Effect of Foreign Aid on Economic Growth and Investment in Ethiopia

Moroda Kenea Duresa

doi:doi:10.11648/j.ijefm.20221001.12

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Effect of Foreign Aid on Economic Growth and Investment in Ethiopia

Moroda Kenea Duresa

Published in International Journal of Economics, Finance and Management Sciences (Volume 10, Issue 1)

Received: 20 December 2021 Accepted: 21 January 2022 Published: 28 January 2022

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Abstract

This study examined the effect of foreign aid on both economy and investment of Ethiopia from time 1974 to 2014. The empirical analysis has been done using multivariate co integration analysis of both vector autoregressive model (VAR) and (Vector error Correction model (VECM). Both models which enables to capture short run dynamics. VECM model is constructed by restricting long run behavior of endogenous variables for allowing for short run adjustment dynamics. The co integrating vector which is deviation from the long run equilibrium corrected through series of partial short run dynamics, which is known as error correction term The main findings of the study shown foreign aid has a significant positive effect on economic progress in both lengthy run and squat run. On other hands, aid has irrelevant and optimistic effect on gross domestic investment in both extensive time and short run. Further, the findings discovered that there is unidirectional causality among foreign aid to economic growth and foreign aid to gross domestic investment. Based on the findings the study recommends aid should be used to support the shortage of resource gap; also, aid should be focused on growth enhancing sectors as well as poverty reduction policies, then it will rise savings of societies’.

Published in	International Journal of Economics, Finance and Management Sciences (Volume 10, Issue 1)
DOI	10.11648/j.ijefm.20221001.12
Page(s)	12-27
Creative Commons	This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.
Copyright	Copyright © The Author(s), 2022. Published by Science Publishing Group

Keywords

Economic Growth, Investment, Foreign Aid, Gross Capital Formation, Co Integration

References

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[2]	Burnside c. and D. Dollar (2000), Aid, Policies and growth, Policy Research Working Papers 1777, The World Bank, Development Research Group, Washington. DC.
[3]	Dowling, J. and Hiemenz, V. (1982) “Aid, Saving and Growth in Asian Region”, quoted in White. (1992a) “The Macro economic Impact of Foreign Aid: A critical survey”, Journal of Development studies”, vol. 28 (2), pp. 166-224.
[4]	Fentaye S. (2015), The Impact of Foreign aid on Economic growth of Ethiopia (Through Transmission Channels), Adigrat University, Adigrat, Ethiopia.
[5]	Girma H. (2015), The impact of Foreign aid on Economic growth: Empirical Evidence from Ethiopia, Using ARDL approach, Aksum University, Aksum, Ethiopia.
[6]	Griffin K. and Enos J. (1970), Foreign Assistance: Objectives and Consequences, Economic Development and Cultural Change vol. 18, pp. 313 -320.
[7]	Levy V. (1988), Aid and Growth in Sub-Saharan Africa; The Recent Experience, Europe Economic Review, Vol. 32, Pp. 77 - 78.
[8]	Mehdi S. and Masoud. A (2011), Investigating The effect of Foreign Aid and Investment on Economic Growth in Iran, Journal of International Review of Business Research Papers Vol. 7. No. 4, PP. 150 -158.
[9]	MoFEC, (2015) Ministry of Finance and economic development of Ethiopia.
[10]	Papanek G. (1972), The Effect of aid and other resource transfers on savings and Growth in less Developed countries, Economic Journal.
[11]	Papanek G. (1973), Aid, Private Foreign Investment, Savings and Growth in less Developed countries, Journal of Political Economy, Vol. 81, pp. 120-130.
[12]	Tasew T. (2011), Foreign Aid and Economic Growth in Ethiopi, M.Sc. thesis. Adama University.
[13]	Tesfahun B. (2014), Foreign Aid and economic growth in Ethiopia unpublished M.Sc. thesis, AAU.
[14]	Wondwesen W. (2011), Impact of Foreign capital inflows on economic growth of Ethiopia, working Paper.
[15]	World Bank 1998. Assessing Aid: What Works, What Doesn't and Why. Oxford UP, Oxford, UK.
[16]	Newlyn (1973). The effect of Aid and Other Resource Tranisfer on Savings and Growth in Less Developed countries, Economic Journal, Royal Economic Society, vol. 83 (331), pages 867-869.
[17]	Rajan & Subramanian (2005), Aid and Growth: What does the cross country Evidence really show? The Review of Economics and Statistics, MIT Press, vol. 90 (4), pages 643-665, 06.
[18]	Doucouliagos, C., & Paldam, M. (1997). Conditional aid effectiveness. A Meta Study. Mimeo Economics Department, University of Aarhus, Denmark.
[19]	Gong and Heng-fu (2001) Foreign Aid Reduces Labor Supply and Capital Accumulation. Review of Development Economics, Vol. 5, Issue 1, pp. 105-118.
[20]	Weisskopf (1970), The impact of foreign capital inflow on domestic savings in underdeveloped countries, Volume 2, Issue 1, February 1972, Pages 25-38.
[21]	Paldam (1997). Political Business Cycles, Perspectives on public choice: A handbook, a) 342-370.
[22]	Battarai (2005). The Effects of Exchange Rate on the Trade Balance in Ghana: Evidence from Cointegration Analysis. Hull, Centre for Economic Policy, University of Hull.
[23]	ECA (2006). Economic Commission for Africa (2007-02). Report on ECA's statistical activities in 2006-2007 and proposed work programme 2008-2009. UN. ECA Committee on Development Information Meeting (5th: 2007, Apr. 29 - May 04: Addis Ababa, Ethiopia). Addis Ababa.
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[25]	Griffin (1972). Financing Development in Latin America. Aid as Imperialism (Harmondsworth, Penguin Books). Pp. 222.

