Poverty and Economic Growth in Ethiopia: A Multivariate Causal Linkage

Abstract

The relationship between economic growth and poverty reduction has long been researched in numerous studies around the world; yet, the results are far from being conclusive. Although it is now widely recognised that economic growth is good for poverty reduction through the trickle-down effect, alternative views still exist. This paper, therefore, investigates the dynamic causal linkage between poverty reduction and economic growth in Ethiopia during the period from 1970 to 2014. To address the omission of variable bias, the study includes financial development and investment as intermittent variables – thereby creating a multivariate Granger-causality model. The study uses two proxies to measure the level of poverty in Ethiopia, namely: household consumption expenditure and the infant mortality rate. The study further uses the newly developed autoregressive distributed lag (ARDL) bounds testing approach to cointegration and the ECM-based Granger-causality test to examine this linkage. The study finds that there is a short-run bi-directional causality between economic growth and poverty reduction – irrespective of which variable is used as a proxy for poverty reduction. However, in the long run, the study finds unidirectional causality from economic growth to poverty reduction (proxied by infant mortality rate); but it fails to find any causal relationship between household consumption expenditure and economic growth. The study, therefore, concludes that while poverty reduction and economic growth are mutually beneficial in the short run; in the long run, it is economic growth that leads to poverty reduction when the infant mortality rate is used as a proxy for poverty reduction. The study recommends that policy makers in Ethiopia should pursue both pro-poor policies and pro-economic-growth strategies in the short run; since poverty reduction and economic growth have been found to have a mutual causal relationship in the short run. It is further recommended that such policies should be complementary and mutually reinforcing. If the economic growth and poverty reduction policies are well crafted and co-ordinated; in the short run, a reduction in poverty could lead to an increase in economic growth – in a way that reinforces further reduction in poverty and inequality and benefits the population at large, while promoting higher economic growth in turn. However, in the long run, pro-growth policies should be prioritised; since economic growth has been found to Granger-cause poverty reduction in the long run. This would ensure that poverty in all its forms is reduced as far as is possible.