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Low Savings Rates in the Economic Community of West African States (Ecowas): The Role of the Political Instability-Income Interaction

Low Savings Rates in the Economic Community of West African States (Ecowas): The Role of the... This paper employs PCSE, OLS and TSLS with random effects to investigate the impact of the political instability- income interaction on savings in ECOWAS countries during the period 1996-2012. The empirical evidence illustrates that higher political stability is associated with higher savings and income levels moderate the adverse effect of politi- cal instability on savings, indicating that the impact of political instability on savings is higher in low income ECOWAS countries, but lesser at higher levels of income. The paper recommends the promotion of political stability via increases in incomes to raise savings in the ECOWAS region. Keywords: savings, political instability. JEL classification: O1, O11 INTRODUCTION The role of savings in economic development has been The region has also seen changes in government (elected discussed extensively in the literature (for instance, see or military) more than any other region on the African con- Lucas 1988; Romer 1986; Solow 1956). Despite the impor- tinent due mainly to military coups. In the year 1985, for in- tance of high savings rates, World Development Indicators stance, 11 ECOWAS countries had military governments (Edi (WDI) reveal that savings rates declined and/or fluctuated 2006). Other than military coups, ethnic and religious crises across developing regions of the world, including East Asia including civil wars appear to be common characteristics and the Pacific, the Middle East and North Africa, Latin of ECOWAS countries. In particular, there were civil wars in America and the Caribbean, Europe and Central Asia, and Liberia (1989-96 and 1999-2003), Sierra Leone (1991-2002), Sub-Saharan Africa (SSA) between 1970 and 2010. In addi- * Nurudeen Abu, MSc tion, the ECOWAS region recorded little success in savings PhD Candidate mobilization compared to other developing regions during Othman Yeop Abdullah Graduate School of Business, the same period. Although inadequate savings undermines Universiti Utara Malaysia a country’s economic development (Adewuyi, Bankole, and Email: abu.nurudeen@yahoo.com Arawomo 2010) increased access to international capital can cushion the adverse effects of lower savings in an economy. Mohd Zaini Abd Karim, Ph.D Unfortunately, many SSA countries (including ECOWAS) are Professor facing declines in international capital inflow as a results Othman Yeop Abdullah Graduate School of Business, of factors that include lending constraints (Elbadawi and Universiti Utara Malaysia Mwega 2000), while the recent global financial crisis has Email: zaini500@uum.edu.my further reduced the countries’ access to external resources. Besides low savings, the ECOWAS region has witnessed Mukhriz Izraf Azman Aziz, PhD political instability since the 1960s, when a number of coun- School of Economics, Finance and Banking, Universiti tries attained independence, and up through the late 1980s Utara Malaysia due to frequent military interferences in politics (Edi 2006). Email: mukhriz@uum.edu.my Copyright © 2013 by the School of Economics and Business Sarajev 53 o Low savings rates in the economic community of West African states (ECOWAS): The role of the political instability-income interaction Guinea Bissau (1998) and Cote D’Ivoire (2002-2007 and Therefore, it is expected that for low income ECOWAS coun- 2010-2011) (Zounmenou and Loua 2011). Also, between tries, higher income would lead to an improvement in politi- 2009 and 2012, the military staged coups in Guinea Bissau, cal stability and higher savings. Mali and Niger, while Nigeria continues to contend with eth- The objective of this paper therefore is to examine the no-religious crises. The political crises facing these countries impact of political instability-income interaction on savings are due to lack of economic opportunities, youth unrest, or- in the ECOWAS. We believe that focusing on the ECOWAS ganized crime, piracy, endemic corruption, higher spending region will reduce the problem of heterogeneity found in on the military than basic services, disrespect for the rule many cross-country studies (Gyimah-Brempong 2002). The of law and democratic principles by the ruling elite, human remainder of the paper is structured as follows. Section rights abuse, military interference in politics, and lack of in- two highlights savings and political instability patterns in stitutional reforms (Akenroye 2012). ECOWAS countries, while section three reviews the empiri- Though the literature has not adequately addressed the cal literature on savings. Section four contains a theoretical role of political instability in savings mobilization (Da Silva framework and model, and section five presents results and 1998), political instability may be an important determinant discussion. Section six concludes the paper. of savings, particularly in ECOWAS countries. During periods of political instability, government and policy makers usu- ally make sub-optimal and short-term macroeconomic poli- SAVINGS AND POLITICAL INSTABILITY IN cies, including switching policies, and in the process create ECOWAS COUNTRIES volatility which has negative consequences on the econo- my (Aisen and Veiga 2013; Alesina et al. 1996). These conse- As mentioned in the introductory section, the ECOWAS re- quences include low production and income, and declining gion has recorded little success in the mobilization of sav- welfare (Alesina and Perotti 1996), as well as poor invest- ings required to boost investment and growth. For instance, ment and growth (Barro 1991; Campos and Nugent 2003) ECOWAS savings rates were lower than those of Latin all of which tend to lower savings. Da Silva (1998) opined American and the Caribbean, SSA and the world averages that instability increases a state’s discretionary power to the between 1970 and 2010. Similarly, two regions - East Asia extent that the state violates the individual’s property rights and the Pacific and Europe and Central Asia, had higher sav - or fails to enforce their rights, including non-guaranteeing ings rates compared to ECOWAS in 1980-2010 and 1990- of contracts such as savings and investment. Political insta- 2010, respectively (Figure 1). bility also increases the perceived uncertainties/risks associ- In addition, at the individual level, many ECOWAS coun- ated with savings and investment because it may prevent tries did not fare better as their savings rates were lower people from enjoying the returns/incomes from their sav- than both regional and world savings rates between 1970 ings/investment, and therefore lead to lower future savings. and 2010. Also, ECOWAS countries’ savings rates occasion- Edwards (1996) argued that a higher probability of ally fluctuated and declined during the same period (Figure changes in the government/party in power (political insta- 2). Elbadawi and Mwega (2000) attributed the low savings bility) reduces the incentives to save. The author maintained rates in SSA countries (including ECOWAS) to low income that, since savings only translates after a lag into investment, per capita, a high young-age dependency ratio, and high production and consumption, projects initiated by the gov- dependence on aid. ernment in power today may be completed and its benefits Coupled with inadequate savings rates, is the political realized at a later date when the opposition party may have instability (military coups, political violence, civil wars, and assumed power. If this happens, the credit of such projects ethno-religious crises) that has ravaged the region since usually goes to the opposition, even though it was initiat- the 1960s and has continued unabated. The rising political ed by the party previously in power. In addition, Edwards crisis and uncertainty in many developing countries have (1996) pointed out that political polarization (differences attracted the interest of notable organizations, institutions in political parties’ preferences) influences a government’s and groups, who later devised the mechanisms to meas- decisions to save. If the preferences of the party in power ure the extent of perceived political uncertainties or risks are similar to those of the opposition, there is a high ten- in each country. One such organization is the Political Risk dency that the party in power will save (even if there is a Service Group, which publishes the International Country high probability of changes to the party in power) and vice Risk Guide (ICRG). The ICRG political risk rating (PRR) ranges versa. Therefore, it is common to see lower savings in politi- between 0% and 100%. A PRR of 0.0%-49.9% implies a very cally unstable countries. high risk; 50.0%-59.9% a high risk; 60.0%-69.9% a moderate Given that income level varies across countries, the im- risk; 70.0%-79.9% a low risk; and 80.0% or more indicates pact of political instability on savings may depend on in- a very low risk. Figure 3 shows the PRR for ECOWAS coun- come level. Mauro (1995) asserted that low income (poor) tries from 1999 to 2011. Gambia and Ghana appeared to be countries tend to be politically unstable, thus suggesting the least politically risky among ECOWAS countries, as their that high income moderates (lowers) the impact of politi- PRR was 60% and above during 1999-2011, but Gambia’s re- cal instability in an economy. It also indicates that at high cent rating suggests that it is heading towards becoming a income levels countries may likely have a politically stable high risk country. Also, Burkina Faso was rated above many environment which in turn enhances overall economic countries in the region, with an average PRR of 60% during performance, including promoting savings mobilization. the same period. In the same vein, Sierra Leone had a better 54 South East European Journal of Economics and Business, Volume 8 (2) 2013 Low savings rates in the economic community of West African states (ECOWAS): The role of the political instability-income interaction Figure 1: Savings rates across developing regions Source: Authors computation base on the WDI data Figure 2: Savings rates across ECOWAS countries Source: Authors computation base on the WDI data political environment compared to most of its neighbors, as a gradual improvement starting from 2006. Unfortunately, its rating stood at an average of 60%-65% during 2004-2010. Africa’s most populous and richest country (Nigeria) had a In the case of Cote D’Ivoire and Guinea, their PRR indicates very low PRR (less than 50%) from 1999 to 2011, signaling that political instability is on the rise. For example, Guinea’s a highly politically unstable environment. Other countries PRR fell from almost 50% in 1999-2005 to less than 50% in such as Niger and Senegal fared better than Nigeria as they 2006-2011, while Cote D’Ivoire’s PRR declined continuously both had a PRR of 50%-60%. Though Mali’s PRR was 60% from 1999 to 2011. The PRR of Guinea Bissau stood at 51%- during 1999-2006, it has continued to decline since 2007. 