Abstract
The main research question here is to address drivers of economic growth in Ethiopia using the time series data from 1970 to 2016 where the complementarity of aid and policy index is critically assessed. The empirical result from cointegration test confirms the existence of long run relationship among the variables entered in the per capita growth equation. In the long run, foreign aid inflow entered alone has a positive and significant impact on economic growth. Again, aid interacted with policy appears to have a positive contribution showing that both aid and policy are complementary to each other. The results of the study calls for devising policies for checking the apparent link and dynamics between population growth and economic growth, capacitating and maintaining institutional qualities, and proper allocation of financial and infrastructural resources to enhance human capital, comprehensible selection and priority for productive public investment for foreign aid to be more effective, putting more efforts to achieve macroeconomic stabilities via use of prudent fiscal, monetary and trade polices used in amalgamations to complement both aid and policy. Key words: Economic growth, policy index, foreign aid.
Highlights
In many developing countries including Ethiopia, the prime hub of policy effects is to bring high and sustainable economic growth
The aggregate production function (APF) framework which assumes the usual conventional input namely labour and capital which are used in the neoclassical production function, with other unconventional inputs represent other variables like foreign aid and trade openness which may possibly be included in the model to capture their contribution to per capita economic growth (Feder, 1983; Fosu, n.d.)
The econometric test of stationarity of macroeconomic variables was carried by the Augmented Duckey-Fuller (ADF) test
Summary
In many developing countries including Ethiopia, the prime hub of policy effects is to bring high and sustainable economic growth. To achieve and sustain a high growth rate, policy makers have to understand the drivers of economic growth. There is a general view that economic growth is illustrated by the trend of GDP over a period of time.The Solow–Swan growth model affirms that per capita GDP is determined by exogenous factors including saving rate, population growth and technical progress. Attention was given to the relationship between foreign aid and economic growth to a larger extent, putting aside other potential factors accounting for efficient utilization of foreign aid. Subsequent studies shifted from such aid economic growth relationships to conditionality, effectiveness, the policy environment of the recipient country, etc. Subsequent studies shifted from such aid economic growth relationships to conditionality, effectiveness, the policy environment of the recipient country, etc. (Mercieca, 2010)
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