Publication Date: 2023/03/31
Abstract: The main objective of this study is to investigate the determinants of economic growth in Ethiopia ranging from periods of 1974 to 2020. The study employs an Auto-regressive Distributed Lag (ARDL) bound test model to cointegration in order to investigate the long run relationship and Error Correction Model (ECM) for short-run relationship between growth of real GDP and Its selected determinants. The long-run empirical result using the bound test reveals that there is a stable long run relationship between growth of real GDP and its determinants. Gross capital formations, Human capital, labor force, government spending and population growth have a positive significant impact on the growth of real GDP during the study period while export, foreign aid, external debt and financial sector development have a negative significant effect. However, inflation and social welfare expenditure has a negative insignificant impact on economic growth in the long-run, with unexpected sign. The financial sector development, export and social welfare expenditure are significant with unexpected sign. The short-run dynamic results show that gross capital formation and Government expenditure have also positive impact on the growth real GDP while all variables have negative significant effect. Finally, in the short run, the coefficient of equilibrating Error Term (ECM) is -0.9349 suggesting that about 93.49 percent annual adjustments towards long run equilibrium. That is since it is high speed of adjustment (feedback effects towards the long run equilibrium) it takes few years for full adjustment when there is a shock in the system. This study has also an important policy implication. The findings of this study imply that economic growth can be improved significantly when the gross capital formation and human capital 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 human capital, which will help to work on quality of education and providing basic health services to the society. In order to sustain long run growth the government or policy makers should design appropriate policies that results in the efficient use of resources contributing to economic growth and proper management of variables resulting to negative growth (specially all variables negatively impacted) in order to reverse their effect on output.
Keywords: Ethiopia, Economic Growth, ARDL, Bound Test, ECM, Determinants.
DOI: https://doi.org/10.5281/zenodo.7789476
PDF: https://ijirst.demo4.arinfotech.co/assets/upload/files/IJISRT23FEB731.pdf
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