57%, but recent ratings point to a worsening political situa- In summary, available evidence suggests that low in- tion in the country. Liberia’s low PRR reflects the instability come ECOWAS countries are politically unstable and faced by the country in the past, but the rating has shown have failed to mobilize the higher savings needed to raise South East European Journal of Economics and Business, Volume 8 (2) 2013 55 Low savings rates in the economic community of West African states (ECOWAS): The role of the political instability-income interaction Figure 3: ECOWAS countries political risk rating Source: Authors computation base on the ICRG data. Benin and Cape Verde are excluded investment and growth. It is not surprising, therefore, that Hondroyiannis (2006) assessed the main determinants the region is highly underdeveloped, with unfavorable eco- of savings in 13 European countries from 1961 to 1998 by nomic conditions such as low income, high poverty, and un- employing the panel co-integration technique. The author employment, to mention just a few. confirmed a positive effect of old-age dependency, govern- ment budget, growth of real disposable income, real inter- est rate and inflation rate on savings. In addition, the author discovered that liquidity constraints and financial develop - REVIEW OF THE EMPIRICAL LITERATURE ON ment have a negative impact on savings. Gutiérrez (2007) SAVINGS studied the determinants of savings in 9 Latin American Many scholars have attempted to investigate the determi- countries from 1990 to 2003, using pooled OLS, fixed effects nants of savings across countries. For instance, Kelly and and random effects estimation techniques. The results illus- Mavrotas (2003) investigated the determinants of savings in trate that inflation rate, GDP growth, government balance, 17 African countries with a primary focus on financial de - and financial depth have a positive impact on savings, while velopment. The authors employed a panel co-integration foreign savings has a negative effect on savings. Adewuyi, method and discovered that financial sector development Bankole, and Arawomo (2010) examined the determinants has a positive effect on savings in the countries considered of savings in ECOWAS countries during the period 1980- in their study. Also, Agenor and Aizenman (2004) employed 2006, using pooled OLS, fixed effects and random effects the instrumental variable technique to examine the deter- methods of analysis. The authors confirmed the negative minants of savings in SSA countries during the period 1980- impact of gross domestic income per capita, deposit rate, 1996. The results show that the terms of trade and income financial development, inflation, budget deficit and terms per capita have a positive effect on savings, while govern- of trade on savings, while they showed that life expectancy ment savings, financial development and foreign savings has a positive effect on savings. have a negative effect on savings. There are not many studies conducted to investigate the 56 South East European Journal of Economics and Business, Volume 8 (2) 2013 Low savings rates in the economic community of West African states (ECOWAS): The role of the political instability-income interaction impact of political instability on savings. But the few studies Another important assumption of the PIH is that permanent that have examined the relationship between the variables changes in income exert more influence on consumption revealed that political instability has a negative impact on than temporary changes in income. An important determi- savings. For instance, Venieries and Gupta (1986) did a cross- nant of permanent income is individuals’ assets categorized national study to examine the impact of income distribution into both human (such as education) and non-human assets and socio-political instability on savings. The authors con- (for example, bonds, property, etc.). cluded that socio-political instability has a negative impact Both the LCH and PIH appear to be identical in many as- on savings. Similarly, Edwards (1996) established that po- pects because they assume that forward-looking consumers litical instability has a negative influence on savings in the plan for their future consumption by making an attempt to sample of countries considered in his study. Also, Fielding smooth-out consumption as much as they can due to varia- (2003) evaluated the effect of several indicators of political tions in their income streams (Jappelli 2005; Pistaferri 2009; instability on macroeconomic performance in Israel. The au- Rao and Sharma 2007). The obvious difference between the thor found a significant and negative effect of political in- theories is that the LCH assumes that individuals do not live stability on the saving behavior of Israelis. However, Radelet, forever, while the PIH assumes that individuals live forever Sachs, and Lee (1997) did not find any significant relation- (Pistaferri 2009). And since individuals do not live forever in ship between political factors and saving rates in a sample real life, both theories can be considered as one. of 72 countries. Given the issues raised above, an ideal savings model It is glaring that researchers have not paid adequate at- would consists of variables such as income (PCY) and in- tention to the savings and political instability relationship, come growth (GPCY), and age structure of the population particularly in the ECOWAS, one of the world’s most politi- (AGE). Moreover, since it is assumed that consumers can cally unstable regions and least successful in savings mobi- borrow and save/invest part of their income, it implies that lization. In fact, Edwards (1996) considered only 4 ECOWAS real interest rate (RIR) is also important when making con- countries, namely – Ghana, Nigeria, Sierra Leone and Togo, sumption/savings decisions and should be included in the while Venieries and Gupta (1986) included 5 countries – savings model. Thus, the savings (GSR) model is specified as: Cote D’Ivoire, Niger, Nigeria, Senegal, and Sierra Leone in their analysis, thus ignoring other countries that are consid- ܩܴܵ ൌ ߚ ൅ߚ ൅ߚ ܻܥܲܩ൅ߚ ൅ ଴ ଵ ଶ ଷ ered to be highly politically unstable in the region. Also, to ߚ ܴܴܫ ൅ܷǥǥǥǥǥǥǥǥǥǤͳ our knowledge, researchers have yet to examine whether the impact of political instability on savings depends on in- Following previous studies, the savings equation above come level in ECOWAS countries. Thus, this paper extends is slightly modified to incorporate other important vari- the literature by investigating the impact of political insta- ables. Given that agriculture (AGR) is the major occupation bility on savings, including examining whether the impact in ECOWAS countries, the variable is also included in the of political instability on savings depends on income level model. Furthermore, since income is more uncertain in de- in the ECOWAS region. veloping countries than developed countries (Athukorala and Sen 2004), inflation (INF) is included in the model to capture the level of uncertainty in the ECOWAS. Moreover, given that low income (poor) countries tend to be politically THEORETICAL FRAMEWORK AND MODEL unstable (Mauro 1995) and have lower savings rates, it is The savings model used in this paper was formulated on the possible that income level moderates the impact of politi- basis of the ideas of Friedman’s (1957) Permanent Income cal instability on savings, so that in high income countries Hypothesis (PIH) and Modigliani and Brumberg’s (1954) Life the effect of political instability on savings will be lower but Cycle Hypothesis (LCH). In explaining the LCH, Ando and higher in low income countries such as ECOWAS. Thus, po- Modigliani (1963) emphasized that individuals accumulate litical instability (POL) and a political instability-income in- wealth during their working years and make provisions for teraction (POL*PCY) are included in the savings model. The old age when they will no longer be able to earn income. general savings model is: Specifically, during young age, individuals earn low income ൌ ߚ ൅ߚ ൅ߚ ܻ ൅ߚ ൅ߚ ܴܫܴ relative to their consumption, and borrow to finance their ଴ ଵ ଶ ଷ ସ ൅ߚ ൅ߚ ൅ߚ ൅ߚ כܻ൅ ǥǥʹ consumption needs. In the second phase of their lifetime, ହ ଺ ଻ ଼ individuals earn income higher than their consumption, pay back their debt and save/invest the remainder. The final The savings model above will be estimated using the panel phase is when individuals attain retirement (non-working) model specified as follows: age and their incomes fall to zero. Thus, they will fall back on past savings or returns from their investment in order to ������ �� ������ ����������� �� � � �� � �� � �� maintain their consumption. Dirschmid and Glatzer (2004) �������� ������������� ����� � �� � �� � �� � �� asserted that the LCH assigns an important role to income �������������..…………………..3 � �� �� and income growth, and the age structure of the population in explaining savings rates. On the other hand, the PIH states Where it is the time period t in country i, and U is the er- that permanent wealth is more important than current dis- ror term. The variables are defined or measured as follows: posable income in explaining individuals’ consumption. South East European Journal of Economics and Business, Volume 8 (2) 2013 57 ܷ ܲܥ ܱܲܮ ܣܩܴ ܣܩܧ ܫܰܨ ܱܲܮ ܩܲܥ ܲܥܻ ܩܴܵ GSR is the gross savings rates and dependent variable. It the relationship between interest rate and savings would refers to gross (national) savings as a percentage of GDP. The be positive (Athukorala and Sen 2004; Nwachukwu and data were collected from the WDI. However, data on Nigeria Egwaikhide, 2007). Therefore, we expect the relationship were obtained from the Central Bank of Nigeria (CBN) due between savings rates and real interest rate to be either to its unavailability in the WDI. Although the LCH focuses on positive or negative. individual savings, it has been extended to study aggregate AGE refers to age dependency rate. This variable is de- savings (see Bloom, Canning, and Graham 2003; Bloom et al. fined as the ratio of the population below 15 years plus the 2007; Cook 2005). For instance, Bloom, Canning and Graham population over 65 years to the working population (aged (2003) argued that it is difficult to aggregate over individual 15-64 years). The data were obtained from the WDI. In ex- savings, and therefore used aggregate savings rates in their plaining the LCH, Ando and Modigliani (1963) argued that analysis. In line with this, Cook (2005) claimed that data on individuals accumulate wealth during their productive/ aggregate savings rates are widely available and are also working years and save (or make provisions) for retirement, likely to be more consistent. Thus, we employed aggregate since income is expected to fall during retirement. Thus, if savings rates. the working population rises relative to non-working (de- PCY refers to income (GDP) per capita. The data were col- pendent) population, savings will rise and vice versa. Thus, lected from the WDI. The subsistence-consumption theories we expect either a positive or negative relationship be- argue that savings rates tend to be higher in high income tween age dependency and savings rates. countries and lower in low income countries (Metin-Ozcan, AGR refers to agriculture. It is measured as agriculture Gunay, and Ertac 2003). Thus, we expect a negative rela- value as a