Factors Affecting Economic Growth In Ethiopia: A Time Series Analysis

Abstract

Economic growth is an issue of primary concern to policy makers in both developed and developing countries. This study examined the factors affecting economic growth in Ethiopia from 1990 to 2023, employing a mixed-methods approach that combines descriptive and econometric analysis. The research utilized the Autoregressive Distributed Lag (ARDL) approach to co-integration and Error Correction Model to explore both short run and long run relationships between economic growth (measured in Real GDP) and key determinants. After testing stationarity of the data and confirming the existence of co-integration, the findings reveal that gross capital formation has a significant positive impact on economic growth in both the short run and long run. Exports and military expenditure also positively influence long run economic growth even though their effects are modest. Conversely, foreign aid and external debt exhibit negative long run effects, suggesting inefficiencies in aid utilization and debt management. Institutional quality negatively impacts growth, highlighting governance challenges. Short run dynamics show rapid adjustment to equilibrium with gross capital formation remaining pivotal. The study concludes with policy recommendations to enhance economic growth, including prioritizing investment in infrastructure, improving aid and debt management, diversifying exports, strengthening institutions and optimizing military spending. These insights contribute to discourse on sustainable economic development and offer actionable strategies for policy makers.