Answer to Question #282062 in Macroeconomics for YENEW BIRLE

Question

The relationship between saving and consumption could be summed up in the predictions of the two popular models of consumption behaviour. Namely the permanent income hypothesis and the life cycle models of consumption. These two models are based on the premises that the motive for saving is to average out consumption over an infinite time horizon. In general both theories predict that consumption is determined by life time resources rather than each period’s income. Discuss the relevance of these two theories for explaining saving and consumption behaviour in developing countries including Africa? (10 marks) 

Answer 1

In both rich and emerging economies, saving has always figured strongly in both theoretical analysis and policy planning. This importance stems from the assumption that it has a direct theoretical link to future economic growth and present expenditure levels through its consumption link. Saving was stressed in early economic growth theories as a source of capital accumulation and thus expansion. Similarly, Keynesian economics' aggregate demand-based theory centered on aggregate expenditure, which has a direct impact on saving. In many African countries in the 1980s, the emphasis on saving was relatively overlooked due to their concentration with short-term macroeconomic adjustment and stabilization programs. However, in the 1990s and following, the emphasis on economic growth, and thus on saving, appears to have revived.

This interest stems in part from the notion that one of the reasons for Sub-Saharan Africa's delayed growth is the region's low savings rate in comparison to other developing regions. This is especially evident when comparing domestic saving and investment levels. Savings behavior could be studied in aggregate or on a personal or household basis. A contrast must be established between saving behavior in developed and emerging economies, in addition to the unit of study. There are numerous compelling reasons to believe that the factors that influence saving behavior in developing countries differ from those in affluent countries. In the two groups of countries, these disparities include both macroeconomic and microeconomic characteristics of saving, such as family structure and the types of asset-portfolios available to households.