Is Foreign Aid Panacea for Economic Growth? Case of Ethiopia: A Time Series Data Approach

Abstract

The effect of foreign aid on economic growth has been widely examined, yielding a contradictory and ambiguous results for developing economy like Ethiopia as it has long been an integral part of their annual budget. Thus, the main aim of this study is to identify aspects of the determinants of growth in Ethiopia in particular with the role of aid played in affecting economic growth. The study used modern econometric analysis/estimation techniques to investigate the above relationship by employing data set ranging from 1980 to 2013. The study found that a positive but insignificant impact of foreign aid on economic growth of Ethiopia. Accordingly, the government of Ethiopia is advised to base its economy on domestic resource mobilization rather than debt financing.

Keywords: Foreign Aid, Economic Growth, Cointegration, ECM, Ethiopia