percentage of GDP. The data were obtained from tionship between income per capita and savings rates in WDI. Given that a larger percentage of ECOWAS population ECOWAS countries. engage in agricultural activity, it is obvious that many face GPCY is the income (GDP) growth rate. The data were uncertainty in their future income. Interestingly, researchers collected from the WDI. The PIH predicts a negative relation- have pointed out that price fluctuations occasioned by the ship between income growth and savings because forward recent global financial crisis, increased uncertainty and risk looking consumers anticipate future increases in their per- and affected the economic status of commodity producers, manent income, and therefore dissave against future earn- consumers and traders (Pop, Rovinaru, and Rovinaru 2013). ings. But the LCH asserts that increases in income growth Skinner (1988) suggested that greater uncertainty about fu- have a positive effect on savings, since income growth in- ture incomes compels consumers to set aside some resourc- creases the savings of the working population relative to the es for precautionary purposes. Chowdhury (2001) and Khan non-working population (Metin-Ozcan, Gunay, and Ertac and Hye (2010) discovered that agricultural sector share in 2003). Overall, we expect the relationship between income GDP has a positive impact on savings. Thus, we expect a growth and savings rates to be either positive or negative. positive relationship between agriculture share in GDP and INF refers to inflation rate. The data were collected from savings rates. the WDI. Athukorala and Sen (2004) suggested that the im- POL refers to political instability. The variable has been pact of inflation raises uncertainty about future incomes, measured by the number of people killed in domestic mass leading to higher savings for precautionary purposes, par- violence as a fraction of the total population, number of suc- ticularly for households in developing countries whose in- cessful coups, number of attempted but unsuccessful coups, come prospects are much more uncertain than their coun- or number of politically motivated assassinations (Alesina terparts in developed countries. Also, if individuals seek to and Perotti 1996). However, due to the unavailability of such maintain a target level of wealth or liquid assets relative rich data for ECOWAS countries, the variable is proxied by to income, savings will rise with inflation. Similarly, Metin- the ICRG political risk rating or index. The ICRG index has Ozcan, Gunay, and Ertac (2003) suggested that macroeco- many components, including political leadership, military nomic uncertainty (captured by inflation rate) is expected presence in politics, external conflicts, organized religion in to have a positive effect on savings, as people try to hedge politics, racial and national tension, law and order, political against risk by increasing their savings. This view is support- terrorism, civil war, and political party development. Two ed by Skinner (1988) and Zeldes (1989). In the same man- other indicators were employed to serve as consistency and ner, Hondroyiannis (2006) suggested that in societies where robustness checks for the results obtained using the ICRG in- income prospects are less uncertain, inflation may results in dex. They include the Global Insight Business Conditions and lower savings. Thus, we expect a positive relationship be- Risk Indicators (WMO) index, and the Cingranelli-Richards tween inflation and savings rates. Human Rights Database and Political Terror Scale (HMO) in- RIR is the real interest rate. It is the nominal deposit rate dex (obtained from Worldwide Governance Indicators). The adjusted for inflation rate. The data were obtained from the ICRG index ranges between 0% and 100%, while the HMO WDI. The LCH asserts that a rising interest rate raises the and WMO indices range between 0 and 1. Higher values opportunity cost of current consumption, making the indi- indicate higher political stability (lesser political instabil- vidual consumer reduce current consumption and increase ity) and vice versa. Political instability disrupts production savings (substitution effect). But if a consumer is a net activity, destroys physical capital and displaces human capi- lender, increases in the interest rate lead to higher income tal, leading to high unemployment and lower savings (Le and consumption, and results in lower savings (income ef- 2004). On the other hand, political instability may promote fect). If the substitution effect outweighs the income effect, precautionary savings to address great risks ahead, so that 58 South East European Journal of Economics and Business, Volume 8 (2) 2013 Low savings rates in the economic community of West African states (ECOWAS): The role of the political instability-income interaction higher instability would be associated with higher savings. In addition, we conducted redundant fixed effects and The few studies conducted to assess the impact of political Hausman tests to select the most appropriate of the com- instability on savings indicate that political instability has a peting models, which included pooled OLS, fixed effects negative effect on savings (see Edwards 1996; Fielding 2003; (FE), and random effects (RE). The redundant fixed effects Venieries and Gupta 1986). Thus, we expect a positive rela- test tests the hypothesis of no time-specific effects in the es- tionship between higher political stability (higher political timates. If the test reveals the presence of effects, it is highly risk rating) and savings rates. probable that the OLS estimator will not be a good predic- POL*PCY refers to the political instability-income inter- tor of the cross section units over the time period. Similarly, action and indicates that the impact of political instability the Hausman statistic is used to test the hypothesis that the on savings depends on income levels. Though political in- RE estimates are consistent and preferable to FE estimates. stability tends to have adverse impact on savings, we expect income levels to moderate its impact on savings. Thus, the impact of political instability on savings should be lesser in Endogeneity higher income countries, but higher in low income countries such as ECOWAS. A potential problem that may arise using Studies have indicated that income GDP per capita/income this variable is multicollinearity because the interaction growth is endogenous to savings (Baldé 2011; Loayza, term is calculated from POL and PCY, which are also present Schmidt-Hebbel, and Servén 1999; Sinha and Sinha 1998), in the model. Therefore, multicollinearity is eliminated by re- suggesting that while increases in income per capita/in- gressing POL*PCY on POL and PCY, and the residuals series come growth results in higher savings, rising savings also is used in our estimation. leads to higher income per capita/income growth. The cau- It is important to mention that, of the 15 countries that sality between savings and income/growth would lead to make up the ECOWAS, only 13 were considered in this study. correlation between the control variables and disturbance The remaining two (Benin and Cape Verde) were left out due term, and therefore violates the assumptions of the linear to the unavailability of data on political instability indices regression model (Baldé 2011). Besides, it is difficult to de - for the countries. Moreover, we are missing data on other termine the impact of the individual variable on savings, variables (in particular savings rates) for some years in cer- and estimating such a relationship leads to a potential en- tain countries, such as Liberia and Guinea Bissau. Thus, we dogeneity bias. are left with an unbalanced dataset of 121 observations. The One way to solve this problem is to employ the Two period covered is 1996-2012. Stage Least Squares (TSLS)-instrumental variables method to estimate the relationship between savings and its po- tential determinants. The technique involves finding vari- ables that are highly correlated with the endogenous vari- PRESENTATION OF RESULTS AND DISCUSSION able, but uncorrelated with the disturbance term. While it is In the estimation of panel models that involve time-series somewhat difficult to select the appropriate instruments to and cross-sectional data (TSCS), one usually encounters control for endogeneity, employing the lagged values of ex- problems of contemporaneous correlations and hetero- planatory variables which are also endogenous can be very scedasticity (Beck and Katz 1995). Therefore, any inferences helpful (Baldé 2011). For instance, Baldé (2011) employed drawn based on the standard errors obtained using the the TSLS-instrumental variables method, which takes into ordinary least squares (OLS) estimator will be misleading. account FE to estimate the relationship between savings/ A better alternative is the Generalized Least Squares (GLS) investment and aid and remittances in SSA. The author used method (Parks 1967). Employing the GLS to estimate mod- income per capita lagged by two periods as an instrument els of TSCS requires one to have knowledge of the error for income per capita. Thus, we follow Baldé’s approach in process (auto-correlation and heteroscedasticity param- our estimation by using the TSLS. The Hausman test was eters), but this is usually not possible (Beck and Katz 1995). also employed to determine whether FE or RE is to be used A superior method of estimation is the Feasible GLS (FGLS). along with the TSLS estimator. Lastly, White’s method was Unfortunately, the FGLS tends to understate the exact vari- used to correct for heteroscedasticity, and TSLS estimates ability of the estimates of the standard errors of the coef- were employed to serve as a consistency and robustness ficients (Beck and katz 1995). check for PCSE estimates. The problems highlighted above can be avoided by using the Panel Corrected Standard Errors (PCSE) method (Beck and Katz 1995). The PCSE generates robust covari- Presentation of Results ances and accounts for deviations from the errors, leading to the ability to draw meaningful inferences. Also, it has been Prior to estimation of the savings model, we conducted a suggested that the PCSE performs better than the FGLS correlation test on political instability indicators. The cor- (Jonsson 2005) and it has been employed in recent studies relation matrix reported in Table 1 suggests a strong cor- (see, Bjørnstad and Nymoen 2008; Hanke and Hauser 2008; relation between ICRG and WMO (r=0.76), ICRG and HMO Juttner, Chung, and Leung 2006; Silaghi and Ghatak 2011). (r=0.64), and HMO and WMO (r=0.53). These findings sug- Thus, we employed the PCSE to estimate the savings mod- gest that the indicators are measuring the same thing. els for ECOWAS countries. South East European Journal of Economics and Business, Volume 8 (2) 2013 59 Low savings rates in the economic community of West African states (ECOWAS): The role of the political instability-income interaction Table 1: Correlation matrix for political instability indicators of the RE estimation reveal that higher political stability (captured by a higher political risk rating) and the political ICRG WMO HMO instability-income interaction have a significant positive ef- ICRG 1.00 – – fect