrahim Abdullahi, Ahmad Muhammad Tsauni, Mosab I. Tabash
DOI: 10.4018/978-1-6684-5289-9.ch007
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The chapter analyses gross domestic saving, household consumption, and inequality in African countries. The study covers the period from 1989 to 2019, a length of 31 years, for 24 Africa nations from all the regions of the continent. The main econometric methods of analysis employed for the work is panel cointegration analysis. The variables used for the study to explain both gross domestic savings and household consumption trajectories in Africa include income, inequality, financial development, and government final consumption expenditure. The results show that inequality has negative effects on gross domestic saving but positive effects on household consumption in countries across Africa.
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The importance of domestic savings and strong domestic consumption in the development of nations in modern era cannot be taken for granted. Over the years nations in Africa have suffer from lack of domestic savings; and international capital mobility into Africa is not significant to offset the lack of domestic savings. According to Keynesian theory, there is presumed equality of saving and investment. Thus, where nation’s saving is lower than investment as is the case in Africa, foreign investment and debts sometimes fill the gap. This has been going on for decades since African countries experiences serious shortfalls due to falls in export revenues. Notable works such as Feldstein and Horioka (1980) has demonstrated that saving and investment rates are strongly correlated. Other works such as that of Baxter and Crucini (1993) and Irandoust (2019) pointed to the same conclusion. Liquidity problems and less than competitive insurance markets are some of the prominent features of financial markets in Sub-Saharan Africa (Aryeetey andUdry, 2000). The importance of saving to economic growth and development of nations has been emphasized by Solow growth model and by other scholars such as Hanson (1978). Saving reduces the demands for consumer goods, thus freeing resources for the production of capital goods. Modern governments use taxation to force people into saving in the situation where saving fall short of investment. The performance and subsequent crisis of 1997 in the East Asian economies put to rest the belief that developing countries are madly in need of capital from developed countries to achieve development. Instead of capital to move from developed to developing countries it was reverse of the case for these Asian economies as they become important sources of capital for developed economies. According to Flassbeck (2008), the fact that capital is moving “uphill”, from poor to rich nations, contradicts conventional neoclassical economic theory. He noted that this might have contradicted a very long accepted economic theory, seeing developing countries that export surplus capital growing faster and having higher investment ratio than their peer developing countries who receive net capital inflows’.

Key Terms in this Chapter

Financial Development: Financial development is the development of financial institutions, financial markets, and financial instruments. It involves funding of entrepreneurial activity and innovations.

Inequality: Inequality in economics means unequal (unjust) distribution of resources and opportunities among members of a given society.

Consumption: Consumption is the act of using resources to satisfy current needs and wants whether by individual or group. Consumption in economics is frequently associated with the use of goods and services by households. Consumption is distinct from consumption expenditure, which is the purchase of goods.

Poverty: Poverty is the inability of individual or household to meet basic needs including food, clothing, and shelter. Absolute poverty measures poverty as those earning less than $1.90 a day.

Panel Data: Panel data is a type of data that contains observations about different cross sections across time.

Africa: Africa comprises all the countries in the African continent.

Saving: Saving is the opposite of consumption; it is the amount of money kept for future consumption. Hence, saving is income not spent.

Government Expenditure: Government expenditure means money spent by public sector on acquisition of goods and provision of services. It includes all government consumption, investment, and transfer payments.

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