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The Dynamic Links between Investment, Trade and Growth: Evidence from Ethiopia

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  • Ambachew, Mekonnen Sisay

Abstract

The existing pool of evidence on the growth effects of investment and trade, as well as the reciprocal effects, is hardly sufficient, rendering their connections to remain inconclusive. The insufficiency of such studies is chronic when it comes to the Ethiopian economy. The investment, trade and growth connections in the Ethiopian economy have not been well researched, calling for such kinds of studies. Targeting at characterising the patterns of impact flows between investment, trade and growth in Ethiopia and contributing a little in filling some aspects of the lacuna, this study becomes a short-run causality analyses on their dynamic links using time series data over the period 1955-2003. According to the estimated VAR results, there is no feedback between any pair of the variables, out of the 3 hypothesised dynamic feedback links. Nonetheless, we have observed two uni-directional positive causalities that run from economic growth to enhanced trade openness and from the latter to investment. However, the evidence should not be interpreted as investment and trade do not contribute to growth. Rather, it could be signalling the low investment and trade performances of the country despite the unknown minimum thresholds of the rate of investment and trade openness for their respective impacts to be recognizable. Hence, measures that improve the performance of both activities, their linkages and the contribution of trade to investment could help the economy to build its productive capacity and then to grow faster.

Suggested Citation

  • Ambachew, Mekonnen Sisay, 2009. "The Dynamic Links between Investment, Trade and Growth: Evidence from Ethiopia," Ethiopian Journal of Economics, Ethiopian Economics Association, vol. 18(2), pages 132-132, August.
    • Handle: RePEc:ags:eeaeje:249608
    DOI: 10.22004/ag.econ.249608
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