The main objective of this study is to investigate the macroeconomic determinants of economic growth in Ethiopia from 1974-2014. A Vector Error Correction Model (VECM) to cointegration approach is applied in order to investigate the long run and short run relationship between real GDP and its macroeconomic determinants. The finding of the cointegration test shows that there is a stable long run relationship between real GDP, gross domestic saving, labor, human capital, export, FDI, foreign aid and external debt. The long run empirical result reveals gross domestic saving, human capital proxied by government expenditure on health and education, and labor force have positive and significant relationship with real output. However export and real GDP have positive but insignificant relationship.
External debt, foreign aid and FDI have negatively significant relationship with real GDP during the study period. The short run dynamic results shows that human capital, saving and FDI have positive relationship with output growth whereas labor, export, aid and external debt have negative relationship with Real GDP. The coefficient of equilibrating error term (ECM) suggests that the speed of adjustment (feedback effect towards the long run equilibrium) takes few years for full adjustment when there is 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 in order to reverse their effect on output.
Table of Contents
CHAPTER ONE: INTRODUCTION
1.1 Background of the Study
1.2 Statement of the problem
1.3 Objectives of the study
1.4 Justifications of the study
1.5 Significance of the study
1.6 Scope of the study
1.7 Limitations of the study
1.8 Organization of the paper
CHAPTER TWO: LITERATURE REVIEW
2.1 Theoretical Literature Review
2.2 Empirical Literature Review
2.3 Conceptual Frameworks
CHAPTER THREE: METHODS OF THE RESEARCH
3. Research Design
3.1 Data Source
3.2 Model specification
CHAPTER FOUR: RESULTS AND DISCUSSIONS
4.1 Descriptive Analysis
4.2 Econometric Analysis
4.2.1 Unit Root Test for Stationerity
4.2.2 Selection of optimal lag length
4.2.3 Results of Cointegration Tests and Long run Estimation
4.2.4 Test for zero restriction on long run variables and interpretations of result
4.2.5 Model diagnostic tests
4.2.6 Short Run Error Correction Model
4.2.7 Stability condition of the model
4.2.8 Impulse response function
4.2.9 Forecasting
CHAPTER FIVE: CONCLUSION AND RECOMMENDATIONS
5.1 Conclusion
5.2 Recommendations
Objectives and Research Themes
This study aims to provide a comprehensive and critical exploration of the macroeconomic determinants of economic growth in Ethiopia for the period 1974-2014, utilizing a Vector Error Correction Model (VECM) to analyze both short-run and long-run relationships among key economic variables.
- Macroeconomic determinants of economic growth in Ethiopia.
- Interaction of variables within the growth process.
- Analysis of short-run and long-run relationships using VECM.
- Evaluation of the impact of domestic resource mobilization versus external resources.
Excerpt from the Book
1.1 Background of the Study
The political economy of growth is sensitive and difficult subject in today’s Ethiopia because of lack of accurate information and uncertainty surrounding initiating dialogue on the subject. The history of Ethiopia has predominately been history of war/conflicts for the reasons like religion, land, nationality or mixture of these but mainly aimed at power and resource control.
Two opposing interest groups have characterized Ethiopian history prior to 1974 people’s revolution. The landlords and farmers with state (Alemayehu & Addis, 2014). Ethiopia has experienced three main political regimes with five economic policy shifts. The first was the imperial regime (1970-1974) which was a mixture of feudalism and capitalism as the main framework of the economy. During this regime the government attempted to launch a centrally administered development plan with the aim of building agro-industrial economy which in general was not successful. Onwards the government established three consecutive five year plans with the objectives of infrastructural development, enhancing commercial agriculture, agro-industry and manufacturing (Zerayehu, 2013).
The first five year plan (1957-1963) focused on industrialization and infrastructural development giving due attention to industries producing light consumer goods for domestic consumption. However the plan ignores agriculture which finally leads to failure. The second five year plan (1963-68) was launched with the objectives of building heavy industries that produce chemicals and metals. This time shows growth accompanied by increased investment, exports and employment. But the plan ends with failure for the same reason in the first five year plan. The other was the third five year plan (1969-1974) which favors commercial agriculture and industries. This plan didn’t give satisfactory result because of poor performance of agriculture and resource mobilization as well as high domestic transportation cost and natural disasters which leave the economy without transformation (Zerayehu, 2013).
Summary of Chapters
CHAPTER ONE: INTRODUCTION: Presents the background, problem statement, objectives, significance, and scope of the study regarding economic growth in Ethiopia.
CHAPTER TWO: LITERATURE REVIEW: Reviews relevant theoretical models and empirical literature to establish a conceptual framework for the analysis.
CHAPTER THREE: METHODS OF THE RESEARCH: Details the research design, data sources, and the VECM methodology used for the analysis.
CHAPTER FOUR: RESULTS AND DISCUSSIONS: Provides a comprehensive descriptive and econometric analysis of the collected data and model outcomes.
CHAPTER FIVE: CONCLUSION AND RECOMMENDATIONS: Concludes the research findings and suggests policy recommendations for economic growth management.
Keywords
Economic growth, Determinants, VECM, Ethiopia, Gross Domestic Product, Gross domestic saving, Labor force, Foreign direct investment, Foreign aid, External debt, Human capital, Cointegration, Time series analysis, Macroeconomic, Economic policy.
Frequently Asked Questions
What is the core focus of this research?
The research focuses on identifying the primary macroeconomic determinants that have driven or hindered economic growth in Ethiopia from 1974 to 2014.
What are the central themes addressed in the work?
The work examines the roles of saving, labor force, human capital, exports, foreign direct investment, foreign aid, and external debt in the context of Ethiopia's economic growth performance.
What is the primary objective of the study?
The primary objective is to conduct a critical and comprehensive exploration of the long-run and short-run relationships between real GDP and its macroeconomic determinants in Ethiopia.
Which scientific methodology is utilized?
The study employs a Vector Error Correction Model (VECM) approach, which allows for the analysis of cointegration and dynamic relationships between non-stationary time series data.
What does the main body of the paper cover?
The main body covers the theoretical and empirical literature review, research methods, a detailed descriptive analysis of variables, and econometric testing including unit root tests, cointegration tests, and short-run error correction models.
Which keywords characterize this paper?
Key terms include economic growth, determinants, VECM, Ethiopia, saving, labor force, FDI, foreign aid, external debt, and human capital.
What does the empirical result reveal about foreign aid in Ethiopia?
The study indicates that foreign aid has a negative and significant relationship with real GDP growth in Ethiopia during the study period, likely due to institutional weaknesses and potential misallocation.
How does the study evaluate the impact of human capital?
Human capital is proxied by government expenditure on health and education, and the empirical results show it has a positive and significant relationship with real GDP, supporting endogenous growth theories.
What conclusion does the author reach regarding saving?
The author concludes that saving is a significant positive driver of economic growth and recommends that the government prioritize saving mobilization through financial institution expansion and other policy measures.
How is the stability of the model determined?
The model stability is verified using a unit root circle for the companion matrix, where the results indicate that all points lie within the unit circle, confirming a stable model that converges to equilibrium.
- Citation du texte
- Asmamaw Kassahun Agdew (Auteur), 2016, Macroeconomic Determinants of Economic Growth in Ethiopia. A Vector Correction Model, Munich, GRIN Verlag, https://www.grin.com/document/498084