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Moroda Kenea Duresa. (2022). Effect of Foreign Aid on Economic Growth and Investment in Ethiopia. International Journal of Economics, Finance and Management Sciences, 10(1), 12-27. https://doi.org/10.11648/j.ijefm.20221001.12

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Moroda Kenea Duresa. Effect of Foreign Aid on Economic Growth and Investment in Ethiopia. Int. J. Econ. Finance Manag. Sci. 2022, 10(1), 12-27. doi: 10.11648/j.ijefm.20221001.12

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AMA Style

Moroda Kenea Duresa. Effect of Foreign Aid on Economic Growth and Investment in Ethiopia. Int J Econ Finance Manag Sci. 2022;10(1):12-27. doi: 10.11648/j.ijefm.20221001.12

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@article{10.11648/j.ijefm.20221001.12,
  author = {Moroda Kenea Duresa},
  title = {Effect of Foreign Aid on Economic Growth and Investment in Ethiopia},
  journal = {International Journal of Economics, Finance and Management Sciences},
  volume = {10},
  number = {1},
  pages = {12-27},
  doi = {10.11648/j.ijefm.20221001.12},
  url = {https://doi.org/10.11648/j.ijefm.20221001.12},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijefm.20221001.12},
  abstract = {This study examined the effect of foreign aid on both economy and investment of Ethiopia from time 1974 to 2014. The empirical analysis has been done using multivariate co integration analysis of both vector autoregressive model (VAR) and (Vector error Correction model (VECM). Both models which enables to capture short run dynamics. VECM model is constructed by restricting long run behavior of endogenous variables for allowing for short run adjustment dynamics. The co integrating vector which is deviation from the long run equilibrium corrected through series of partial short run dynamics, which is known as error correction term The main findings of the study shown foreign aid has a significant positive effect on economic progress in both lengthy run and squat run. On other hands, aid has irrelevant and optimistic effect on gross domestic investment in both extensive time and short run. Further, the findings discovered that there is unidirectional causality among foreign aid to economic growth and foreign aid to gross domestic investment. Based on the findings the study recommends aid should be used to support the shortage of resource gap; also, aid should be focused on growth enhancing sectors as well as poverty reduction policies, then it will rise savings of societies’.},
 year = {2022}
}

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TY  - JOUR
T1  - Effect of Foreign Aid on Economic Growth and Investment in Ethiopia
AU  - Moroda Kenea Duresa
Y1  - 2022/01/28
PY  - 2022
N1  - https://doi.org/10.11648/j.ijefm.20221001.12
DO  - 10.11648/j.ijefm.20221001.12
T2  - International Journal of Economics, Finance and Management Sciences
JF  - International Journal of Economics, Finance and Management Sciences
JO  - International Journal of Economics, Finance and Management Sciences
SP  - 12
EP  - 27
PB  - Science Publishing Group
SN  - 2326-9561
UR  - https://doi.org/10.11648/j.ijefm.20221001.12
AB  - This study examined the effect of foreign aid on both economy and investment of Ethiopia from time 1974 to 2014. The empirical analysis has been done using multivariate co integration analysis of both vector autoregressive model (VAR) and (Vector error Correction model (VECM). Both models which enables to capture short run dynamics. VECM model is constructed by restricting long run behavior of endogenous variables for allowing for short run adjustment dynamics. The co integrating vector which is deviation from the long run equilibrium corrected through series of partial short run dynamics, which is known as error correction term The main findings of the study shown foreign aid has a significant positive effect on economic progress in both lengthy run and squat run. On other hands, aid has irrelevant and optimistic effect on gross domestic investment in both extensive time and short run. Further, the findings discovered that there is unidirectional causality among foreign aid to economic growth and foreign aid to gross domestic investment. Based on the findings the study recommends aid should be used to support the shortage of resource gap; also, aid should be focused on growth enhancing sectors as well as poverty reduction policies, then it will rise savings of societies’.
VL  - 10
IS  - 1
ER  -

