This study has examined sectoral analysis of the impact of foreign aid on aggregate and sectoral economic growth in Ethiopia over the period 1981 to 2012 using multivariate Vector auto regression analysis. All the necessary time series tests such as stationary test, co-integration test, weak exiguity test, vector error correction, and causality test in vector error correction model and the like are conducted. The empirical result from the growth equation shows that aid has a significant positive impact on educational sector GDP in the long run. On the other hand, foreign aid has positive but insignificant impact on real GDP, agriculture GDP, and health sector GDP of Ethiopia. Foreign aid is effective in enhancing growth at aggregate level of the economy in general and education sector of the economy of Ethiopia in particular. The test result of the study result reveals that there is a bi-directional causal relationship between educational GDP and educational foreign aid in Ethiopia. However, the agricultural and health sector does not show any bi-directional causality with their respective sector aid. This implies that all aid allocated for sectors is ineffective all in all in achieving its objectives of economic development. Therefore, aid recipient country like Ethiopia has to work how to enhance the domestic revenue raising capacity of the country which is at the heart of the mechanism to meet the capital required for the economy in times of short falls and ineffectiveness of external resources.
Table of Contents
CHAPTER ONE: INTRODUCTION
1.1. Background
1.2. Statement of the Problem
1.3. Objective of the Study
1.3.1. General Objectives
1.3.2. Specific Objectives
1.4. Research Questions
1.5. Hypothesis to be Tested
1.6. Significance of the Study
1.7. Scope and Limitation of the Study
1.7.1. Scope of the Study
1.7.2. Limitation of the Study
1.8. Organization of the Paper
CHAPTER TWO: METHODOLOGY OF THE STUDY
2.1. Data Types and Sources
2.2. Description of Variables
2.3. Model Specification
2.4. Econometric Estimation Techniques
2.4.1. Testing for Unit Root
2.4.2. Test for Cointegration
2.4.3 Vector Error Correction Model
2.4.4 Causality Test in Vector Error Correction Model
CHAPTER TREE: RESULT AND DISCUSSION
3.1. Descriptive Analysis of Macroeconomic Performance in Ethiopia
3.1.1. Analysis of Aggregate Economic Growth in Ethiopia
3.1.2. Sector Wise Analysis of Economic Growth in Ethiopia
3.1.3. Trends of Domestic Savings and Investment in Ethiopia
3.1.4. Trends of External Sector Economic Growth in Ethiopia
3.1.5. Government Expenditure and Economic Growth
3.1.6. Foreign Aid (ODA) and Economic Growth in Ethiopia
3.1.7. Sectorial Composition of Foreign Aid (ODA) in Ethiopia
3.2. Empirical Results Analysis and Interpretations
3.2.1. Results for Unit-Root Test
3.2.2. Co-integration and Long run Growth Equation Analysis
3.2.3. Short Run VECM Estimation of Economic Growth
3.2.4. Causality Analysis of Aggregate and Sectoral Economic Growth
CHAPTER FOUR: SUMMARY AND CONCLUSION
4.1. Summary
4.2. Conclusion
4.3. Policy Implication
Objectives and Research Themes
This thesis aims to investigate the impact of foreign aid on both aggregate and sectoral economic growth in Ethiopia from 1981 to 2012, utilizing multivariate Vector Autoregression (VAR) analysis and Vector Error Correction Models (VECM) to capture dynamic effects and causal relationships.
- The macroeconomic performance of Ethiopia across different political regimes.
- The sectoral impact of foreign aid on agriculture, education, and health.
- The role of foreign aid as a driver of domestic capital formation.
- The existence of short-run and long-run causal relationships between aid and growth.
- Policy implications for enhancing domestic revenue to reduce dependence on external aid.
Excerpt from the Book
1.1. Background
Developing countries face challenges of massive poverty, slow Gross Domestic Product (GDP) growth, high mortality rates from illnesses, and low levels of education. More than 20 percent of the developing world (1.1 billion) people subsist on less than $1 a day. In some developing countries, such as those of Sub-Saharan Africa (SSA), more than 70 percent of the population lives in extreme poverty (i.e. the proportion of population earning less than $2 a day) (Kumler'07, 2007; Leeson, 2008). The governments in these countries do not have sufficient financial resources to fight these challenges effectively. Foreign aid has played an instrumental role in the implementation of development programs to combat the challenges (Lohani'04, 2004; Pattillo, Polak, & Roy, 2007).
