Savings Gaps in Africa
Background
The savings rate throughout Africa is considerably lower than in more developed
countries, but surprisingly even significantly lower than the savings rate in China,
where around 50% of income is saved. This resource explores the reasons why
savings are important for economic growth and development, some of the reasons
why there is a lack of saving in African countries, and why aid is used to “plug the
savings gap”.
Warm-up starter quiz: savings in Europe
Take a look at the chart below, showing the average household savings rates in
selected European countries:
Source: https://www.bba.org.uk/news/press-releases/the-bba-calls-on-government-to-support-savers/#.VhYuOESFNAg
1. Describe what the data shows. Think about using words such as peak/trough,
“compared with”, volatility, stability, trend, and so on.
2. Why might France have significantly higher savings rates than other
countries?
•
(hints: many people in France pay their income tax in an annual lump-sum; people in
France are generally more “risk averse” so tend to invest less in shares, property etc;
also consider interest rates, rates of inflation etc)
Task One – reasons for saving: UK and Sub-Saharan Africa compared
Each of the following boxes contains a reason for or purpose of saving for typical
households. You should cut out the boxes, and then rank them in order from “main
reason for saving” to “least important reason for saving”. First consider your ranking
from the point of view of a typical household in the UK, and then rearrange the cards
to reflect what you think the ranking might be for a typical household in Sub-Saharan
Africa. Remember to justify your answers.
Savings allow you to build
up enough money in order
to buy assets such as a car
or home
Savings allow you to
continue to have a decent
standard of living when
you retire
Savings allow you to pay
for education for your
children
Savings allow you to
“smooth” your
consumption over your
lifetime
Savings allow you to be
able to pay unexpected
bills
Savings can provide you
with an income if you
become unemployed or
too ill to work
When inflation is low, the
value of savings could rise
more quickly than inflation
When interest rates are
high, saving can boost
your income
Savings allow you to pay
for luxury purchases such
as holidays
When you have finished, you can see how your answers compare to the results of
these studies:
• http://www.thisismoney.co.uk/money/bills/article-2246337/Main-reasondipping-savings-pay-household-bills--ING-Direct.html
• http://www.dailymail.co.uk/news/article-183718/One-save-money.html
• http://www.fin24.com/Savings/News/South-Africans-among-the-worldsworst-savers-20150707
Task Two – why are savings so low in Sub-Saharan Africa?
There are a number of reasons below that could explain low savings rates in
countries in Sub-Saharan Africa. Your task is to rank them from what you consider to
be the most likely reason to least likely reason. Will the ranking be different in
different countries? Why? Why not?
Reason
Low growth in disposable income
Low growth in employment levels
Subsistence farming
A rising income tax burden, reducing disposable income
High inflation, which would wipe out the value of savings
A lack of confidence in the future
Inaccessible banking system
An unregulated / untrustworthy banking system
Short-termism behaviour
Lack of education
High consumption levels
High levels of capital flight i.e. people saving abroad
High minimum deposit requirements for saving accounts
High levels of bureaucracy when opening a bank account
Low interest rates
Savings are held in non-monetary form e.g. grain, cattle
Rank
Task three: why aid is needed to “plug the savings gap” in sub-Saharan Africa
Many sub-Saharan African countries run large trade deficits – they must import large
volumes and values of essential items and capital goods. We can use simple algebra
to help explore the impact that this has on the economy, and why aid is needed to
help their economies to “balance”. Make sure you understand each step in the
following chain, and answer the questions that appear throughout.
1. Start by writing down the formula for Aggregate Demand:
AD = C + I + G + (X – M)
2. Replace AD by GDP:
GDP = C + I + G + (X – M)
3. Subtract “net exports” from both sides of the equation:
GDP – (X – M) = C + I + G
4. Let’s call the trade deficit a “trade gap” (not a term we use in A-level
economics, but it is a standard term that means “imports minus exports”), and
(C + I + G) as domestic consumption. This means that we can now write the
equation as follows:
GDP + trade gap = domestic consumption
What this tells us is that domestic consumption in sub-Saharan Africa is higher
than the level of GDP, therefore there are imports.
5. Now we need to think about how people living in sub-Saharan African
countries can continue to consume goods and service over and above the
level of domestic production / GDP.
One way in which this happens is through the use of remittances from abroad
– more remittances can improve the current account and compensate for the
trade deficit. Write down a brief explanation of the term “remittances”:
6. Whilst remittances certainly help, they are rarely large enough to fund all of
the additional domestic spending.
An alternative approach requires the government to run a large surplus on the
financial account of the balance of payments. A government could either
“draw on its foreign exchange reserves” or try to attract lots of inwards FDI.
Explain why:
a) Countries in sub-Saharan Africa may have limited foreign exchange
reserves
b) Struggle to attract FDI
7. Clearly none of these three possible solutions are likely to work well in many
sub-Saharan countries. We need to return to our equation from question 4:
GDP + trade gap = C + I + G
Subtract C and G from each side:
(GDP – C – G) + trade gap = I
Savings are the difference between total income and consumption (by the
private and public sector). This means that we can rewrite the equation above
as follows:
Savings + trade gap = Investment
8. We already know that savings in most of sub-Saharan Africa are very low, and
we know that the trade deficit is also high. What this must mean is that if
investment is to rise, then either people need to import less, or save more –
this is really difficult in many African countries, and so aid must be used to
plug the savings gap in order to investment to take place and cause the
economy to grow and develop.