Determinants of Economic Growth in Ethiopia: An Autoregressive Distributed Lag (ARDL) Approach

Abstract

The paper sought to study the determinants of economic growth in Ethiopia. The study made use of secondary data from a world development indicator and the World Bank. The main objective of the study was to investigate the determinants of economic growth in Ethiopia. An advanced econometric technique, the ARDL model, was applied in the data analysis to realize the objective of the study. The results of the study indicate that foreign direct investment, human capital, and physical capital formation had a positive sign and significantly influence economic growth in the long-run. Nevertheless, terms of trade and foreign aid had an adverse consequence on economic growth in the long-run. Moreover, the results reveal that capital formation, terms of trade, and foreign direct investment were the main determinants of economic growth in the short-run. Based on the findings, policymakers should pursue policies that will boost the quality of human capital to promote and sustain economic growth and enhance the contribution of the physical capital formation. Finally, the study recommends a detailed study on more variables and long enough time series data, including the significant variables, to get a factual picture of economic growth in the country; and policymakers need to focus on these factors in formulating any economic development policy.