| Peer-Reviewed

Foreign Aid Inflow and Domestic Savings in Uganda: Error Correction Modelling

Received: 13 June 2019     Accepted: 23 July 2019     Published: 27 January 2020
Views:       Downloads:
Abstract

The study sought to establish the impact of foreign aid inflow on domestic savings in Uganda. It was motivated by the low savings ratio which was identified as one of the major constraints to future growth in Uganda, under Vision 2025. Error-Correction Modelling was applied on a time series database for the period 1970-2016. Results of the study show that foreign aid has a negative impact on domestic savings in Uganda both in the short-run and long-run. An increase in foreign aid inflow by 1% of GDP leads to 0.71% decrease in gross domestic savings in the long-run. This implies that an increase in foreign aid as a whole crowded-out domestic savings in the short-run and long-run. By making resources easily available, foreign aid encourages relaxation in saving effort and increases consumption. A policy implication of this result is that Uganda should be wary in soliciting for foreign aid. If foreign aid becomes expedient, then it should be channeled to productive ventures.

Published in Journal of World Economic Research (Volume 9, Issue 1)
DOI 10.11648/j.jwer.20200901.17
Page(s) 41-50
Creative Commons

This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.

Copyright

Copyright © The Author(s), 2020. Published by Science Publishing Group

Keywords

Foreign Aid, Domestic Savings, Error Correction Modelling

References
[1] Ahmed, N. (1971). A note on the Haavelmo hypothesis. Review of Economics and Statistics 53, 413-414.
[2] Angmortey B. N. and Tandoh-Offin P. (2014): Does Foreign Capital Crowd-Out Domestic Saving in Developing Countries? An Empirical Investigation of Ghana, International Journal of Economics and Finance; Vol. 6, No. 8; 2014 ISSN 1916-971X E-ISSN 1916-9728.
[3] Baharumshah, A. Z., and Thanoon, H. (2000): Foreign Capital, Savings and Economic Growth: A dynamic Panel Study on the East Asian Countries. Department of Economics. University of Putra. Malaysia.
[4] Bashier, A. and Bataineh, T. (2007). The casual relationship between foreign direct investment and saving in Jordan, International Management Review 3 (4): 12–18.
[5] Biswajit, M (2018): Macroeconomic Impact of Public debt and foreign aid in Sri Lanka. Journal of Policy Modeling, Elsevier, vol 41 (2), pages 372-394.
[6] Carkovic, M. V. and Levine, R. (2002). Does foreign direct investment accelerate economic growth? University of Minnesota, Department of Finance Working Paper.
[7] Chenery, H. and A. Strout (1966): Foreign assistance and economic development. American Economic Review 56.
[8] Cheung, K. and P. Lin (2003) 'Spillover Effects of FDI on Innovation in China: Evidence from the Provincial Data', China Economic Review 15 (1): 25-44.
[9] Chung, C., Chang, L., Zhang, Y., (1995). “The Role of Foreign Direct Investment in China’s Post-1978 Development”, World Development, 23 (4), pp, 691-707.
[10] Dickey, D. A. and Fuller, W. A.(1979). ‘Distributions of the estimators for autoregressive time series with a unit root’, Journal of the American Statistical Association, 74, 427-431.
[11] Dzogbenu V. K (1996) “Foreign Aid Inflows and its Implication for Domestic Savings in Ghana” M. A. Thesis, University of Ghana Legon.
[12] Edwards, S., (1995), Why are Saving Rates so Different across Countries? An International Comparative Analysis, NBER Working Papers, (5097).
[13] Engle Robert F. and C. W. J. Granger (1987): Co-Integration and Error Correction, Representation, Estimation, and Testing. Econometrica, Vol. 55, No. 2. pp. 251-276.
[14] Griffin, K. (1970). Foreign capital, domestic savings and economic development. Oxford Bulletin of Economics and Statistics, 55, 99-112. http://dx.doi.org/10.1111/j.1468-0084.1970.mp32002002.x
[15] Griffin, K. and J. Enos (1970): Foreign Assistance: Objectives and Consequences, Economic Development and Cultural Change, Vol. 18 economy. Cambridge MA, MIT.
[16] Gruben, W. C., & Mcleod, D. (1998). Capital Flows, Savings and Growth in the 1990s. Quarterly Review of Economics and Finance, 3 (38), 287–301. http://dx.doi.org/10.1016/S1062-9769(99)80119-7.
[17] Haavelmo, T. (1963): The Econometric Approach to Development Planning. North HollandPublishing Company. Holland.
[18] Hall, P. (1986), "On the bootstrap and confidence intervals", The Annals of Statistics, 14, 1431-1452.