on savings. Other important determinants of savings include the inflation rate and agricultural share in GDP, with WMO 0.76 1.00 – positive and negative effects, respectively. HMO 0.64 0.53 1.00 In an attempt to check the consistency and robustness of the results obtained using the ICRG index, we re-estimat- Note: ICRG is International Country Risk Guide, HMO is Cingranelli- Richards Human Rights Database and Political Terror Scale, and ed the savings models using the WMO and HMO indices. WMO is Global Insight Business Conditions and Risk. Although not presented here, the results are consistent. We went further to estimate our relationship using the OLS and TSLS estimators taking into account RE, as the re- The results of estimations and tests conducted using the sults of the Hausman test indicated that models with RE ICRG index are presented in Table 2. The result of the redun- would be preferable. Using the ICRG index, the results pre- dant fixed effects test indicates the presence of effects in the sented in Table 3 indicate that higher political stability has estimates. The result of the Hausman test demonstrates that a significant positive effect on savings, and the impact of the RE estimates are preferable to FE estimates. The results political instability on savings is higher at low income levels Table 2: Estimation results using the ICRG index (Dependent variable: GSR) Variables Pooled OLS FE RE Constant -1.6926 84.181*** 13.4614 (15.246) (27.3159) (18.4148) POL 0.1460** 0.1579* 0.1314** (0.0642) (0.0899) (0.0773) PCY 0.0043** 0.0026 0.0039 (0.0021) (0.0026) (0.0025) POL*PCY -0.0001** -0.0009** -0.0008** (0.0001) (0.0001) (0.0001) GPCY 0.1438 0.1211 0.1170 (0.1159) (0.1208) (0.1093) AGE 0.1359 -1. 975** -0.2055 (0.2982) (0.5685) (0.3806) INF 0.325*** 0.2190 0.3085* (0.0950) (0.2467) (0.1612) RIR 0.2140* 0.2042 0.2320 (0.1230) (0.2550) (0.1726) AGR -0.218** 0.1471 -0.166** (0.0673) (0.1105) (0.0776) R 0.45 0.59 0.34 Redundant FE Test - 3.46 - (0.0001) Hausman Test (X ) - 0.00 - (1.0000) F-Stat. 11.54 8.19 7.33 (0.0000) (0.0000) (0.0000) Obs. 121 121 121 Note: *, **, *** indicates significant at 10%, 5%, and 1%, respectively. Columns 3 & 4 are estimates generated using the robust coefficient covariance method, i.e. PCSE (Cross-section SUR). Standard errors are in parenthesis. A positive sign of POL indicates higher political stabil- ity (lesser political instability). 60 South East European Journal of Economics and Business, Volume 8 (2) 2013 Low savings rates in the economic community of West African states (ECOWAS): The role of the political instability-income interaction Discussion but lesser at high income levels. Other than our variables of interest, income per capita, inflation rate, and real interest rate all have a significant positive impact on savings, but the The results reported above reveal that higher political leads effect of agriculture on savings is negative. We also used the to higher savings in ECOWAS countries. The finding con- WMO and HMO indices to check for the consistency of the firms the outcome of previous studies (see, Edwards 1996; results obtained using the ICRG index. The results (though Fielding 2003; Venieries and Gupta 1986). Thus, declining po- not presented here) are consistent. litical unrest/violence, higher stability in government, lesser Overall, the results of PCSE, OLS, and TSLS with RE illus- ethno-religious conflict, etc., reduce uncertainties and risks trate that higher political stability is associated with higher associated with savings, and therefore promote savings mo- savings, and higher income tends to reduce the impact of bilization. Similarly, higher political stability promotes the political instability on savings. Moreover, the OLS and TSLS enforcement of property rights and the guarantee of con- estimates are identical for our variables of interest, indicat- tracts. This increases the assurance that individuals will en- ing that the OLS estimates are consistent and unbiased. joy the returns/incomes on their savings/investment, lead- Therefore, endogeneity is not a problem in the estimated ing to future higher savings. A politically stable atmosphere relationships, and there is no simultaneity between savings enhances production through higher savings and invest- and income per capita/income growth. ment, to mention just a few. The increased output growth leads to higher employment and income, and savings. The political instability-income interaction is significant Table 3: Estimation results using the ICRG index (Dependent vari- and the variable has the expected sign (especially in the es- able: GSR) timation that considered the ICRG index). This suggests that income level moderates the adverse effect of political insta- Variables OLS/RE TSLS/RE bility on savings, so that at higher income levels the impact of political instability on savings is less. Since it has been sug- Constant 13.4614 -4.0378 gested that low income (lack of economic opportunities) is (16.1078) (20.6255) a major reason for political instability in ECOWAS countries (Akenroye 2012), higher incomes (and improvement in eco- POL 0.1314** 0.2378** nomic conditions) will reduce discontent and dissatisfaction (0.0605) (0.1141) among the citizens, including socio-political unrest and fre- quent changes in government. In fact, an improvement in PCY 0.0039 0.0093* incomes (economic conditions) has been found to promote (0.0030) (0.0049) political stability, including sustaining democracy (Adelman POL*PCY -0.0008*** -0.0007*** and Morris 1968; Feng 1997; Helliwell 1994). Thus, higher in- come will reduce political instability in ECOWAS countries (7.68E-05) (9.33E-05) and promote savings mobilization. GPCY 0.1170 -0.7784 Income per capita has a significant and positive effect on savings. This finding lends support to those reported in (0.0931) (0.8461) previous studies in developing countries (see Collins 1991; AGE -0.2055 -0.0484 Elbadawi and Mwega 2000). Thus, rising income raises households’ ability to finance their consumption and saving (0.3534) (0.3985) of the remainder. Cross–country studies have indicated that INF 0.3085* 0.3044* high income countries save a higher percentage of their in- (0.1741) (0.1817) come (Metin-Ozcan, Gunay, and Ertac 2003). Inflation rate has a significant positive effect on sav - RIR 0.2320 0.4597* ings. This outcome confirms those of previous studies (see (0.1515) (0.2452) Burnside, Schmidt-Hebbel, and Servén 1999; Callen and Thimann 1997; Hondroyiannis 2006; Hüfner and Koske AGR -0.1663** -0.0225 2010; Loayza, Schmidt-Hebbel, and Serven 1999). Thus, (0.0761) (0.1180) higher inflation (a measure of macroeconomic uncertainty) raises uncertainty regarding future earnings, and therefore R 0.34 0.03 forces individuals to increase their savings on precaution- F-Stat. 7.33 8.73 ary grounds. Athukorala and Sen (2004) pointed out that (0.0000) (0.0000) households’ income is more uncertain in developing coun- tries than their developed counterparts, making savings rise Obs. 121 121 with the inflation rate. In-as-much as many households in ECOWAS countries are employed in the agricultural sector Note: *, **, *** indicates significant at 10%, 5%, and 1%, respec - and face uncertainty with respect to their future incomes, tively. White’s method correction was used to solve the problem they are compelled to save for precautionary purposes. of heteroscedasticity. Standard errors are in parenthesis. A posi- Real interest rate has a significant and positive effect tive sign of POL indicates higher political stability (lesser political on savings. The finding lends support to previous ones instability). South East European Journal of Economics and Business, Volume 8 (2) 2013 61 Low savings rates in the economic community of West African states (ECOWAS): The role of the political instability-income interaction (see Athukorala and Tsai 2003; Callen and Thimann 1997; analysis/278-ecowas-and-the -recent-coups-in-west-africa- Burnside, Schmidt-Hebbel, and Servén 1999; Hondroyiannis which-way-forward.html (Accessed November 6, 2013). 2006; Hüfner and Koske 2010). Thus, increases in real inter- Alesina, A., Ozler, S., Roubini, N. and Swagel, P. 1996. Political in- est rate induce households to raise their savings in a bid to stability and economic growth. Journal of Economic Growth 1: earn higher returns in the future. Lowering inflation rate in- 189-212. creases real interest rates (Edwards 1996). Alesina, A. and Perotti, R. 1996. Income distribution, political in- Agriculture has a significant and negative effect on sav - stability and investment. European Economic Review 40: ings. This reflects a situation where the agricultural sector is 1203-1228. highly underdeveloped and practised at subsistence level, Ando, A. and Modigliani, F. 1963. The ‘life cycle’ hypothesis of sav- implying low incomes for most households employed in the ing: Aggregate implications and tests. American Economic sector in ECOWAS countries. Thus, given low income levels Review, March. and subsistence agricultural production, additional output Athukorala, P. and Sen, K. 2004. The determinants of private saving will be consumed rather than sold to generate additional in- in India, World Development 32: 491-503. come, leading to lower savings. In fact, poor households will Athukorala, P. and Tsai, P. 2003. 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This study employs PCSE, OLS and curve tested on OECD panel data. Institut für Weltwirtschaft TSLS with random effects to investigate the effect of the po - Economics Discussion Paper 4. litical instability-income interaction on savings in ECOWAS Bloom, D. E., Canning, D. and Graham, B. 2003. Longevity and life countries. The PCSE, OLS and TSLS estimates are identical cycle savings. Scandinavian Journal of Economics 105: 319-338. for our variables of interest (political instability and politi- Bloom, D. E., Canning, D., Mansfield, R. and Moore, M. 2007. cal instability-income interaction). The empirical evidence Demographic change, social security systems and savings. indicates that a politically stable environment is required Journal of Monetary Economics 54: 92-114. for the mobilization of higher savings in ECOWAS countries. Burnside, C., Schmidt-Hebbel, K. and Servén, L. 1999. Saving in Moreover, the results illustrate that the impact of political Mexico: The national and international evidence. Economía instability on savings is higher in ECOWAS countries due to Mexicana 8: 181-230. their low income levels. Other important determinants of Callen, T. and Thinmann, C. 1997. Empirical determinants of house- savings include income per capita, inflation rate, real inter - hold saving: Evidence from OECD countries. IMF Working est rate and agricultural share in GDP. Based on the findings, Paper 181. policies to raise incomes are required to promote political Campos, N. F. and Nugent, J. B. 2003. Aggregate investment and stability in order to raise savings in the region. political instability: An econometric investigation. Economica 70: 533-549. Central Bank of Nigeria. REFERENCES Chowdhury, A. R. 2001. The impact of financial reform on private savings in Bangladesh. WIDER Discussion Paper 78. Adelman, I. and Morris, C. T. 1968. 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Low Savings Rates in the Economic Community of West African States (Ecowas): The Role of the Political Instability-Income Interaction

