Enhancing Economic Growth through Public Investment in Ethiopia: Long-Run Evidence and Policy Insights

This study examines the impact of public investment on economic growth in Ethiopia, focusing on both long-run dynamics and short-run adjustments while accounting for key macroeconomic determinants. The study adopts a quantitative time-series approach using annual data from 1983 to 2024. An autoregressive distributed lag (ARDL) model is employed to estimate long-run and short-run relationships. Unit root and bounds tests are conducted to establish stationarity and cointegration, followed by an error correction model (ECM). Diagnostic and stability tests ensure model robustness, and Granger causality analysis examines directional relationships. The results confirm a long-run equilibrium relationship among the variables. Public investment has a positive and significant long-run effect on economic growth, while it remains insignificant in the short run, indicating delayed impact. Labour force and gross capital formation significantly promote growth, whereas inflation, interest rates, and external debt service exert negative effects. Foreign aid shows a weak negative influence, suggesting inefficiencies in its utilization. The error correction term indicates a moderate speed of adjustment toward equilibrium. Causality results reveal a unidirectional relationship from public investment to economic growth. The study contributes by constructing a composite index of public investment and providing updated empirical evidence for Ethiopia, offering policy-relevant insights on enhancing the efficiency of public investment for sustainable growth.