Foreign aid is defined as any flow of capital to a developing countries for the objective that should be non commercial from the point of view of the donor on development, poverty reduction, or income distribution grounds and it should be characterized by concessional terms; that is, the interest rate and repayment period for borrowed capital should be softer (less stringent) than commercial terms (Bakare, 2011; Randhawa, 2012; Todaro & Smith, 2012). Official Development Assistance (ODA), commonly known as foreign aid is a flow of financial resources from developed countries to developing countries on development grounds (Eroglu & Yavaz, 2005; Moreira, 2005; Leeson, 2008; Paul & Pistor, 2009). It is an international transfer of public funds in the form of loans or grants either directly from one government to another (bilateral) or indirectly through multilateral assistance agency such as International Monetary Fund and World Bank (Radelet, 2006; UNCTAD, 2006; Abuzeid, 2009; OECD, 2009).
Summary of Chapters
CHAPTER ONE: INTRODUCTION: This chapter introduces the problem of poverty and the role of foreign aid in developing economies, outlining the research objectives, significance, and limitations of the study.
CHAPTER TWO: METHODOLOGY OF THE STUDY: This chapter details the data types, variables, and the econometric models, specifically the VECM, used to analyze the relationship between aid and economic growth.
CHAPTER THREE: RESULT AND DISCUSSION: This chapter presents a descriptive analysis of Ethiopia's macroeconomic performance and the empirical results concerning the impact of aid on aggregate and sectoral growth.
CHAPTER FOUR: SUMMARY AND CONCLUSION: This chapter synthesizes the study's findings, offers final conclusions regarding aid effectiveness, and suggests policy implications for the Ethiopian economy.
Keywords
foreign aid, economic growth, sector, aggregate, Ethiopia, impact, ODA, macroeconomic performance, VECM, unit root, cointegration, causality, domestic capital formation, trade openness, development economics
Frequently Asked Questions
What is the core focus of this research?
The study examines the sectoral impact of foreign aid on the Ethiopian economy, comparing its influence at both the aggregate level and within the specific sectors of agriculture, education, and health.
What are the primary themes discussed?
Key themes include the historical trends of macroeconomic performance in Ethiopia, the relationship between foreign aid and capital formation, the impact of government expenditure, and the effectiveness of development assistance across different social sectors.
What is the central research question?
The study primarily investigates the causal relationship between foreign aid and economic growth in Ethiopia, seeking to determine whether aid effectively spurs development at either the aggregate or sectoral levels.
Which methodology is employed?
The researcher uses multivariate Vector Autoregression (VAR) analysis and Vector Error Correction Models (VECM) to handle time series data and test for stationarity, cointegration, and Granger causality.
What does the main body of the work cover?
The main body covers the theoretical framework, the descriptive analysis of Ethiopian macroeconomic indicators (including GDP and trade trends), the empirical estimation of long-run and short-run growth models, and the causality analysis between aid and sectoral growth.
Which keywords characterize this work?
Key terms include foreign aid, economic growth, Ethiopia, sectoral analysis, VECM, ODA, domestic savings, and capital formation.
Does the study find that foreign aid is equally effective across all sectors?
No, the study reveals that while foreign aid has a significant positive impact on the educational sector in the long run, its effect on the agricultural and health sectors is found to be positive but statistically insignificant.
What is the significance of the causality analysis?
The causality analysis is crucial because it helps identify the direction of the relationship between aid and growth, revealing, for example, a bi-directional causal link specifically within the educational sector.
What policy recommendations does the author offer?
The author recommends that Ethiopia should prioritize enhancing its domestic revenue-raising capacity to reduce long-term dependency on external aid and to better mitigate exposure to external shocks.
- Arbeit zitieren
- Fikadu Goshu (Autor:in), 2014, Sectoral Analysis of the Impact of Foreign Aid on Economic Growth in Ethiopia, München, GRIN Verlag, https://www.grin.com/document/283048