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Abstract

This paper employs PCSE, OLS and TSLS with random effects to investigate the impact of the political instability- income interaction on savings in ECOWAS countries during the period 1996-2012. The empirical evidence illustrates that higher political stability is associated with higher savings and income levels moderate the adverse effect of politi- cal instability on savings, indicating that the impact of political instability on savings is higher in low income ECOWAS countries, but lesser at higher levels of income. The paper recommends the promotion of political stability via increases in incomes to raise savings in the ECOWAS region. Keywords: savings, political instability. JEL classification: O1, O11 INTRODUCTION The role of savings in economic development has been The region has also seen changes in government (elected discussed extensively in the literature (for instance, see or military) more than any other region on the African con- Lucas 1988; Romer 1986; Solow 1956). Despite the impor- tinent due mainly to military coups. In the year 1985, for in- tance of high savings rates, World Development Indicators stance, 11 ECOWAS countries had military governments (Edi (WDI) reveal that savings rates declined and/or fluctuated 2006). Other than military coups, ethnic and religious crises across developing regions of the world, including East Asia including civil wars appear to be common characteristics and the Pacific, the Middle East and North Africa, Latin of ECOWAS countries. In particular, there were civil wars in America and the Caribbean, Europe and Central Asia, and Liberia (1989-96 and 1999-2003), Sierra Leone (1991-2002), Sub-Saharan Africa (SSA) between 1970 and 2010. In addi- * Nurudeen Abu, MSc tion, the ECOWAS region recorded little success in savings PhD Candidate mobilization compared to other developing regions during Othman Yeop Abdullah Graduate School of Business, the same period. Although inadequate savings undermines Universiti Utara Malaysia a country’s economic development (Adewuyi, Bankole, and Email: abu.nurudeen@yahoo.com Arawomo 2010) increased access to international capital can cushion the adverse effects of lower savings in an economy. Mohd Zaini Abd Karim, Ph.D Unfortunately, many SSA countries (including ECOWAS) are Professor facing declines in international capital inflow as a results Othman Yeop Abdullah Graduate School of Business, of factors that include lending constraints (Elbadawi and Universiti Utara Malaysia Mwega 2000), while the recent global financial crisis has Email: zaini500@uum.edu.my further reduced the countries’ access to external resources. Besides low savings, the ECOWAS region has witnessed Mukhriz Izraf Azman Aziz, PhD political instability since the 1960s, when a number of coun- School of Economics, Finance and Banking, Universiti tries attained independence, and up through the late 1980s Utara Malaysia due to frequent military interferences in politics (Edi 2006). Email: mukhriz@uum.edu.my Copyright © 2013 by the School of Economics and Business Sarajev 53 o Low savings rates in the economic community of West African states (ECOWAS): The role of the political instability-income interaction Guinea Bissau (1998) and Cote D’Ivoire (2002-2007 and Therefore, it is expected that for low income ECOWAS coun- 2010-2011) (Zounmenou and Loua 2011). Also, between tries, higher income would lead to an improvement in politi- 2009 and 2012, the military staged coups in Guinea Bissau, cal stability and higher savings. Mali and Niger, while Nigeria continues to contend with eth- The objective of this paper therefore is to examine the no-religious crises. The political crises facing these countries impact of political instability-income interaction on savings are due to lack of economic opportunities, youth unrest, or- in the ECOWAS. We believe that focusing on the ECOWAS ganized crime, piracy, endemic corruption, higher spending region will reduce the problem of heterogeneity found in on the military than basic services, disrespect for the rule many cross-country studies (Gyimah-Brempong 2002). The of law and democratic principles by the ruling elite, human remainder of the paper is structured as follows. Section rights abuse, military interference in politics, and lack of in- two highlights savings and political instability patterns in stitutional reforms (Akenroye 2012). ECOWAS countries, while section three reviews the empiri- Though the literature has not adequately addressed the cal literature on savings. Section four contains a theoretical role of political instability in savings mobilization (Da Silva framework and model, and section five presents results and 1998), political instability may be an important determinant discussion. Section six concludes the paper. of savings, particularly in ECOWAS countries. During periods of political instability, government and policy makers usu- ally make sub-optimal and short-term macroeconomic poli- SAVINGS AND POLITICAL INSTABILITY IN cies, including switching policies, and in the process create ECOWAS COUNTRIES volatility which has negative consequences on the econo- my (Aisen and Veiga 2013; Alesina et al. 1996). These conse- As mentioned in the introductory section, the ECOWAS re- quences include low production and income, and declining gion has recorded little success in the mobilization of sav- welfare (Alesina and Perotti 1996), as well as poor invest- ings required to boost investment and growth. For instance, ment and growth (Barro 1991; Campos and Nugent 2003) ECOWAS savings rates were lower than those of Latin all of which tend to lower savings. Da Silva (1998) opined American and the Caribbean, SSA and the world averages that instability increases a state’s discretionary power to the between 1970 and 2010. Similarly, two regions - East Asia extent that the state violates the individual’s property rights and the Pacific and Europe and Central Asia, had higher sav - or fails to enforce their rights, including non-guaranteeing ings rates compared to ECOWAS in 1980-2010 and 1990- of contracts such as savings and investment. Political insta- 2010, respectively (Figure 1). bility also increases the perceived uncertainties/risks associ- In addition, at the individual level, many ECOWAS coun- ated with savings and investment because it may prevent tries did not fare better as their savings rates were lower people from enjoying the returns/incomes from their sav- than both regional and world savings rates between 1970 ings/investment, and therefore lead to lower future savings. and 2010. Also, ECOWAS countries’ savings rates occasion- Edwards (1996) argued that a higher probability of ally fluctuated and declined during the same period (Figure changes in the government/party in power (political insta- 2). Elbadawi and Mwega (2000) attributed the low savings bility) reduces the incentives to save. The author maintained rates in SSA countries (including ECOWAS) to low income that, since savings only translates after a lag into investment, per capita, a high young-age dependency ratio, and high production and consumption, projects initiated by the gov- dependence on aid. ernment in power today may be completed and its benefits Coupled with inadequate savings rates, is the political realized at a later date when the opposition party may have instability (military coups, political violence, civil wars, and assumed power. If this happens, the credit of such projects ethno-religious crises) that has ravaged the region since usually goes to the opposition, even though it was initiat- the 1960s and has continued unabated. The rising political ed by the party previously in power. In addition, Edwards crisis and uncertainty in many developing countries have (1996) pointed out that political polarization (differences attracted the interest of notable organizations, institutions in political parties’ preferences) influences a government’s and groups, who later devised the mechanisms to meas- decisions to save. If the preferences of the party in power ure the extent of perceived political uncertainties or risks are similar to those of the opposition, there is a high ten- in each country. One such organization is the Political Risk dency that the party in power will save (even if there is a Service Group, which publishes the International Country high probability of changes to the party in power) and vice Risk Guide (ICRG). The ICRG political risk rating (PRR) ranges versa. Therefore, it is common to see lower savings in politi- between 0% and 100%. A PRR of 0.0%-49.9% implies a very cally unstable countries. high risk; 50.0%-59.9% a high risk; 60.0%-69.9% a moderate Given that income level varies across countries, the im- risk; 70.0%-79.9% a low risk; and 80.0% or more indicates pact of political instability on savings may depend on in- a very low risk. Figure 3 shows the PRR for ECOWAS coun- come level. Mauro (1995) asserted that low income (poor) tries from 1999 to 2011. Gambia and Ghana appeared to be countries tend to be politically unstable, thus suggesting the least politically risky among ECOWAS countries, as their that high income moderates (lowers) the impact of politi- PRR was 60% and above during 1999-2011, but Gambia’s re- cal instability in an economy. It also indicates that at high cent rating suggests that it is heading towards becoming a income levels countries may likely have a politically stable high risk country. Also, Burkina Faso was rated above many environment which in turn enhances overall economic countries in the region, with an average PRR of 60% during performance, including promoting savings mobilization. the same period. In the same vein, Sierra Leone had a better 54 South East European Journal of Economics and Business, Volume 8 (2) 2013 Low savings rates in the economic community of West African states (ECOWAS): The role of the political instability-income interaction Figure 1: Savings rates across developing regions Source: Authors computation base on the WDI data Figure 2: Savings rates across ECOWAS countries Source: Authors computation base on the WDI data political environment compared to most of its neighbors, as a gradual improvement starting from 2006. Unfortunately, its rating stood at an average of 60%-65% during 2004-2010. Africa’s most populous and richest country (Nigeria) had a In the case of Cote D’Ivoire and Guinea, their PRR indicates very low PRR (less than 50%) from 1999 to 2011, signaling that political instability is on the rise. For example, Guinea’s a highly politically unstable environment. Other countries PRR fell from almost 50% in 1999-2005 to less than 50% in such as Niger and Senegal fared better than Nigeria as they 2006-2011, while Cote D’Ivoire’s PRR declined continuously both had a PRR of 50%-60%. Though Mali’s PRR was 60% from 1999 to 2011. The PRR of Guinea Bissau stood at 51%- during 1999-2006, it has continued to decline since 2007. 