The nexus between savings and investment in the East African Community: Co-integration and error correction models

Abstract

This study examines the effect of savings on investment in East African countries in the face of the recent reduction in trade barriers and other regional integration policies. The findings reveal that among all the regions in Africa, East Africa had the lowest household saving for the period 2000-2016 and only Burundi and Kenya savings and investment rates were co-integrated. The policy implication is that the domestic saving rates significantly drive economic growth via investment in only Burundi and Kenya. In addition, there was weaker impact of savings on investment in the East African Community (EAC) due to flexible capital mobility and harmonized government policies. These findings also corroborate the Solow model that capital accumulation (saving) is not the main driver of economic growth (investment) but rather exogenous technological progress. The study therefore recommends that knowledge, education and skills of the labor force, number of years of schooling, learning by doing, the strength of property rights, the quality of infrastructure, cultural attitudes towards entrepreneurship and work should be improved in the EAC.