Determinants of economic growth in Ethiopia: a time series analysis

Abstract

The main objective of this study is to investigate the determinants of economic growth in Ethiopia during the period 1981-2016. The Autoregressive Distributed Lag (ARDL) Approach to Co-integration and Error Correction Model, respectively, are applied in order to investigate the long-run and short run relationship between the dependent variable real GDP and its determinants. The finding of the Bounds test shows that there is a stable long run relationship between real GDP, Gross Capital formation, Government Expenditure, population, export, foreign aid, and external debt and inflation variables. The estimation results reveal that Gross Capital formation, Government Expenditure, population, export and foreign aid are found to have positive impact on economic growth both in the short run and the long run, while debt has affects economic growth negatively and statically significantly in a long run and short run but inflation is affect Ethiopian economy negatively statically insignificant in short run significantly in long run . However, the study found out that, inflation and debt has statistically significant impact on economic growth in the long run. This study has important policy implication. The findings of this study imply that economic growth can be improved significantly when the Gross capital formation, export increases. Hence policy makers and /or the government should strive to increase capital formation (investment) which is believed as a back bone of growth and has allocate adequate finance for export intensive which will help to stabilizing the inflation and exchange rate . In addition to its effort, there should be a close monitoring and consistent debt management strategies, which is used to avoid misallocation and mismanagement of foreign aid and external debt problem.