CHAPTER ONE

INTRODUCTION

Background of the Study

The role of savings and investment in achieving and maintaining high economic growth is extensively laid out in theories of economic growth. Harrod-Domar growth theory highlighted how economic growth depends on the rate of saving or investment and the incremental capital-output ratio in the economy. The neoclassical growth theory due to Solow (1956) assigned a critical role to saving rate for facilitating a higher growth in per capita capital and per capita income in the transition to the steady state and also implied that a high saving rate facilitates achieving a higher level of steady state per capita capital and income. Subsequently, fully endogenous growth models suggest that increases in saving rate and in the size of population increase the long-term growth rate. Consistent with theoretical predictions,

Empirical evidences also strongly support close interlink ages between savings and economic growth in a cross-country perspective. It is observed that economies witnessing rapid economic growth such as China, India, Indonesia, Malaysia Singapore, South Korea, and Thailand are also characterized by high saving rates. Similarly, many countries in sub-Saharan Africa and Latin America typically save at a low rate and experience slow economic growth. In this backdrop, analysis of determinants of savings in an economy is very relevant to formulate appropriate policy initiatives fostering higher savings and thus higher economic growth. Athukorala and Sen (2) have highlighted the relevance for country specific study to assess the role of determinants of domestic savings as the cross-country studies suffer from the restrictive “homogeneity” assumption, while in reality there are considerable variation across the countries in regard to various structural features and institutional factors that have a direct bearing on the impact of economic factors on the saving process. Deaton (3) and Srinivasan (4) also warn against cross-country studies in this area due to vast differences in nature and quality of data across the countries.

In various studies, an extensive literature has examined the aggregate determinants of the private saving rate around the globe and in Latin America in particular (Loayza, Schmidt-Hebbel and Servén,

2000, and IDB, 2013). This active field of research, while having enriched the understanding of this complex and vital economic outcome, falls short of being bulletproof. By its very nature, macroeconomic variables cannot accurately inform about the ultimate factors behind why and how much households save.

However, despite the apparent advantages of the micro data approach, little was known until very recently about household saving decisions in Latin America. Among the handful of existing contributions, we can mention Butelmann and Gallego (2000) for Chile and Sandoval Hernández (2013) for Mexico and Gandelman (2014a, b) for nine economies in the region.

Attanasio and Székely (2000) construct synthetic cohorts to compare household saving behavior between two Latin American countries (Peru and Mexico) and two East Asian economies (Thailand and Taiwan).

The important role of savings has been stressed in both developed and developing countries due to possible distortion of aggregate savings, the role of savings as a measure of economic performance and the central issue of mobilizing domestic savings in less-developed countries have always engaged the attention of development economists due to the continued unsatisfactory growth performance and the high incidence of poverty in several of the countries. Domestic savings is seen as a means of increasing investment, which in turn enhances economic growth through capital formation. Understanding the nature of national savings behavior is critical in designing policies to promote savings and investment. It is therefore not surprising that the analysis of saving behaviour has become one of the central issues in empirical macroeconomics (Jappelli and Pagano, 1998). Along with the recent revival and the consequent expansion of the literature on macroeconomic growth, interest in the saving’s determinants underwent an upsurge attention (Ozcan et al, 1998). Deaton, 1989; Jappelli and Pagano, 1998; Ozcan, 2000; Schmidt-Hebbel et al, 2000 and Elbadawi and Mwega, 2000 further stressed the important of saving behavior in developing countries. Among other things, the long-debated relationship between saving and the level of growth rate of income has provided a strong stimulus for analyzing the determinants of saving more thoroughly in most countries of the world.

Saving rates display considerable variation across countries of Africa and over time. A comparison of West Africa rate of savings, with that of other regions of Africa, shows that the region has performed poorly throughout, the period of study. In the period 1980-1985, the North Africa had the highest savings rate of 22.1%, Middle Africa follows at a distant rate, with 9.9 per cent. West Africa savings rate stayed at a very disturbing low rate of 6.1 per cent. Although, the savings rate in West African increased from 6.6 percent in 1980-85 to 7.8 per cent in the period 1985-1990, the region continued to trail behind all other regions except South Africa. The period of 1990-1995 and 1995-2000, still left West Africa trailing behind North and Middle Africa sub-regions. Even, in the recent period of 2000-2006 when most countries witnessed some growth the rate of savings in West Africa was still below 10 per cent.

