The Impact of Remittance on Economic Growth of Ethiopia

Mesfin Bekele Gebbisa

doi:10.7176/jesd/10-17-01

Abstract

The purpose of this study was to investigate whether or not international remittances enhance economic growth in Ethiopia. Data for the period 1984-2017 from World Development Indicator and Ethiopia Ministry of Education annual statistical Bulletin was used. To investigate the impact international inflow remittances, foreign direct investment net inflow, inflation, general government final consumption expenditure, gross fixed capital formation, openness to international trade, human capital and population growth were also included. The study employed an aggregate Cobb-Douglas production function. Augmented Dickey Fuller tests were used to test for non Stationarity of the variables. It was found that all variables were integrated of order one. In addition, Johansen Cointegration test was employed to determine whether or not the variables were cointegrated. Error correction model was employed to estimate short – run and long run relationship using ordinary least square technique. The study found that in the long run General government final consumption expenditure, openness to international trade, human capital and Population growth where as in short run foreign direct investment net inflow had both positive and significant impact on economic growth. Additionally in the long run Inflow remittances, Inflation and foreign direct investment net inflows and in the short run inflation, Openness to international trade and Human capital (secondary school enrolment) had both negative and significant. This was in contrast with the expected result of positive and significance impact on economic growth rate. Gross fixed capital formation in long run where as remittance inflow, general government final consumption expenditure and human capital (secondary school enrolment) were found to be insignificant and no impact economic growth. Keywords: Remittances, Economic growth, Error Correction Model (ECM), Augmented Dickey Fuller (ADF) test DOI : 10.7176/JESD/10-17-01 Publication date :September 30 th 2019

Highlights

Remittances are a major source of foreign exchange earnings in many developing countries
The results show that holding all other factors constant, a one percentage increase in remittances leads to 0.013 percentage point decrease in ΔLNGDP
5.1 Conclusion The main purpose of this seminar is to investigate the impact of remittances on Ethiopian economic growth by employing time series data from1984-2017 from the World Bank and Ethiopia ministry of Education

Summary

Introduction

Remittances are a major source of foreign exchange earnings in many developing countries These flows were more than three times the size of official development assistance (ODA), More Stable than Private Capital Flows and significantly larger than foreign direct investment (FDI), excluding China. They are a more stable component of receipts in the current account, reliably bringing in foreign currency that helps sustain the balance of payments and reduce instability (World Bank 2018a). Remittances tend to be significantly higher in countries that are high risk and that have a high level of debt to gross domestic product (GDP). Where cash remittances are sufficiently large, they may weaken the exchange rate of the home country, further depressing the economy and providing even more reason to migrate (World Bank, 2005)

Objectives

Methods

Findings

Conclusion