The Role of External Sector Dynamics in Food Production in Ethiopia: Evidence from Foreign Aid, FDI, Trade Openness, and Remittances

This paper examines the macro-econometric relationship between external sector dynamics and agricultural food production in Ethiopia. Utilizing a comprehensive structural framework, this study investigates the long-run and short-run impacts of official development assistance (ODA), foreign direct investment (FDI), trade openness, and personal remittances on the Ethiopian Food Production Index. Using annual time-series data spanning from 1990 to 2024 and employing a Vector Error Correction Model (VECM), the framework captures complex cointegrating properties and systemic feedback mechanisms. The empirical findings indicate that trade openness and macroeconomic remittances exert statistically significant positive effects on food production in the long run. Foreign direct investment demonstrates a positive but modest long-run contribution, while official development assistance exhibits a minor negative impact, highlighting potential aid-dependency distortions and structural misallocation. The error correction term is found to be -0.65, implying a robust and rapid adjustment speed toward long-run equilibrium. These insights indicate that Ethiopia can structurally optimize its food production systems by deepening regional and global trade integration, creating targeted agro-industrial investment frameworks, and formalizing diaspora resource channels.