| Abstract: | The main objective of the study was to analyze the major macroeconomic determinants of economic growth in Ethiopia in the years 1981-2013 using co-integration approach. The analysis is based on time series econometrics using the variables of; growth in real GDP per capita, physical capital, labour force, foreign direct investment, foreign aid, consumer price index, and government expenditure. All variables turned out to be non-stationary at their levels but became stationary at their first difference. The results of Johansson’s co integration test indicates that there exist a long run and short run relationship between growth in real GDP per capita and study variables.
The study finds out that in the long run physical capital and labour had a positive effect on growth in real GDP per capita, although labour is not statistically significant. As a result, increase in these variables lead to improvement in real GDP per capita growth.
However, foreign direct investment, foreign aid, inflation and government expenditure had negative effect on growth in real GDP per capita, though inflation is not significant statistically. Hence, in the long run, physical capital, foreign direct investment, foreign aid and government expenditure are significant determinants of growth in real GDP per capita in Ethiopia. In the short run, the error correction model (ECM) estimate indicates that there is 5.59 percentage adjustment taking place each year towards the long run periods.
The short run analysis indicates all variables are statistically insignificant except physical capital. Therefore, in the short run, physical capital is significant determinants of growth in real GDP per capita in Ethiopia.
The Granger Causality test showed that there is unilateral and bidirectional causality between variables.
The above results have an important policy implication. The findings of this paper imply that economic growth can be improved significantly when;
1. Policies should be put in place to increase physical capital and labour in Ethiopia since these have positive effects on growth in real GDP per capita.
2. Government retain appropriate monetary and fiscal policies in order to fight inflation in the economy, since inflation have negative influence on investment and economic growth.
3. Educational institutions should link up with the business organization and in rewarding sectors to know what different institutions need in terms of the labour force, to curb the current negative impact of labour on growth.
4. Government device strategies to mobilize money domestically for developmental projects rather than to rely on foreign direct investment.
5. Government should also spend on the most productive sectors of the economy like the health sector, educational sector, and agricultural sector and so on.
6. Government put rigorous policy in place to make the best from the cheap resources of labour force so that in order to enhance their performance to the economy. |
