Saving-Investment Gap and Economic Growth in Developing Countries: Simulated Evidence from Selected Countries in Africa

Abstract

It is a challenge for most developing countries, especially in Africa, to mobilize domestically enough capital to meet their extensive investment needs because of two main reasons: the undeveloped nature of their financial system and the low rate of access of households to basic financial products. This study analyzes the impacts of persistent savings (S)-investment (I) gaps on economic growth using a sample of 5 developing countries in Africa - Egypt, Côte d’Ivoire, Ghana, Kenya and Nigeria. The methodology of this study is based on a Ramsey model within a general equilibrium framework where consumption and savings are the determinant factors in a typical household’s utility function. Calibrations and simulations indicate significant gaps between optimal and actual levels of savings and investment. Furthermore, the findings point out that these gaps are associated with relatively lower growth rates of actual output compared to simulated output, with the notable, but limited, exception of Nigeria until 2019. It accordingly becomes appropriate to suggest policies addressing both the structural and non-structural factors that limit the ability of these developing countries to effectively bolster households’ deposits.