In the aftermath of independence, Cameroon opted for a development strategy based on five-year plans with main objective to revive a general investment and economic growth. All these depends largely on the levels of savings in the economy. Indeed, until the second half of the 1980s, Cameroon’s economic growth remained positive and relatively stable in term of economic growth, with acceptable rates of investment and saving. This period of prosperity was supported by oil revenues earned and especially export revenues from agricultural products. Between 1986 and 1994, Cameroon experienced a global economic crisis with a negative economic growth. Production dropped significantly due to low investment and insignificant savings stock to boost the economy. Multiple liquidations of public enterprises and the closure of some commercial banks followed and poverty remained the norms of the day. Conscious of this growing state of poverty, the Cameroon government accepted the Structural Adjustment Programme (SAP) at the beginning of the90s, which had major macroeconomic objectives was to advocate economic liberalization and especially to reduce the level of state intervention in the economy in terms of investment.

This initiative brought its fruits as up to1995; economic growth became positive through higher domestic investment with the share of high private investment as a result of multiple privatizations. Many other measures were put in place like the three-year plan in 1997, the decision point, the completion point, the very achievement of the latter and the salary adjustments which had in one way or another had positive influence on investment, savings and economic growth. Despite the move towards an integrated global economy, Cameroon remained marginalized because of the weaknesses of its savings and investments which are major determinants of economic growth. Thus, there is a link between savings, investment and economic growth in Cameroon.

Savings are an indispensable resource for economic growth and also financial institution including microfinance institution (MFIs). They must mobile sufficient savings to meet their commitment and become independent from grant providers. They must therefore convince customers, which includes the public in general and micro and small size enterprises, to entrust their savings. This requires an understanding of customers’ characteristics, as well as their needs and expectations.

• Statement of the problem

People would naturally try to secure their future by saving more in the fear of high inflation and economic uncertainties in the country. Jongwanich (2009), Horiako and Wan in2007 (cited in Coulibaly and Diaby, 2013) supported this finding of a positive relationship between savings and inflation with their findings in Thailand and China. With respect to the relationship between savings and economic growth, Feldstein and Horioka (1980) interpreted the positive causality between savings and investment as a result of imperfect international capital mobility.

Under these conditions, savings become a limiting factor for investment. Carroll and Weil (1994), studying the relationship between savings and growth (in both macro and micro levels showed that income growth rate is above that of savings. Equally, Blomstrom, Lipsey and Zejan (1992) led to the conclusion that the increase in GDP leads to an increase in fixed capital formation which is stronger than the impact on growth. Bjorn Anderson studied the causality between saving and growth with data from Switzerland, United Kingdom and United States; using both the long and short run dynamics and country heterogeneity using the VAR methodology: His study led to the conclusion that the causal link between savings and output differs depending on the country and that causality runs more easily in both directions (from savings to growth and vice versa) when the study is conducted taking into account the long-term adjustments.

Cameroon in 2020 had a low saving rate of 13.4% representing barely 15% of GDP in Cameroon. Given that saving is what has to be mobilized for investment with its numerous benefits on an economy, the low rate of saving pushes the country into severe external debts with its disastrous effects in the economy. With this in mind, much attention has to be paid on research on the field of saving bot no recent thorough research has been conducted in Cameroon on this field. This is what prompted the researcher to explore this gap in literature by posing the following questions.

• Research question

Based on this above, this study intends to provide general answers to the following questions;

Main Research Question

• What are the major determinants of saving in Cameroon?

Specific Research Questions.

• Does interest rate affect the level household saving?
• How is income level related in saving?
• What is the effect of price level on saving?
  • Objectives of the Study

This study is generally aimed (main objective) at empirically examining the determinants of savings in Cameroon.

Specific objectives

• To investigate the effect of interest rates on savings in Cameroon.
• To assess the effect of income on savings.
• To evaluate the effects of inflation on savings.