The Determinants of Economic Growth in Ethiopia: A Time Series Analysis

Abstract

The main objective of this study was to investigate the determinants of economic growth in Ethiopia during the period of 1981-2015. Co-integration and Error Correction Model were applied in order to investigate the long-run and short run relationship between the dependent variable (real GDP) and its determinants. The finding of the test shows that there was a stable long run relationship between real GDP, Physical capital, human capital, labor force and export. The empirical results reveal that both physical and human capital were found to have positive impact on economic growth both in long run and short run analysis while term of trade and foreign aid affect economic growth negatively and statically insignificant at 1 percent. However, the study found out that export of goods and service had statistically insignificant impact on economic growth with positive sign in the long run, but labor force had statistically significant impact on economic growth. This study has also an important policy implication. The findings of this study imply that economic growth can be improved significantly when the physical capital increases. Hence, policy makers and/or the government should strive to increase capital formation (gross capital accumulation) which is believed as a back bone of growth and has allocate adequate finance for human capital, which will help to work on quality of education.