The Impact of Foreign Aid on Economic Growth in Ethiopia: Accounting for Transmission Mechanisms
No Thumbnail Available
Date
2011-05
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
Addis Ababa University
Abstract
Developing countries in general and Ethiopia in particular has been experiencing huge amount
of saving gap, trade gap and fiscal gap for more than four decades. Consequently, there has
been a significant net inflow of official development assistance (foreign aid). Therefore, the
main objective of the study is to examine the impact of foreign aid on economic growth and the
transmission mechanisms (i.e. investment, import and government consumption expenditure) of
Ethiopia using Johansson maximum likelihood approach over the period of 1970/1 to 2008/9.
The co integration test result indicates the existence of long run relationship among the variables
entered in all models. In the long run foreign aid has a positive and significant impact on growth
through its significant contribution to investment and import. However, the dynamic short run
model points out that aid to have a significant impact on growth it has to be assisted by good
monetary, fiscal and trade policy. In addition, in the short run aid has significant impact on
government consumption expenditure, which confirms the existence of aid fungibility. The study
also confirms the existence of debt overhang problem in the Ethiopian economy. Generally, the
theoretical view of the gap models is proven in this study. Aid can enhance growth by financing
the three gaps. However to mitigate the problems with aid fungibility and debt overhang
problem, foreign aid has to be linked to a good policy framework.
Description
Keywords
The Impact of Foreign Aid, on Economic Growth in Ethiopia