57%, but recent ratings point to a worsening political situa- In summary, available evidence suggests that low in- tion in the country. Liberia’s low PRR reflects the instability come ECOWAS countries are politically unstable and faced by the country in the past, but the rating has shown have failed to mobilize the higher savings needed to raise South East European Journal of Economics and Business, Volume 8 (2) 2013 55 Low savings rates in the economic community of West African states (ECOWAS): The role of the political instability-income interaction Figure 3: ECOWAS countries political risk rating Source: Authors computation base on the ICRG data. Benin and Cape Verde are excluded investment and growth. It is not surprising, therefore, that Hondroyiannis (2006) assessed the main determinants the region is highly underdeveloped, with unfavorable eco- of savings in 13 European countries from 1961 to 1998 by nomic conditions such as low income, high poverty, and un- employing the panel co-integration technique. The author employment, to mention just a few. confirmed a positive effect of old-age dependency, govern- ment budget, growth of real disposable income, real inter- est rate and inflation rate on savings. In addition, the author discovered that liquidity constraints and financial develop - REVIEW OF THE EMPIRICAL LITERATURE ON ment have a negative impact on savings. Gutiérrez (2007) SAVINGS studied the determinants of savings in 9 Latin American Many scholars have attempted to investigate the determi- countries from 1990 to 2003, using pooled OLS, fixed effects nants of savings across countries. For instance, Kelly and and random effects estimation techniques. The results illus- Mavrotas (2003) investigated the determinants of savings in trate that inflation rate, GDP growth, government balance, 17 African countries with a primary focus on financial de - and financial depth have a positive impact on savings, while velopment. The authors employed a panel co-integration foreign savings has a negative effect on savings. Adewuyi, method and discovered that financial sector development Bankole, and Arawomo (2010) examined the determinants has a positive effect on savings in the countries considered of savings in ECOWAS countries during the period 1980- in their study. Also, Agenor and Aizenman (2004) employed 2006, using pooled OLS, fixed effects and random effects the instrumental variable technique to examine the deter- methods of analysis. The authors confirmed the negative minants of savings in SSA countries during the period 1980- impact of gross domestic income per capita, deposit rate, 1996. The results show that the terms of trade and income financial development, inflation, budget deficit and terms per capita have a positive effect on savings, while govern- of trade on savings, while they showed that life expectancy ment savings, financial development and foreign savings has a positive effect on savings. have a negative effect on savings. There are not many studies conducted to investigate the 56 South East European Journal of Economics and Business, Volume 8 (2) 2013 Low savings rates in the economic community of West African states (ECOWAS): The role of the political instability-income interaction impact of political instability on savings. But the few studies Another important assumption of the PIH is that permanent that have examined the relationship between the variables changes in income exert more influence on consumption revealed that political instability has a negative impact on than temporary changes in income. An important determi- savings. For instance, Venieries and Gupta (1986) did a cross- nant of permanent income is individuals’ assets categorized national study to examine the impact of income distribution into both human (such as education) and non-human assets and socio-political instability on savings. The authors con- (for example, bonds, property, etc.). cluded that socio-political instability has a negative impact Both the LCH and PIH appear to be identical in many as- on savings. Similarly, Edwards (1996) established that po- pects because they assume that forward-looking consumers litical instability has a negative influence on savings in the plan for their future consumption by making an attempt to sample of countries considered in his study. Also, Fielding smooth-out consumption as much as they can due to varia- (2003) evaluated the effect of several indicators of political tions in their income streams (Jappelli 2005; Pistaferri 2009; instability on macroeconomic performance in Israel. The au- Rao and Sharma 2007). The obvious difference between the thor found a significant and negative effect of political in- theories is that the LCH assumes that individuals do not live stability on the saving behavior of Israelis. However, Radelet, forever, while the PIH assumes that individuals live forever Sachs, and Lee (1997) did not find any significant relation- (Pistaferri 2009). And since individuals do not live forever in ship between political factors and saving rates in a sample real life, both theories can be considered as one. of 72 countries. Given the issues raised above, an ideal savings model It is glaring that researchers have not paid adequate at- would consists of variables such as income (PCY) and in- tention to the savings and political instability relationship, come growth (GPCY), and age structure of the population particularly in the ECOWAS, one of the world’s most politi- (AGE). Moreover, since it is assumed that consumers can cally unstable regions and least successful in savings mobi- borrow and save/invest part of their income, it implies that lization. In fact, Edwards (1996) considered only 4 ECOWAS real interest rate (RIR) is also important when making con- countries, namely – Ghana, Nigeria, Sierra Leone and Togo, sumption/savings decisions and should be included in the while Venieries and Gupta (1986) included 5 countries – savings model. Thus, the savings (GSR) model is specified as: Cote D’Ivoire, Niger, Nigeria, Senegal, and Sierra Leone in their analysis, thus ignoring other countries that are consid- ܩܴܵ ൌ ߚ ൅ߚ ൅ߚ ܻܥܲܩ൅ߚ ൅ ଴ ଵ ଶ ଷ ered to be highly politically unstable in the region. Also, to ߚ ܴܴܫ ൅ܷǥǥǥǥǥǥǥǥǥǤͳ our knowledge, researchers have yet to examine whether the impact of political instability on savings depends on in- Following previous studies, the savings equation above come level in ECOWAS countries. Thus, this paper extends is slightly modified to incorporate other important vari- the literature by investigating the impact of political insta- ables. Given that agriculture (AGR) is the major occupation bility on savings, including examining whether the impact in ECOWAS countries, the variable is also included in the of political instability on savings depends on income level model. Furthermore, since income is more uncertain in de- in the ECOWAS region. veloping countries than developed countries (Athukorala and Sen 2004), inflation (INF) is included in the model to capture the level of uncertainty in the ECOWAS. Moreover, given that low income (poor) countries tend to be politically THEORETICAL FRAMEWORK AND MODEL unstable (Mauro 1995) and have lower savings rates, it is The savings model used in this paper was formulated on the possible that income level moderates the impact of politi- basis of the ideas of Friedman’s (1957) Permanent Income cal instability on savings, so that in high income countries Hypothesis (PIH) and Modigliani and Brumberg’s (1954) Life the effect of political instability on savings will be lower but Cycle Hypothesis (LCH). In explaining the LCH, Ando and higher in low income countries such as ECOWAS. Thus, po- Modigliani (1963) emphasized that individuals accumulate litical instability (POL) and a political instability-income in- wealth during their working years and make provisions for teraction (POL*PCY) are included in the savings model. The old age when they will no longer be able to earn income. general savings model is: Specifically, during young age, individuals earn low income ൌ ߚ ൅ߚ ൅ߚ ܻ ൅ߚ ൅ߚ ܴܫܴ relative to their consumption, and borrow to finance their ଴ ଵ ଶ ଷ ସ ൅ߚ ൅ߚ ൅ߚ ൅ߚ כܻ൅ ǥǥʹ consumption needs. In the second phase of their lifetime, ହ ଺ ଻ ଼ individuals earn income higher than their consumption, pay back their debt and save/invest the remainder. The final The savings model above will be estimated using the panel phase is when individuals attain retirement (non-working) model specified as follows: age and their incomes fall to zero. Thus, they will fall back on past savings or returns from their investment in order to ������ �� ������ ����������� �� � � �� � �� � �� maintain their consumption. Dirschmid and Glatzer (2004) �������� ������������� ����� � �� � �� � �� � �� asserted that the LCH assigns an important role to income �������������..…………………..3 � �� �� and income growth, and the age structure of the population in explaining savings rates. On the other hand, the PIH states Where it is the time period t in country i, and U is the er- that permanent wealth is more important than current dis- ror term. The variables are defined or measured as follows: posable income in explaining individuals’ consumption. South East European Journal of Economics and Business, Volume 8 (2) 2013 57 ܷ ܲܥ ܱܲܮ ܣܩܴ ܣܩܧ ܫܰܨ ܱܲܮ ܩܲܥ ܲܥܻ ܩܴܵ GSR is the gross savings rates and dependent variable. It the relationship between interest rate and savings would refers to gross (national) savings as a percentage of GDP. The be positive (Athukorala and Sen 2004; Nwachukwu and data were collected from the WDI. However, data on Nigeria Egwaikhide, 2007). Therefore, we expect the relationship were obtained from the Central Bank of Nigeria (CBN) due between savings rates and real interest rate to be either to its unavailability in the WDI. Although the LCH focuses on positive or negative. individual savings, it has been extended to study aggregate AGE refers to age dependency rate. This variable is de- savings (see Bloom, Canning, and Graham 2003; Bloom et al. fined as the ratio of the population below 15 years plus the 2007; Cook 2005). For instance, Bloom, Canning and Graham population over 65 years to the working population (aged (2003) argued that it is difficult to aggregate over individual 15-64 years). The data were obtained from the WDI. In ex- savings, and therefore used aggregate savings rates in their plaining the LCH, Ando and Modigliani (1963) argued that analysis. In line with this, Cook (2005) claimed that data on individuals accumulate wealth during their productive/ aggregate savings rates are widely available and are also working years and save (or make provisions) for retirement, likely to be more consistent. Thus, we employed aggregate since income is expected to fall during retirement. Thus, if savings rates. the working population rises relative to non-working (de- PCY refers to income (GDP) per capita. The data were col- pendent) population, savings will rise and vice versa. Thus, lected from the WDI. The subsistence-consumption theories we expect either a positive or negative relationship be- argue that savings rates tend to be higher in high income tween age dependency and savings rates. countries and lower in low income countries (Metin-Ozcan, AGR refers to agriculture. It is measured as agriculture Gunay, and Ertac 2003). Thus, we expect a negative rela- value as a percentage of GDP. The data were obtained from tionship between income per capita and savings rates in WDI. Given