Abstract:
This study investigates the effects of international remittances on the economic growth of
Ethiopia using a time series analysis from 1990 to 2023. Although remittances are the most
stable source of external finance, its macroeconomic effects on economic growth remain
insufficiently explored. Prior research has largely focused on its macroeconomic indicators
or household level impacts, ignoring how weak institutional frameworks might undermine the
productive utilization of remittance inflows. In addition, remittances can help to reduce
poverty quickly, but they might also discourage people from working or fail to create jobs if
institutions can’t effectively invest the funds in productive areas. As a result, the interplay
between remittances, institutional quality, and unemployment rate has not been
systematically investigated in Ethiopian context. Recognizing Ethiopia as a significant source
of remittance inflows, the researcher aims to understand how these financial transfers
influence the country’s gross domestic product while considering mediating factors such as
institutional quality and unemployment rates. The methodology employs the Autoregressive
Distributed Lag (ARDL) model based on the works of Pesaran et al (2001) to analyze the
long-term relationships between remittances and economic growth. The result indicates
positive and statistically significant relationships, with one percent increase in remittance
inflows leading to a 0.17 percent increase in real GDP. Furthermore, gross capital formation
(GCF) is identified as a crucial driver of economic growth, while poor institutional quality
negatively impacts GDP. Unlike in the short run, export positively and significantly boost
economic growth in the long run. Moreover, unemployment drives down the economic growth
since large number of labor force remain idle without work. The study concludes that while
remittances enhance household incomes and stimulates economic activity; their potential for
fostering sustainable growth is contingent upon a robust institutional framework. The
Granger Causality test has confirmed that there is a unidirectional causality which runs from
remittance to output. Based on these findings, the study recommends the government to focus
on strengthening institutional capacities, implement policies that incentivize the productive
use of remittances, and developing financial products to optimize the impact of remittances.
Likewise, the government should address unemployment through vocational training and
develop a specific office that monitor the utilization of remittances that are essential for
maximizing their economic benefits.
