Impacts of Foreign Aid on Economic Growth of Ethiopia: Time Series Econometric Analysis
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Date
2020-10
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A.A.U
Abstract
Developing countries are constrained, among other things, by low level of saving in their endeavor to develop their economies. To augment their scare resource, they seek foreign aid. Empirical evidences provide mixed results on the effect of foreign aid on economic development. This study aimed at examining the effect of foreign aid on economic growth in the case of Ethiopia. It used time series data covering the period between 1981 and 2018. Autoregressive Unit root test results revealed that the variables included in the model have a mixed order of integration (or I (0) and I (1)) and none of them is I (2). Accordingly, Distributive Lag (ARDL) model was employed taking labor force, capital stock, external debt stock, debt servicing, and openness to trade, inflation and gross national saving as control variables in the regression equation. Result of co-integration tests confirmed the existence of long-run co-integrating relationship among the variables. Estimation result shows that foreign aid variable was found to be statistically significant both in the short run and long-run to explain the variance of economic growth for Ethiopia. The long run elasticity of economic growth with respect to foreign aid is -0.1242, implying a percent increase in foreign aid results in .0124% fall in real per capita GDP in the long run. The estimated short run short run coefficient of aid variable and its lag negatively affect economic growth in Ethiopia at 1%significance level. Hence, the study recommends policymakers in Ethiopia to establish strong institutions, avoiding dependency on foreign aid through well-structured domestic resource mobilization initiatives, proper engagement of the donor community as well as accurate channeling of foreign aid resources to productive and growth enhancing economic sectors.
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Economic development