that a larger percentage of ECOWAS population ECOWAS countries. engage in agricultural activity, it is obvious that many face GPCY is the income (GDP) growth rate. The data were uncertainty in their future income. Interestingly, researchers collected from the WDI. The PIH predicts a negative relation- have pointed out that price fluctuations occasioned by the ship between income growth and savings because forward recent global financial crisis, increased uncertainty and risk looking consumers anticipate future increases in their per- and affected the economic status of commodity producers, manent income, and therefore dissave against future earn- consumers and traders (Pop, Rovinaru, and Rovinaru 2013). ings. But the LCH asserts that increases in income growth Skinner (1988) suggested that greater uncertainty about fu- have a positive effect on savings, since income growth in- ture incomes compels consumers to set aside some resourc- creases the savings of the working population relative to the es for precautionary purposes. Chowdhury (2001) and Khan non-working population (Metin-Ozcan, Gunay, and Ertac and Hye (2010) discovered that agricultural sector share in 2003). Overall, we expect the relationship between income GDP has a positive impact on savings. Thus, we expect a growth and savings rates to be either positive or negative. positive relationship between agriculture share in GDP and INF refers to inflation rate. The data were collected from savings rates. the WDI. Athukorala and Sen (2004) suggested that the im- POL refers to political instability. The variable has been pact of inflation raises uncertainty about future incomes, measured by the number of people killed in domestic mass leading to higher savings for precautionary purposes, par- violence as a fraction of the total population, number of suc- ticularly for households in developing countries whose in- cessful coups, number of attempted but unsuccessful coups, come prospects are much more uncertain than their coun- or number of politically motivated assassinations (Alesina terparts in developed countries. Also, if individuals seek to and Perotti 1996). However, due to the unavailability of such maintain a target level of wealth or liquid assets relative rich data for ECOWAS countries, the variable is proxied by to income, savings will rise with inflation. Similarly, Metin- the ICRG political risk rating or index. The ICRG index has Ozcan, Gunay, and Ertac (2003) suggested that macroeco- many components, including political leadership, military nomic uncertainty (captured by inflation rate) is expected presence in politics, external conflicts, organized religion in to have a positive effect on savings, as people try to hedge politics, racial and national tension, law and order, political against risk by increasing their savings. This view is support- terrorism, civil war, and political party development. Two ed by Skinner (1988) and Zeldes (1989). In the same man- other indicators were employed to serve as consistency and ner, Hondroyiannis (2006) suggested that in societies where robustness checks for the results obtained using the ICRG in- income prospects are less uncertain, inflation may results in dex. They include the Global Insight Business Conditions and lower savings. Thus, we expect a positive relationship be- Risk Indicators (WMO) index, and the Cingranelli-Richards tween inflation and savings rates. Human Rights Database and Political Terror Scale (HMO) in- RIR is the real interest rate. It is the nominal deposit rate dex (obtained from Worldwide Governance Indicators). The adjusted for inflation rate. The data were obtained from the ICRG index ranges between 0% and 100%, while the HMO WDI. The LCH asserts that a rising interest rate raises the and WMO indices range between 0 and 1. Higher values opportunity cost of current consumption, making the indi- indicate higher political stability (lesser political instabil- vidual consumer reduce current consumption and increase ity) and vice versa. Political instability disrupts production savings (substitution effect). But if a consumer is a net activity, destroys physical capital and displaces human capi- lender, increases in the interest rate lead to higher income tal, leading to high unemployment and lower savings (Le and consumption, and results in lower savings (income ef- 2004). On the other hand, political instability may promote fect). If the substitution effect outweighs the income effect, precautionary savings to address great risks ahead, so that 58 South East European Journal of Economics and Business, Volume 8 (2) 2013 Low savings rates in the economic community of West African states (ECOWAS): The role of the political instability-income interaction higher instability would be associated with higher savings. In addition, we conducted redundant fixed effects and The few studies conducted to assess the impact of political Hausman tests to select the most appropriate of the com- instability on savings indicate that political instability has a peting models, which included pooled OLS, fixed effects negative effect on savings (see Edwards 1996; Fielding 2003; (FE), and random effects (RE). The redundant fixed effects Venieries and Gupta 1986). Thus, we expect a positive rela- test tests the hypothesis of no time-specific effects in the es- tionship between higher political stability (higher political timates. If the test reveals the presence of effects, it is highly risk rating) and savings rates. probable that the OLS estimator will not be a good predic- POL*PCY refers to the political instability-income inter- tor of the cross section units over the time period. Similarly, action and indicates that the impact of political instability the Hausman statistic is used to test the hypothesis that the on savings depends on income levels. Though political in- RE estimates are consistent and preferable to FE estimates. stability tends to have adverse impact on savings, we expect income levels to moderate its impact on savings. Thus, the impact of political instability on savings should be lesser in Endogeneity higher income countries, but higher in low income countries such as ECOWAS. A potential problem that may arise using Studies have indicated that income GDP per capita/income this variable is multicollinearity because the interaction growth is endogenous to savings (Baldé 2011; Loayza, term is calculated from POL and PCY, which are also present Schmidt-Hebbel, and Servén 1999; Sinha and Sinha 1998), in the model. Therefore, multicollinearity is eliminated by re- suggesting that while increases in income per capita/in- gressing POL*PCY on POL and PCY, and the residuals series come growth results in higher savings, rising savings also is used in our estimation. leads to higher income per capita/income growth. The cau- It is important to mention that, of the 15 countries that sality between savings and income/growth would lead to make up the ECOWAS, only 13 were considered in this study. correlation between the control variables and disturbance The remaining two (Benin and Cape Verde) were left out due term, and therefore violates the assumptions of the linear to the unavailability of data on political instability indices regression model (Baldé 2011). Besides, it is difficult to de - for the countries. Moreover, we are missing data on other termine the impact of the individual variable on savings, variables (in particular savings rates) for some years in cer- and estimating such a relationship leads to a potential en- tain countries, such as Liberia and Guinea Bissau. Thus, we dogeneity bias. are left with an unbalanced dataset of 121 observations. The One way to solve this problem is to employ the Two period covered is 1996-2012. Stage Least Squares (TSLS)-instrumental variables method to estimate the relationship between savings and its po- tential determinants. The technique involves finding vari- ables that are highly correlated with the endogenous vari- PRESENTATION OF RESULTS AND DISCUSSION able, but uncorrelated with the disturbance term. While it is In the estimation of panel models that involve time-series somewhat difficult to select the appropriate instruments to and cross-sectional data (TSCS), one usually encounters control for endogeneity, employing the lagged values of ex- problems of contemporaneous correlations and hetero- planatory variables which are also endogenous can be very scedasticity (Beck and Katz 1995). Therefore, any inferences helpful (Baldé 2011). For instance, Baldé (2011) employed drawn based on the standard errors obtained using the the TSLS-instrumental variables method, which takes into ordinary least squares (OLS) estimator will be misleading. account FE to estimate the relationship between savings/ A better alternative is the Generalized Least Squares (GLS) investment and aid and remittances in SSA. The author used method (Parks 1967). Employing the GLS to estimate mod- income per capita lagged by two periods as an instrument els of TSCS requires one to have knowledge of the error for income per capita. Thus, we follow Baldé’s approach in process (auto-correlation and heteroscedasticity param- our estimation by using the TSLS. The Hausman test was eters), but this is usually not possible (Beck and Katz 1995). also employed to determine whether FE or RE is to be used A superior method of estimation is the Feasible GLS (FGLS). along with the TSLS estimator. Lastly, White’s method was Unfortunately, the FGLS tends to understate the exact vari- used to correct for heteroscedasticity, and TSLS estimates ability of the estimates of the standard errors of the coef- were employed to serve as a consistency and robustness ficients (Beck and katz 1995). check for PCSE estimates. The problems highlighted above can be avoided by using the Panel Corrected Standard Errors (PCSE) method (Beck and Katz 1995). The PCSE generates robust covari- Presentation of Results ances and accounts for deviations from the errors, leading to the ability to draw meaningful inferences. Also, it has been Prior to estimation of the savings model, we conducted a suggested that the PCSE performs better than the FGLS correlation test on political instability indicators. The cor- (Jonsson 2005) and it has been employed in recent studies relation matrix reported in Table 1 suggests a strong cor- (see, Bjørnstad and Nymoen 2008; Hanke and Hauser 2008; relation between ICRG and WMO (r=0.76), ICRG and HMO Juttner, Chung, and Leung 2006; Silaghi and Ghatak 2011). (r=0.64), and HMO and WMO (r=0.53). These findings sug- Thus, we employed the PCSE to estimate the savings mod- gest that the indicators are measuring the same thing. els for ECOWAS countries. South East European Journal of Economics and Business, Volume 8 (2) 2013 59 Low savings rates in the economic community of West African states (ECOWAS): The role of the political instability-income interaction Table 1: Correlation matrix for political instability indicators of the RE estimation reveal that higher political stability (captured by a higher political risk rating) and the political ICRG WMO HMO instability-income interaction have a significant positive ef- ICRG 1.00 – – fect on savings. Other important determinants of savings include the inflation rate and agricultural share in GDP, with WMO 0.76 1.00 – positive and negative effects, respectively. HMO 0.64 0.53 1.00 In an attempt to check the consistency and robustness of the results obtained using the ICRG index, we re-estimat- Note: ICRG is International Country Risk Guide, HMO is Cingranelli- Richards Human Rights Database and Political Terror Scale, and ed the savings models using the WMO and HMO indices. WMO is Global Insight Business Conditions and Risk. Although not presented here, the results are consistent. We went further to estimate our relationship using the OLS and TSLS estimators taking into account RE, as the re- The results of estimations and tests conducted using the sults of the Hausman test indicated that models with RE ICRG index are presented in Table 2. The result of the redun- would be preferable. Using the ICRG index, the results pre- dant fixed effects test indicates the presence of effects in the sented in Table 3 indicate that higher political stability has estimates. The result of the Hausman test demonstrates that a significant positive effect on savings, and the impact of the RE estimates are preferable to FE estimates. The results political instability on savings is higher at low income levels Table 2: Estimation results using the ICRG index (Dependent variable: GSR) Variables Pooled OLS FE RE Constant -1.6926 84.181*** 13.4614 (15.246) (27.3159) (18.4148) POL 0.1460** 0.1579* 0.1314** (0.0642) (0.0899) (0.0773) PCY 0.0043** 0.0026 0.0039 (0.0021) (0.0026) (0.0025) POL*PCY -0.0001** -0.0009** -0.0008** (0.0001) (0.0001) (0.0001) GPCY 0.1438 0.1211 0.1170 (0.1159) (0.1208) (0.1093) AGE 0.1359 -1. 