Impact of Foreign Aid on Economic Growth in Ethiopia

Abstract

This paper aims to analyze the impact of foreign aid on economic growth in Ethiopia using time series data over the period 1974–2017. Autoregressive distributed lag approach to co-integration and error correction model was applied to investigate the long-run and short-run impact of foreign aid on economic growth. The model results revealed that foreign aid has a negative impact on economic growth in both the long run and short run. The negative and significant error correction term shows that the short-run disequilibrium adjusts to its long-run equilibrium by 84.6% each year. The paper suggested that more effort has to be made to improve the negative impact of foreign aid, mainly because of the existence of poor institutional arrangements that contribute the funds to unproductive sectors. The government has to ensure a close monitoring and consistent management strategies, which are used to avoid misallocation and mismanagement problems and has to ensure that foreign aid is linked to the productive sectors to optimize the benefits.

Foreign Aid, Institutions, and Economic Performance in Developing Countries

“…In the study covering the period of 1980-2017, the results show that foreign aid increased with effective fiscal policy towards education and health has a positive impact on income levels in all the regions except Central Africa. Gebresilassie et al (2023) examine the impact of foreign aid on economic growth in Ethiopia using time series data for the period 1974-2017. The model results show that foreign aid has a negative impact on economic growth both in the long run and the short run.…”