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Author Information

Moroda Kenea Duresa

Senior Research and Development, Awash Bank, Addis Ababa, Ethiopia

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Plain Text BibTeX RIS

APA Style

Moroda Kenea Duresa. (2022). Effect of Foreign Aid on Economic Growth and Investment in Ethiopia. International Journal of Economics, Finance and Management Sciences, 10(1), 12-27. https://doi.org/10.11648/j.ijefm.20221001.12

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ACS Style

Moroda Kenea Duresa. Effect of Foreign Aid on Economic Growth and Investment in Ethiopia. Int. J. Econ. Finance Manag. Sci. 2022, 10(1), 12-27. doi: 10.11648/j.ijefm.20221001.12

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AMA Style

Moroda Kenea Duresa. Effect of Foreign Aid on Economic Growth and Investment in Ethiopia. Int J Econ Finance Manag Sci. 2022;10(1):12-27. doi: 10.11648/j.ijefm.20221001.12

Copy | Download

@article{10.11648/j.ijefm.20221001.12,
  author = {Moroda Kenea Duresa},
  title = {Effect of Foreign Aid on Economic Growth and Investment in Ethiopia},
  journal = {International Journal of Economics, Finance and Management Sciences},
  volume = {10},
  number = {1},
  pages = {12-27},
  doi = {10.11648/j.ijefm.20221001.12},
  url = {https://doi.org/10.11648/j.ijefm.20221001.12},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijefm.20221001.12},
  abstract = {This study examined the effect of foreign aid on both economy and investment of Ethiopia from time 1974 to 2014. The empirical analysis has been done using multivariate co integration analysis of both vector autoregressive model (VAR) and (Vector error Correction model (VECM). Both models which enables to capture short run dynamics. VECM model is constructed by restricting long run behavior of endogenous variables for allowing for short run adjustment dynamics. The co integrating vector which is deviation from the long run equilibrium corrected through series of partial short run dynamics, which is known as error correction term The main findings of the study shown foreign aid has a significant positive effect on economic progress in both lengthy run and squat run. On other hands, aid has irrelevant and optimistic effect on gross domestic investment in both extensive time and short run. Further, the findings discovered that there is unidirectional causality among foreign aid to economic growth and foreign aid to gross domestic investment. Based on the findings the study recommends aid should be used to support the shortage of resource gap; also, aid should be focused on growth enhancing sectors as well as poverty reduction policies, then it will rise savings of societies’.},
 year = {2022}
}

Copy | Download

TY  - JOUR
T1  - Effect of Foreign Aid on Economic Growth and Investment in Ethiopia
AU  - Moroda Kenea Duresa
Y1  - 2022/01/28
PY  - 2022
N1  - https://doi.org/10.11648/j.ijefm.20221001.12
DO  - 10.11648/j.ijefm.20221001.12
T2  - International Journal of Economics, Finance and Management Sciences
JF  - International Journal of Economics, Finance and Management Sciences
JO  - International Journal of Economics, Finance and Management Sciences
SP  - 12
EP  - 27
PB  - Science Publishing Group
SN  - 2326-9561
UR  - https://doi.org/10.11648/j.ijefm.20221001.12
AB  - This study examined the effect of foreign aid on both economy and investment of Ethiopia from time 1974 to 2014. The empirical analysis has been done using multivariate co integration analysis of both vector autoregressive model (VAR) and (Vector error Correction model (VECM). Both models which enables to capture short run dynamics. VECM model is constructed by restricting long run behavior of endogenous variables for allowing for short run adjustment dynamics. The co integrating vector which is deviation from the long run equilibrium corrected through series of partial short run dynamics, which is known as error correction term The main findings of the study shown foreign aid has a significant positive effect on economic progress in both lengthy run and squat run. On other hands, aid has irrelevant and optimistic effect on gross domestic investment in both extensive time and short run. Further, the findings discovered that there is unidirectional causality among foreign aid to economic growth and foreign aid to gross domestic investment. Based on the findings the study recommends aid should be used to support the shortage of resource gap; also, aid should be focused on growth enhancing sectors as well as poverty reduction policies, then it will rise savings of societies’.
VL  - 10
IS  - 1
ER  -

Copy | Download