The Impact of Privatization on Economic Growth of Ethiopia

Abstract

Privatization has been a prominent economic reform strategy implemented by many developing countries, including Ethiopia. Recently, the Ethiopian government has announced plans for further privatization to unlock the potential for economic expansion. This study investigates the potential impact of Ethiopia's privatization program on its economic growth using data from 1994-2021. The study employs the Granger causality test and the Johansen co-integration approach. The results of the Granger causality test show that previous values of all independent variables have significant causation with current GDP, indicating their importance in economic growth. While the Johansen co-integration approach shows, both the trace and maximum eigenvalue tests confirm the existence of two co-integrating equations, indicating a long-run relationship between the investigated variables. Subsequently, a Vector Error Correction Model (VECM) is employed to further analyze the data. Before applying the time series data analysis, the time series properties of all variables are tested for stationary using the Augmented DickeyFuller (ADF) and Phillips-Perron (PP) tests. The results indicate that all variables in the study are stationary in their first difference. The study's findings reveal that foreign direct investment, privatization, and political stability exert positive and statistically significant impacts on the long-run economic growth of Ethiopia. In contrast, privatization and inflation have statistically insignificant effects on short-run economic growth, while foreign direct investment and political stability have positive and statistically significant impacts on short-run economic growth in Ethiopia. These findings highlight the need for a comprehensive approach that combines privatization with other structural changes to effectively enhance economic growth in Ethiopia. Privatization alone may not be sufficient to stimulate short-term economic growth, necessitating the implementation of additional policies. Therefore, the Ethiopian government should consider strengthening other policy initiatives alongside privatization efforts to promote sustainable and inclusive economic development in the country