Predictability of Foreign Aid and Economic Growth in Ethiopia
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Date
2016-06
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Addis Ababa University
Abstract
Foreign aid is one source of physical capital accumulation in Ethiopia. It is also a main media of
government revenue in meeting increasing trends of government expenditure. To investigate the
impact of foreign aid flow on economic growth, various empirical studies were conducted, but
they came up with mixed result. This leads to raise question of why impact of aid on economic
growth in Ethiopia continues to be paradoxical in its findings. To assess the effectiveness of
foreign aid in Ethiopia; this study sets predictability of foreign aid and economic growth in
Ethiopia as a general objective. Specifically, the study sought to examine the contribution of
foreign aid and the macroeconomic policy environment to economic growth in the country. In
order to meet the aforementioned objective, the study employed an autoregressive distributed lag
(ARDL) approach over the period 1981-2014. The empirical finding shows that in the long run,
foreign aid has a positive contribution to economic growth, but in the short run its effect
appeared to be insignificant. The predictability of foreign aid has a positive effect both in the
short and long run. Macroeconomic policy index also has a positive effect in the long run, but its
short run effect become negative. Based on the listed empirical finding, the study came up with
policy recommendation; the government should allocate the external assistance on the successful
development projects. Moreover, to make the flow of aid more predictable and persistent over
time, both the government of Ethiopia and the donor communities should come up mechanism of
transparently working jointly.
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Keywords
Predictability of Foreign Aid