[19] Hussein, K. and A. P. Thirlwall (1999): Explaining Differences in the Domestic Savings RatioAcross Countries: A Panel Data Study. Journal of Development Studies, 36: 31-52.
[20] IMF Working Paper (2015): Poverty, Growth, and Inequality in Sub-Saharan Africa: Did the Walk Match the Talk under the PRSP Approach? By Daouda Sembene. WP/15/122.
[21] Janicki, H. P. and Wunnava, P. V (2004): Determinants of Foreign Direct Investment: Empirical Evidence from EU Accession Candidates. Applied Economics, 36 (5): 505-509.
[22] Johansen, S. (1988), ‘Statistical Analysis of Cointegrating Vectors, Journal of EconomicDynamics and Control, 12: 231-254.
[23] Johansen, S. and Juselius, K. (1994):‘Testing Structural Hypothesis in a Multivariate Cointegration Analysis of the PPP for UK, Journal of Econometrics, 53: 211-244.
[24] Katircioglu, S. T., Naraliyeva, A. (2006). Foreign Direct Investment, Domestic Savings and Economic Growth in Kazakhstan: Evidence from Co-Integration and Causality Tests, Investment Management and Financial Innovations, Vol. 3, Issue 2.
[25] Mahua, R., & Sakthivel, E. (2000). Has Foreign Savings ‘Crowded-out’ Domestic Savings in India? An Empirical Investigation. Institute of Economic Growth. University of Delhi Enclave, North Campus. Delhi.
[26] Morisset, J. (1989), "The Impact of Foreign Capital Inflows on Domestic Savings Reexamined: The Case of Argentina’. World Development 17 (11): 1709-15.
[27] Muawiya A. H. (2009): “Impacts of Foreign Direct Investment on Economic Growth in Gulf Cooperation Council (GCC) countries”, International Review of Business Research Papers, 5 (3), pp. 362-376.
[28] Nelson, C. R. and Plosser, C. I. (1982). ‘Trends and random walks in macroeconomic time series’, Journal of Monetary Economics 10, 139-162.
[29] Odhiambo, N. M. (2009). Savings and Economic Growth in South Africa: A Multivariate Causality Test. Journal of Policy Modelling, 31, 708-718.
[30] Osundina J. A., & Osundina, C. K. (2014). Interest rate as a link to investment decision in Nigeria. Journal of Economics and Finance, 2 (4), 08-14.
[31] Ouattara, B. (2006): "Foreign aid and government fiscal behavior in developing countries: Panel data evidence," Economic Modeling, vol. 23, p. 506-514.
[32] Ozekhome, H. O. (2017). "Foreign Aid, Foreign Direct Investment And Economic Growth In Ecowas Countries: Are There Diminishing Returns In The Aid-Growth Nexus?" West African Journal of Monetary and Economic Integration, West African Monetary Institute, vol. 17 (1).
[33] Phillips, P. C. B. and Perron, P. (1988). ‘Testing for a unit root in a time series regression’, Biometrika 75, 335-346.
[34] Radelet, S. (2006). “A Primer on Foreign Aid,” Center for Global Development, Working Paper No. 92, July.
[35] Rahaman, M. A. (1968): Foreign Capital and Domestic Savings. A Test of Haavelmo’s Hypothesis with Cross–Country Data. Review of Economic Statistics, 50 (February), 137–138. http://dx.doi.org/10.2307/1927068
[36] Rostow, W. W. (1960): The Stages of Economic Growth. A non-communist Manifesto. Cambridge University Press, Cambridge.
[37] Salahuddin, M., Shahbaz, M. and Chani, M. I. (2010). A Note on Causal Relationship between FDI and Savings in Bangladesh, Theoretical and Applied Economics, 11, 53-62.
[38] Shahbaz M., R. U. Awan and L. Ali, (2008). “Bi-Directional Causality between FDI and Saving: A Case Study of Pakistan,” International Research Journal of Finance and Economic, No. 17, pp. 75-83.
[39] Sobhan, and Islam (1988) Foreign Aid and Domestic Resource Mobilization in Bangladesh. Bangladesh Development Studies 26.
[40] Taslim, J. T., and Weliwita, R. (2000): Foreign Direct Investment and Productivity: Evidence from Selected Countries. In Building Coalitions for Effective Development Finance. Global Development Finance.
[41] Uganda Bureau of Statistics 2014, 2015 and 2016 Statistical Abstracts.
[42] Uneze, E. (2011). Testing the Impact of Foreign Aid and Aid Uncertainty on Private Investment in West Africa, Centre for Study of Economies of Africa, CSEA Working Paper WP/11/01, February.
[43] Utkulu, U. (1994): Cointegration Analysis: Introductory Survey with Applications to Turkey, in M. Güneş, Ş. Üçdoğruk and M. V. Pazarlıoğlu (eds) (Papers at the International Symposium of Econometrics and Statistics), 303-24, İzmir.
[44] World Bank (2017): National accounts data at http://data.worldbank.org viewed on 2nd April 2017.
[45] World Bank, (2018). World Development Indicators database, Washington, DC.
Cite This Article
  • APA Style

