Investment Expenditure Nexus Economic Growth in Ethiopia: Cointegration Approach

Netsanet Gizaw

doi:10.7176/jesd/11-11-04

Abstract

The major objective of this study was to investigate the nexus between investment expenditure and economic growth in Ethiopia. The study adopted modified neoclassical growth framework using a data from NBE and WB data base from 1975-2018. All the variables were found non stationary at level and become stationary at first difference, so that Johansen’s co-integration test was conducted to check for long run relationship among variables in the model. Subsequently, all the variables confirmed co-integartion and VEC model was estimated to show both short run and long run relationships and finally Granger causality test was applied to recognize the direction of causation. The findings of the study revealed that investment expenditure have insignificant short run impact on growth, however significantly positive in long run. The result from causality exhibited bidirectional relationship. Besides, labor force, openness, exchange rates and liberalization dummy incorporated in the model were found positive and significant in the long run. Further, the coefficient of ECT was -0.4010 that shows any deviations from long run equilibrium is corrected at 40.10% annually and converges towards its long run steady state path. Based on the findings, it is recommended that a long run policy towards investment expenditure in home economy is whispered to deliver a significant effect on economic growth. Hence, increasing efficiency of investment sector would enable Ethiopia to sustain domestic economic growth in long run. Keywords : Investment expenditure, Granger, Co-integration, Economic Growth, long run, Ethiopia. DOI: 10.7176/JESD/11-11-04 Publication date: June 30th 2020

Highlights

Economic development, among the major goals of every country in the world needs economic growth as its requisites
Johansen’s Co-Integration Test Result: According to Augmented Dickey Fuller (ADF) and PP test results conducted so far, all the variables were found to be integrated of order one I (1) which suggests that all the variables included in the model are found to be a candidates for inclusion in a long run relationship for testing the number of co-integrating relationship
In developing countries like Ethiopia, investment would boost growth if it is properly directed over long run, inferring that growth would be continuous with higher investment expenditure in a productive sector there by creating capital accumulation through its multiplier effect as the theory stipulates and long run bidirectional causality results confirmed this findings

Summary

Introduction

Among the major goals of every country in the world needs economic growth as its requisites. Most economic literatures revealed that investment is, both empirically and theoretically, the key determinant of economic growth there by increasing productive capacity of the economy. Following the global economic integration that gained momentum since 1990’s, Ethiopian government give priorities for growth by privatizing development sectors, liberalizing its economy, and allowing for further investments both by foreigner and domestic investors. Investment expenditure at national level extends to comprise, capital outlay on new projects for public utilities and infrastructure like opening major and branch road projects, extensions of water and sewerage networks, creating urban plans and construction projects, housing and extensions of electricity and power generation, social development in the areas of education, health and communication projects, as well projects allied with economic activity for the production of goods and services such as industry, agriculture, housing, health, education and tourism sectors(Bakari,2018)

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Results

Conclusion