| Abstract: | The purpose of this study was to investigate the major determinants of economic
growth in Ethiopia from the period 1974 to 2015.The study employed an
Autoregressive Distributed Lag (ARDL) bound test model to co-integration in
order to investigate the long run relationship and Error Correction Model (ECM)
for short-run relationship between growth of real GDP and gross capital formation,
human capital, export, foreign aid, external debt, inflation rate, labor force and
financial sector development. The long-run empirical result using the bound test
reveals that there was a stable long run relationship between growth of real GDP
and its determinants. Gross capital formations (gross fixed investment), human
capital (expenditures on education and health, inflation and labor force) had a
positive significant impact on the growth of real GDP during the study period
while external debt had a negative significant effect. However export and foreign
aid had insignificant impact on the long-run with unexpected sign. The financial
sector development (broad money supply (M2) as a percentage of GDP) was
insignificant with expected sign. The short-run dynamic results showed that gross
capital formation, human capital and inflation rate had also positive impact on the
growth real GDP while foreign aid had negative significant effect. Finally the
coefficients of equilibrating Error Term (ECM) suggested that the speed of
adjustment (feedback effects towards the long run equilibrium) took few years for
full adjustment when there was a shock in the system. In order to sustain long run
growth the government or policy makers should design appropriate policies that
results in the efficient use of resources contributing to economic growth and proper
management of variables resulting to negative growth (external debt and foreign
aid) in order to reverse their effect on output. |
