Impacts of external factors on Ethiopia's economic growth: Insights on foreign direct investment, remittances, exchange rates, and imports

Abstract

This study conducts a rigorous examination of relationships that are often assumed but rarely tested within the context of Ethiopia's journey towards sustainable development. An autoregressive distributed lag model is employed using annual time series data from 1982 to 2021 to investigate the short- and long-term impacts of foreign direct investment (FDI), remittances, real exchange rates, and imports on Ethiopia's economic growth. By incorporating additional control variables, this study contributes nuanced insights that were previously lacking in the literature. The findings reveal intriguing patterns that both align with and deviate from existing frameworks. Contrary to some prior studies, foreign investment consistently emerges as a significant driver of economic growth over time. However, remittances demonstrate only transient significance, highlighting the need for cautious policy considerations. The influence of exchange rates on economic growth proves to be unexpectedly complex and nonlinear, challenging conventional assumptions. The empirical validation of these multifaceted realities underscores the importance of this analysis. Furthermore, robustness tests conducted in this study confirm the reliability of the findings while shedding light on additional intricacies. For instance, the relationship between imports and growth is context-dependent and exhibits ambiguities that call for careful consideration. The theoretical and practical implications derived from this research offer valuable insights for researchers and policymakers alike. The recommendations put forth emphasize the promotion of sustained prosperity through evidence-based strategies that prioritize community development.