“Effects of International Remittances on the Economic Growth of Ethiopia”

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.