An Empirical Investigation of the Aid - Growth Relationship in Ethiopia
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Date
2003-07
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Addis Ababa University
Abstract
The objective of this study is to assess the relationship between aid, policies and economic
growth in Ethiopia for the period 1962/63 to 2001/02. The analysis is conducted using the
Johansen Maximum Likelihood Procedure.
The main findings of the empirical investigation are: Foreign aid has a significant positive
contribution to investment, whereas uncertainty of aid flow (as a result of aid volatility)
significantly and negatively affects the capital formation activity. The effect of foreign aid on
economic growth appeared negative but insignificant. Aid interacted policy term, on the other
hand, produced significantly positive result. The result further points out that good economic
policies increase the level of foreign aid that can be productively consumed. The Error
Correction Model (ECM) conclude that foreign aid is insignificant in the short run.
Furthermore, the causality test shows that the causality runs from policies to foreign aid while
the converse does not hold.
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Keywords
Growth Relationship in Ethiopia