Fiscal Aggregates, Aid and Growth in Ethiopia: A Vector Autoregressive Analysis.
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Date
2007-03
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A.A.U
Abstract
Like any other developing countries, aid can affect economic growth of
Ethiopia, such as through its impact on government behavior, investment and
saving. Government expenditure can also raise growth by increasing the
general level of economic activity. As much of aid is given to the government, its
effect on growth and poverty reduction is likely to be properly mediated by
government fiscal policy that makes the analysis of fiscal impact of aid and its
relation ships with growth more interesting.
The main objective of this study is to examine the fiscal impact of aid and its
relationships with growth in Ethiopia using annual time series data over the
period 1960/61-2004/05. Multivariate cointegration and vector error
correction model (VECM) are estimated to establish the short and long run
relationship between foreign a id, fiscal aggregates and economic growth. The
main findings show that foreign aid (both grant and loan) has significant
positive impact on long-run growth of output and expenditure. Government
expenditure is also found to have a positive long-run influence on growth, and
there is no evidence that shows tax revenue retards growth in Ethiopia.
Although both grants and loans have positive long-run influence on growth, the
policy implication is that foreign aid to Ethiopia could better if given in the form
of grants and associated with fiscal discipline because foreign aid which comes
in the form of loan may be transferred to debt burden problem as country's
debt stock has accumulated to unsustainable level.
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Keywords
Aid and Growth in Ethiopia:, A vector Autoregressive Analysis.", Fiscal Aggregates