Demographic changes and economic development: Application of the vector error correction model (VECM) to the case of Ethiopia

Abstract

Ethiopia is one of the countries with high fertility, rapidly growing and largely young population. At the same time, it is among countries with weak and poorly focused population policy. In light of this, this study intended to assess the causation between demographic factors and economic development in Ethiopia. To this end, it applied vector-error-correction model (VECM) to data on economic, demographic and other variables obtained from secondary sources, accompanied by descriptive analysis of the relationship of population with HDI, agricultural landholdings and forestland. VECM results indicated robust and negative long run relationship between per capita income and population growth and a positive one between the former and growth of workers – with bidirectional causality in both cases. That is, rises in per capita income reduce the growth of (dependent) population and enhance that of workers, and vice versa. Conversely, slower growth of population or faster growth of workers raises per capita income. Short run relationships turned out to be weak and non-robust to alternative model specifications. The descriptive analysis signified inverse associations of population growth with landholding, forest coverage and HDI score. These findings point to a need for meaningful efforts to incorporate population matters into the policy arena.