Impact Of Capital Flight On Economic Growth In Ethiopia

Abstract

The paper studies impact of capital flight on economic growth in Ethiopia by covering the period from 1983/84 to 2017/18 sung secondary data collected from National Bank of Ethiopia and raw data on proxy of capital flight was from World Bank’s World Development Indicators. In order to investigate the impact of capital flight on economic growth in Ethiopia, annual macroeconomic data on eight variables were collected from the aforementioned secondary sources. In this thesis real gross domestic product is used as a proxy for economic growth. The seven macroeconomic variables used as explanatory variables include capital flight, gross capital formation, total labor force, foreign reserve, external debt, Trade Openness, and inflation. The methodological framework employed to analyze and achieve the specific objectives of the study include descriptive statistics, and econometric method. The descriptive analysis reveal that the trend of the Ethiopian economy continued to grow and the overall economic performance reflected the rapid expansion; whereas normal capital flight has a falling trend under the study period. In order to select appropriate model, it must go through certain steps such as Pre-estimation test (including Unit root test, maximum lag length). Dickey-Fuller or Augmented Dickey Fuller test will be conducted for stationary. Moreover, the study uses Autoregressive Distributed Lag model, developed by Pesaran et al to examine the impact of capital flight on economic growth in Ethiopia. Co-integration is a technique used in econometrics for testing the stationary of time series variables. In this analysis the Johnsen test was employed. The result shows that capital flight, foreign reserve, inflation, external debt, trade openness, labor force and capital formation co integrate with real gross domestic product in Ethiopia. In contrast to the above, the result of the study shows that foreign reserve has negative impact on Ethiopian economy both in the short and long run and statistically significant. Ethiopia has no enough foreign reserve and the one that is available is misused for importation of different machineries and technologies which in turn discourage domestic technology and export in Ethiopia. As the Ethiopian government implemented a diversity of reformsto improve the country’s balance of payment position in 1992 which result in increased imports and export of goods and service together with foreign direct investment inflows, trade openness has a long run positive impact on the Ethiopian economic growth. Whereas capital flight has negative and statistically significant impact under the study period in the long run.