Savings Rate in the African Countries - Case Study Example

Workers' output, according to Economic Theories, is connected directly with the Savings Rate of a particular country and African countries have one of the slowest savings rates, resulting in low output. "Sustainable growth of living standards, employment, and exports all depend on growth of productivity-output per unit of input. Per capita income, the single best measure of economic well-being, is clearly closely related to output per worker," say Edwards and Golub (2002). A country's exports and international competitiveness naturally depends on labour cost and worker productivity. Growth performance of African countries of 1970s and 1990s had been unimpressive. The empirical literature is still inconclusive. Importance of measuring the output per worker growth that is connected with per worker physical and human capital lies in assessing political changes, technology improvement and social upheavals. It also shows at times, that even in countries with higher economic growth, trends could be reversing. Main factor that affects all levels of economy is the targeted level of development. Financial liberalization is supposed to stimulate higher savings rate and higher interest rates on those savings, leading to higher capital growth. The level of real income plays the most important part in savings, especially in poor countries. Naturally as income increases, savings rate too increases, with comfortable spending power. Empirical research done in the field shows that for sub-Saharan Africa to achieve 5.3 per cent GDP growth, to reach the point where savings rate could be comfortable, it would require 18 years. Though a lot is done in this field, further empirical research has to be done on priority basis. Current research stops after showing that African savings and interest rates are linked with low-income rate and very few government policies exist to encourage savings. In the last two decades, Nigeria, Rwanda, Kenya and Sudan suffered capital flight of 60%, while other African countries suffered a lesser 40%. Many African top officials were presumed to have huge foreign currency accounts in other continents and chances are remote of its being reinvested in Africa. "A difficult question is what African governments can do to obtain the repatriation of those funds, and how the countries in which the accounts are held can be persuaded to be of assistance." http://www.uneca.org/eca_resources/Publications/ESPD/economic_report_1999.htm Foreign direct investment flow to Africa is not stupendous and to create higher savings rate this has to be increased. Migration of skilled labour out of Africa had been another deterrent. Migration is motivated usually because of low investment in transport, infrastructure, energy and communication. Africa has to expand its investment, growth and productivity to stimulate savings rate. African countries are politically and socially unstable and this does not create an atmosphere conducive to attract investments. But it is heartening to note that from 1994 to 1998, Africa showed positive GDP growth in spite of unfavourable global conditions. "To test whether or not Africa has built a critical mass of momentum towards sustained, poverty-reducing growth requires the use of multiple evaluation criteria. Unfortunately, comprehensive, Africa-specific composite indices needed for this purpose are not available," http://www.uneca.org/eca_resources/Publications/ESPD/economic_report_1999.htm Savings rate usually depends on capabilities, aspirations, functions and peculiar constraints of the region and might be helped with a policy evaluation by the Governments. African Governments, most of the time, are fighting for their own survival and this leaves with insufficient elbow space for economic measures. This failure leads to non-accumulation of future growth, and hence, future welfare. This might result in lack of education, unemployment and low worker output. People's choices get highly curtailed with very few future opportunities, leaving generations to come in comparative poverty. This applies not only to people's level, but also to the national level. Worker output has direct bearings on future investments in productive, technological and social sectors. Governments work under enormous constraints and would never be able to justice to the poor millions and national growth gets stunted. "It means that the State cannot finance its expenditures adequately without recourse to external support. Such a scenario is detrimental to national growth, which requires a sustained injection of resources into activities that expand the national output." http://allafrica.com/stories/200511141286.html It is therefore not a coincidence that countries with relatively higher levels of savings are the ones that enjoy sustained growth and welfare. High Savings rate is thus connected with higher worker output and it is imperative that savings rate should be improved for sustainable growth and development. Governments play a crucial role in encouraging higher savings rate and can do a lot in this direction. "With viable, functioning local organizations addressing the many social issues and needs, national leaders will be more able to focus on the commanding heights of the economy: on national economic policy, debt management, natural resource development, higher and technical education, negotiation with foreign states and corporations, and evaluating the impact of national revenue, personnel, etc." according to Wunsch and Olowu (1998, p.288). There is no doubt that discrimination against Africa for centuries and attempts to analyse the discrimination with