The Impact of Educational Expenditure on Ethiopian Economic Growth: Application of Vector Auto Regressive Model (VAR).

Abstract

This study has been attempted to investigate the fundamental impact of educational expenditure on the economic growth of Ethiopia. The nature of data was dynamic in nature and it covers the time ranges of 1975/76-2011/12, implies that the study adopts time series data analysis and the data was collected from secondary sources. To analyze the data, both descriptive and inferential approaches was utilized. The study employed the Solow growth model as a bench mark to specify the econometric model. The model was specified by considering real gross domestic product as a dependent variable subject to gross capital formation, labor force, educational expenditure, export and inflation as an independent variable. Both Vector Auto Regressive (VAR) and Vector Error Correction model was undertaken as an analytical procedure. The Augmented Dicky-Fuller (ADF) test was used to test the stationary nature of variables, so that all variables are stationary at level and first difference except inflation at its level form. The variables were co-integrated and confirmed the existence of long run interdependency. The result of the study was evaluated from both short run and long run aspects. It revealed that all variables were statistically significant except levels of export in the long run. Therefore, educational expenditure (our target variable), inflation and gross capital formation significantly and positively affects growth in long run aspects of the VAR system. However, labor force negatively affects growth. In the short run, only educational expenditure and inflation affects growth positively and significantly. Thus, the responsible bodies should be able to improve the level of investment in the educational sector and focus on skill and ingenuity to increase productivity at the margin. Keywords : educational expenditure, stationary, impulse response, Vector Auto Regressive. DOI: 10.7176/JESD/11-21-02 Publication date: November 30 th 2020