    Henry Tumwebaze Karamuriro, Edward Patrick Ssemanda, Edward Bbaale. (2020). Foreign Aid Inflow and Domestic Savings in Uganda: Error Correction Modelling. Journal of World Economic Research, 9(1), 41-50. https://doi.org/10.11648/j.jwer.20200901.17

    Copy | Download

    ACS Style

    Henry Tumwebaze Karamuriro; Edward Patrick Ssemanda; Edward Bbaale. Foreign Aid Inflow and Domestic Savings in Uganda: Error Correction Modelling. J. World Econ. Res. 2020, 9(1), 41-50. doi: 10.11648/j.jwer.20200901.17

    Copy | Download

    AMA Style

    Henry Tumwebaze Karamuriro, Edward Patrick Ssemanda, Edward Bbaale. Foreign Aid Inflow and Domestic Savings in Uganda: Error Correction Modelling. J World Econ Res. 2020;9(1):41-50. doi: 10.11648/j.jwer.20200901.17

    Copy | Download

  • @article{10.11648/j.jwer.20200901.17,
      author = {Henry Tumwebaze Karamuriro and Edward Patrick Ssemanda and Edward Bbaale},
      title = {Foreign Aid Inflow and Domestic Savings in Uganda: Error Correction Modelling},
      journal = {Journal of World Economic Research},
      volume = {9},
      number = {1},
      pages = {41-50},
      doi = {10.11648/j.jwer.20200901.17},
      url = {https://doi.org/10.11648/j.jwer.20200901.17},
      eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.jwer.20200901.17},
      abstract = {The study sought to establish the impact of foreign aid inflow on domestic savings in Uganda. It was motivated by the low savings ratio which was identified as one of the major constraints to future growth in Uganda, under Vision 2025. Error-Correction Modelling was applied on a time series database for the period 1970-2016. Results of the study show that foreign aid has a negative impact on domestic savings in Uganda both in the short-run and long-run. An increase in foreign aid inflow by 1% of GDP leads to 0.71% decrease in gross domestic savings in the long-run. This implies that an increase in foreign aid as a whole crowded-out domestic savings in the short-run and long-run. By making resources easily available, foreign aid encourages relaxation in saving effort and increases consumption. A policy implication of this result is that Uganda should be wary in soliciting for foreign aid. If foreign aid becomes expedient, then it should be channeled to productive ventures.},
     year = {2020}
    }
    

    Copy | Download

  • TY  - JOUR
    T1  - Foreign Aid Inflow and Domestic Savings in Uganda: Error Correction Modelling
    AU  - Henry Tumwebaze Karamuriro
    AU  - Edward Patrick Ssemanda
    AU  - Edward Bbaale
    Y1  - 2020/01/27
    PY  - 2020
    N1  - https://doi.org/10.11648/j.jwer.20200901.17
    DO  - 10.11648/j.jwer.20200901.17
    T2  - Journal of World Economic Research
    JF  - Journal of World Economic Research
    JO  - Journal of World Economic Research
    SP  - 41
    EP  - 50
    PB  - Science Publishing Group
    SN  - 2328-7748
    UR  - https://doi.org/10.11648/j.jwer.20200901.17
    AB  - The study sought to establish the impact of foreign aid inflow on domestic savings in Uganda. It was motivated by the low savings ratio which was identified as one of the major constraints to future growth in Uganda, under Vision 2025. Error-Correction Modelling was applied on a time series database for the period 1970-2016. Results of the study show that foreign aid has a negative impact on domestic savings in Uganda both in the short-run and long-run. An increase in foreign aid inflow by 1% of GDP leads to 0.71% decrease in gross domestic savings in the long-run. This implies that an increase in foreign aid as a whole crowded-out domestic savings in the short-run and long-run. By making resources easily available, foreign aid encourages relaxation in saving effort and increases consumption. A policy implication of this result is that Uganda should be wary in soliciting for foreign aid. If foreign aid becomes expedient, then it should be channeled to productive ventures.
    VL  - 9
    IS  - 1
    ER  - 

    Copy | Download

Author Information
  • Department of Economics and Statistics, Kyambogo University, Kampala, Uganda

  • Department of Economics and Statistics, Kyambogo University, Kampala, Uganda

  • School of Economics, Makerere University, Kampala, Uganda

  • Sections