975** -0.2055 (0.2982) (0.5685) (0.3806) INF 0.325*** 0.2190 0.3085* (0.0950) (0.2467) (0.1612) RIR 0.2140* 0.2042 0.2320 (0.1230) (0.2550) (0.1726) AGR -0.218** 0.1471 -0.166** (0.0673) (0.1105) (0.0776) R 0.45 0.59 0.34 Redundant FE Test - 3.46 - (0.0001) Hausman Test (X ) - 0.00 - (1.0000) F-Stat. 11.54 8.19 7.33 (0.0000) (0.0000) (0.0000) Obs. 121 121 121 Note: *, **, *** indicates significant at 10%, 5%, and 1%, respectively. Columns 3 & 4 are estimates generated using the robust coefficient covariance method, i.e. PCSE (Cross-section SUR). Standard errors are in parenthesis. A positive sign of POL indicates higher political stabil- ity (lesser political instability). 60 South East European Journal of Economics and Business, Volume 8 (2) 2013 Low savings rates in the economic community of West African states (ECOWAS): The role of the political instability-income interaction Discussion but lesser at high income levels. Other than our variables of interest, income per capita, inflation rate, and real interest rate all have a significant positive impact on savings, but the The results reported above reveal that higher political leads effect of agriculture on savings is negative. We also used the to higher savings in ECOWAS countries. The finding con- WMO and HMO indices to check for the consistency of the firms the outcome of previous studies (see, Edwards 1996; results obtained using the ICRG index. The results (though Fielding 2003; Venieries and Gupta 1986). Thus, declining po- not presented here) are consistent. litical unrest/violence, higher stability in government, lesser Overall, the results of PCSE, OLS, and TSLS with RE illus- ethno-religious conflict, etc., reduce uncertainties and risks trate that higher political stability is associated with higher associated with savings, and therefore promote savings mo- savings, and higher income tends to reduce the impact of bilization. Similarly, higher political stability promotes the political instability on savings. Moreover, the OLS and TSLS enforcement of property rights and the guarantee of con- estimates are identical for our variables of interest, indicat- tracts. This increases the assurance that individuals will en- ing that the OLS estimates are consistent and unbiased. joy the returns/incomes on their savings/investment, lead- Therefore, endogeneity is not a problem in the estimated ing to future higher savings. A politically stable atmosphere relationships, and there is no simultaneity between savings enhances production through higher savings and invest- and income per capita/income growth. ment, to mention just a few. The increased output growth leads to higher employment and income, and savings. The political instability-income interaction is significant Table 3: Estimation results using the ICRG index (Dependent vari- and the variable has the expected sign (especially in the es- able: GSR) timation that considered the ICRG index). This suggests that income level moderates the adverse effect of political insta- Variables OLS/RE TSLS/RE bility on savings, so that at higher income levels the impact of political instability on savings is less. Since it has been sug- Constant 13.4614 -4.0378 gested that low income (lack of economic opportunities) is (16.1078) (20.6255) a major reason for political instability in ECOWAS countries (Akenroye 2012), higher incomes (and improvement in eco- POL 0.1314** 0.2378** nomic conditions) will reduce discontent and dissatisfaction (0.0605) (0.1141) among the citizens, including socio-political unrest and fre- quent changes in government. In fact, an improvement in PCY 0.0039 0.0093* incomes (economic conditions) has been found to promote (0.0030) (0.0049) political stability, including sustaining democracy (Adelman POL*PCY -0.0008*** -0.0007*** and Morris 1968; Feng 1997; Helliwell 1994). Thus, higher in- come will reduce political instability in ECOWAS countries (7.68E-05) (9.33E-05) and promote savings mobilization. GPCY 0.1170 -0.7784 Income per capita has a significant and positive effect on savings. This finding lends support to those reported in (0.0931) (0.8461) previous studies in developing countries (see Collins 1991; AGE -0.2055 -0.0484 Elbadawi and Mwega 2000). Thus, rising income raises households’ ability to finance their consumption and saving (0.3534) (0.3985) of the remainder. Cross–country studies have indicated that INF 0.3085* 0.3044* high income countries save a higher percentage of their in- (0.1741) (0.1817) come (Metin-Ozcan, Gunay, and Ertac 2003). Inflation rate has a significant positive effect on sav - RIR 0.2320 0.4597* ings. This outcome confirms those of previous studies (see (0.1515) (0.2452) Burnside, Schmidt-Hebbel, and Servén 1999; Callen and Thimann 1997; Hondroyiannis 2006; Hüfner and Koske AGR -0.1663** -0.0225 2010; Loayza, Schmidt-Hebbel, and Serven 1999). Thus, (0.0761) (0.1180) higher inflation (a measure of macroeconomic uncertainty) raises uncertainty regarding future earnings, and therefore R 0.34 0.03 forces individuals to increase their savings on precaution- F-Stat. 7.33 8.73 ary grounds. Athukorala and Sen (2004) pointed out that (0.0000) (0.0000) households’ income is more uncertain in developing coun- tries than their developed counterparts, making savings rise Obs. 121 121 with the inflation rate. In-as-much as many households in ECOWAS countries are employed in the agricultural sector Note: *, **, *** indicates significant at 10%, 5%, and 1%, respec - and face uncertainty with respect to their future incomes, tively. White’s method correction was used to solve the problem they are compelled to save for precautionary purposes. of heteroscedasticity. Standard errors are in parenthesis. A posi- Real interest rate has a significant and positive effect tive sign of POL indicates higher political stability (lesser political on savings. The finding lends support to previous ones instability). South East European Journal of Economics and Business, Volume 8 (2) 2013 61 Low savings rates in the economic community of West African states (ECOWAS): The role of the political instability-income interaction (see Athukorala and Tsai 2003; Callen and Thimann 1997; analysis/278-ecowas-and-the -recent-coups-in-west-africa- Burnside, Schmidt-Hebbel, and Servén 1999; Hondroyiannis which-way-forward.html (Accessed November 6, 2013). 2006; Hüfner and Koske 2010). Thus, increases in real inter- Alesina, A., Ozler, S., Roubini, N. and Swagel, P. 1996. Political in- est rate induce households to raise their savings in a bid to stability and economic growth. Journal of Economic Growth 1: earn higher returns in the future. Lowering inflation rate in- 189-212. creases real interest rates (Edwards 1996). Alesina, A. and Perotti, R. 1996. Income distribution, political in- Agriculture has a significant and negative effect on sav - stability and investment. European Economic Review 40: ings. This reflects a situation where the agricultural sector is 1203-1228. highly underdeveloped and practised at subsistence level, Ando, A. and Modigliani, F. 1963. The ‘life cycle’ hypothesis of sav- implying low incomes for most households employed in the ing: Aggregate implications and tests. American Economic sector in ECOWAS countries. Thus, given low income levels Review, March. and subsistence agricultural production, additional output Athukorala, P. and Sen, K. 2004. The determinants of private saving will be consumed rather than sold to generate additional in- in India, World Development 32: 491-503. come, leading to lower savings. In fact, poor households will Athukorala, P. and Tsai, P. 2003. Determinants of household saving often resort to drawing on past savings (if they have them at in Taiwan: Growth, demography and public policy. Journal of all) rather than raising savings. Development Studies 39: 65-88. Baldé, Y. 2011. The impact of remittances and foreign aid on sav- ings/investment in Sub‐Saharan Africa. African Development Review 23: 247-262. CONCLUSION AND RECOMMENDATIONS Barro, R. J. 1991. Economic growth in a cross-section of countries. The ECOWAS region has not been able to mobilize the ad- Quarterly Journal of Economics 106: 407-444. equate savings required for achieving higher rates of invest- Beck, N. and Katz, J. N. 1995. What to do (and not to do) with ment and growth. The region has also witnessed higher po- time-series cross-data. American Political Science Review 89: 634-647. litical instability and remains one of the world’s poorest and Bjørnstad, R. and Nymoen, R. 2008. The new Keynesian Phillips most unstable regions. This study employs PCSE, OLS and curve tested on OECD panel data. Institut für Weltwirtschaft TSLS with random effects to investigate the effect of the po - Economics Discussion Paper 4. litical instability-income interaction on savings in ECOWAS Bloom, D. E., Canning, D. and Graham, B. 2003. Longevity and life countries. The PCSE, OLS and TSLS estimates are identical cycle savings. Scandinavian Journal of Economics 105: 319-338. for our variables of interest (political instability and politi- Bloom, D. E., Canning, D., Mansfield, R. and Moore, M. 2007. cal instability-income interaction). The empirical evidence Demographic change, social security systems and savings. indicates that a politically stable environment is required Journal of Monetary Economics 54: 92-114. for the mobilization of higher savings in ECOWAS countries. Burnside, C., Schmidt-Hebbel, K. and Servén, L. 1999. 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Journal

South East European Journal of Economics and Businessde Gruyter

Published: Nov 1, 2013

Keywords: savings; political instability

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