Frugality for Fiscal Liberals to Fetch Development

As many of the theories of economic growth and development state, saving is a significant determinant of economic growth. Sustainability depends on a country’s ability to save and invest in productive enterprises. It is also an essential foundation for domestic financial resource mobilisation and, by financing development, accelerates growth.

However, saving and investment are two sides of the same coin, for without it investment will be hardly productive. Besides, the increase of output in any economy depends on capital accumulation, which requires investment and an equivalent amount of saving to much it.

Saving plays a vital role in the process of bringing self-sustained economic growth from internally, by injecting loanable funds for investment and promoting it. It is the means for creating employment, income and sufficient demand.

Sadly, developing countries are characterised by the existence of poor saving culture which results in minimal funds available for investment. The two primary headaches of emerging economies are how to stimulate investment and bring about an increase in the level of saving. Without the latter, the rate of investment and economic growth will be limited, making them more vulnerable to global capital shift.

Ethiopia is not unique in this case. In fact, domestic saving to gross domestic product (GDP) is below the sub-Saharan average. The existence of a poor saving culture has been one of the major factors that exacerbated low domestic financial resource mobilisation.  It has manifested to create a high saving to investment gap. The availability of loanable funds for investment, supplied through saving, is by far below the demand to curb economic problems.

A macroeconomic variable, called marginal propensity to save (MPS), is a perfect indicator of the problem. It measures the increase in income that is not put on consumption. For Ethiopia, the MPS stands at around a fifth of a percentage point of a Birr. Saving as a share of GDP is less than a third of the amount investment demands.

But Ethiopia has exhibited a rapid and sustained growth for over a decade. To sustain this remarkable growth, the government has come up with a comprehensive development plan, namely the first and second editions of the Growth & Transformation Plan (GTP I and GTP II). The primary objective of both the programs is to make the economy industry-led, instead of agriculture-led.

Thus, the industry sector needs to be promoted. This could be in the form of adequate capital that is readily available for investment. But the existence of a poor saving culture has become a major constraint, affecting self-sustained development.

Improving the domestic saving rate in a way that it enables the country to finance development from internal sources requires, above all, a commitment by the people and the government. Extra effort and coordination need to be exerted with an appropriate policy, strategy and regulation to attain the desired development.

However, factors that are responsible for reduced saving are economic, social, demographic and regulatory factors, which this article will try to elaborate.

The first is called demonstration effect in economics. It means a substantial engagement of the state to emulate the consumption patterns – concerning lifestyle, policies and programs – of advanced nations. As a result of globalisation, people and governments try to imitate the luxurious spending patterns of Western countries. Thus, majority of the citizens are engaged in what is called conspicuous consumption, where money is spent on goods for public display.

Therefore, there is a need for taking necessary policy measures such as quota, tariff and other regulations that strictly discourage and restrict demand for pricy goods and services. It is also important to work on awareness creation on the importance of relying on domestic products for individual, as well as the national economy. The government should also critically examine the cost-effectiveness of its practice that has imitated expensive policies and programs of the advanced nations and focus on adopting its own cost-efficient strategies that heavily rely on the domestic resource.

Second, as the Keynesian theory of consumption states, saving depends on the level of income. But since many people in our country are either unemployed or dependent on others, income is at subsistence levels. Thus, they spend almost all their earnings for consumption to satisfy necessities or to support family members.

Accordingly, the government is expected to take an appropriate policy measure to increase the income of the majority by improving their productivity. It can also be by intervening in the exploitive market economic system, where few capitalists earn a surplus while many barely get by. The wealth gap has to be stabilised by proportionately distributing income. The government has to focus on creating employment opportunities for the youth so that the coming generation does not suffer from similar problems.

The third reason that is exasperating poor saving culture is the inability to plan smartly, budget right and spend frugally. Due to the absence of such a habit among the mass of the people, it forces them to use their income irregularly and randomly. It is exposing them to unnecessary expenditure that is retarding their ability to save.

The other is the existence of limited financial literacy. Few, especially in rural areas have an awareness on the importance of saving. There is an absence of an effort in knowledge creation to change the attitude the public has towards saving through the media. There is similarly a deficiency in value proposition to promote and encourage people to be fiscally conservative as well as a limited research-based strategic measure.

Recently, Ethiopia is experiencing a double-digit hyperinflation in the continent. Thus, it is retarding the cost of living, purchasing power and creating uncertainty to become a factor that negatively affects domestic saving in the country. Accordingly, the government should take the appropriate policy measures for controlling inflation and bringing it down back to the single digits.

The last, but not the least, factor is the existence of an underdeveloped and under-monetised financial sector. The presence of few financial institutions, their limited accessibility, traditional cash-based payment system, the absence of a capital market and tight regulations have limited financial deepening and are responsible for the insufficient domestic savings in the country.

The government should rebuild itself to realise its ambitious development plans. This could be by mobilising the required financing internally and bringing a real qualitative development, instead of quantitatively maximising social welfare. The populace and the government should work hand-in-hand to create accountability, transparency and good governance. Building a democratic system will improve the efficiency and effectiveness of its bureaucracy and creates the social, economic and political system that promotes the development of the private sector, income growth and, finally, saving culture.


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