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Foreign aid and economic growth in Ethiopia

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  • Tadesse, Tasew

Abstract

Abstract The study has examined the impact of foreign aid on investment and economic growth in Ethiopia over the period 1970 to 2009 using multivariate cointegration analysis. The empirical result from the investment equation shows that aid has a significant positive impact on investment in the long run. On the other hand, volatility of aid by creating uncertainty in the flow of aid has a negative influence on domestic capital formation activity. Foreign aid is effective in enhancing growth. However, the aid-policy interaction term has produced a significant negative effect on growth implying that bad policies can constrain aid effectiveness. The growth equation further revealed that rainfall variability has a significant negative impact on economic growth as the economy. This study indicated also that the country has no problem of capacity constraint as to the flow of foreign aid.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 33953.

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Date of creation: 02 Jul 2011
Date of revision: 20 Sep 2011
Handle: RePEc:pra:mprapa:33953

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Keywords: foreign aid; policy; economic growth; cointegration; VECM; Ethiopia;

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  1. Robert J. Barro, 1996. "Determinants of Economic Growth: A Cross-Country Empirical Study," NBER Working Papers 5698, National Bureau of Economic Research, Inc.
  2. Lensink, Robert & White, Howard, 1999. "Are there negative returns to aid?," Research Report 99E60, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
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  15. Papanek, Gustav F, 1972. "The Effect of Aid and other Resource Transfers on Savings and Growth in Less Developed Countries," Economic Journal, Royal Economic Society, vol. 82(327), pages 934-50, September.
  16. Levy, Victor, 1988. "Aid and growth in Sub-Saharan Africa: The recent experience," European Economic Review, Elsevier, vol. 32(9), pages 1777-1795, November.
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