the help of International Trade Theory had been done often. "A number of economists have accepted international trade theory as a point of departure for the analysis of economic discrimination, but have chosen a reason other than preferences for the discrimination to explain it," say Lundahl and Wadensjo (1984, p.34). When it comes to the investments, there is a relative role of value attached by western powers to a particular country and this is a hypothetical, but important assumption. "It should be noted that the economic aspects of a country's value to the United States are easier to identify conceptually than empirically. However, with some reasonable simplifying assumptions, it should be possible to make fairly acceptable quantitative estimates," says Russett (1968, p.287). Best savings rates induce all fractions of economy into a spurred activity as savings and capital investment are important for economic growth. "If the economy is operating at full employment the allocation of resources toward more capital goods must be at the expense of consumer goods. A higher savings rate releases resources for the production of capital goods that enable worker productivity to increase. This capital deepening adds to real wages and employment while increasing potential output in the economy." http://www.google.co.uk/searchhl=en&q=SAVINGS+RATE+AND+WORKER+OUTPUT&meta= Theory of Economic Growth. More capital adds to labour demand as 'they are complimentary inputs that produce more outputs.' (ibid). Investment in economy is measured by workers' output as it adds up to capital stock. One of economic theories governing such growth is Solow model. "Solow's growth model predicts convergence in income if each country operates on the same production function. Rich countries have higher production functions than poor countries. Labor resources are not homogenous, favoring rich countries with more educated workers." (Ibid). This theory leads to Golden Rule Savings Rate. Another governing theory is Endogenous Growth Theory, and this explains the rate and ability of economic growth on the assumption of "feed on itself." Richard Godwin's Class Struggle Model offers an insight to workers' output by simply stating, "high employment generates wage inflation which can increase the wage share of workers in output; but this will, in turn, reduce the profits of capitalists and thus, in Kaleckian fashion, reduce future investment and output. That reduction in output will in turn reduce labor demand and employment and consequently lead to lower wage inflation or even deflation and thus reduce the wage share of workers. But as workers wage share declines, then profits increase and, with them, investment," http://cepa.newschool.edu/het/essays/multacc/goodw2.htm The difference between a higher rate of savings in one country and a miserable rate of savings in another, reflects on the output per worker in related way. "A similar difference would occur if the richer country had a lower rate of population growth or rate of capital depreciation (n + d). It might also be possible that access to technology does not insure the same rate of application. If A were higher in one country than another, then it would experience greater output per worker at the same rate of capital per worker." (Ibid). John Eatwell connects savings rate to pensions. According to him, pensions through savings rate are connected with workers' output. "The simple way to express this is through a model of output and pensions saving. Clearly, pension payments = workers' savings + tax spent on pensions; or, writing P for the average pension, N for the number of pensioners, S for the savings rate, T for the tax rate, Y for average annual output per worker, and W for the number of workers, PN = (S + T)YW. (Eatwell p4.)" http://ex-parrot.com/chris/wwwitter/20030809-population_context.html Progressive economic policies like Savings Incentives can alter the rate of savings, both in private and public field. Even though under the present circumstances African countries might feel that Western rate of savings is unattainable, they are well on the way to achieve it. With international help, political stability could be established in most of these countries, and with economic transparency and existing liberalization, it would be possible eventually to reach the high point. Worker output resulting in high growth of export and economy would be possible as the savings rate keeps going up. All the underdeveloped and developing countries would, in time, achieve this much cherished goal that would allow them effectively compete with the developed world. BIBLIOGRAPHY: 1. Lundahl, Mats and Wazdensjo, Eskil (1984), Unequal Treeatment, A study in the New-Classical Theory of Discrimination, Croom Helm, London. 2. Russett, Bruce M. (1968), Economic Theories of International Politics, Markham Publishing Company, Chicago. 3. Wunsch, James S. and Olowu, Dele (1990), The Failure of the Centralized State, Westview Press, Oxford. ONLINE SOURCES: 1. Edwards, Lawrence and Golub, Stephen S. (2002), South African Productivity: An International Comparative perspective, http://www.google.co.uk/searchhl=en&q=WORKERS+OUTPUT+IN+AFRICAN+COUNTRIES&meta= under South Africa's International Cost Competitiveness and Productivity accessed on 27.11.2005. 2. http://www.uneca.org/eca_resources/Publications/ESPD/economic_report_1999.htm 3. http://allafrica.com/stories/200511141286.html 4. http://www.google.co.uk/searchhl=en&q=SAVINGS+RATE+AND+WORKER+OUTPUT&meta= Theory of Economic Growth. 5. http://en.wikipedia.org/wiki/Golden_Rule_savings_rate 6. http://ex-parrot.com/chris/wwwitter/20030809-population_context.html Read More