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Foreign Aid and Economic Growth in Ethiopia: A Cointegration Analysis

Author

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  • Tasew Tadesse

    () (Department of Economics, Dilla University)

Abstract

Poor countries lack sufficient domestic resources to finance investment and the foreign exchange to import capital goods and technology. The existing situation in Ethiopia is a living example of the scenario which binds economic growth. In this paper the unresolved question of aid effectiveness (usually measured by its impact on economic growth) in Ethiopia using a time series data covering the period 1970 to 2009 is addressed by employing multivariate cointegration technique. Foreign aid entered alone has a positive role in enhancing growth. However, the aid-policy interaction term has produced a significant negative effect on growth implying the deleterious impact of bad policies in constraining aid effectiveness. The overall effect of aid on economic growth over the period considered turns out to be negative due to lack of good policies. This paper indicates also that the country has no problem of capacity constraint as to the flow of foreign aid.

Suggested Citation

  • Tasew Tadesse, 2011. "Foreign Aid and Economic Growth in Ethiopia: A Cointegration Analysis," Economic Research Guardian, Weissberg Publishing, vol. 1(2), pages 88-108, December.
  • Handle: RePEc:wei:journl:v:1:y:2011:i:2:p:88-108
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    Cited by:

    1. Heng Hokmeng & Pahlaj Moolio, 2015. "The Impact of Foreign Aid on Economic Growth in Cambodia: A Co-integration Approach," KASBIT Business Journals, Khadim Ali Shah Bukhari Institute of Technology (KASBIT), vol. 8(1), pages 4-25, May.
    2. gebregergis, Cherkos Meaza, 2016. "Economic Analysis of the Impact of Development Aid : An Application of Error Correction Modelling (ECM) to Ethiopia," MPRA Paper 83562, University Library of Munich, Germany.

    More about this item

    Keywords

    Foreign aid; Economic growth; Policy; Cointegration; Ethiopia;

    JEL classification:

    • F35 - International Economics - - International Finance - - - Foreign Aid
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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