Conference name, dates, place

2007 International Conference on Ethiopian Development Studies (4th ICEDS) A Multidisciplinary Conference on the Challenges of Peace and Development in Ethiopia & the Horn of Africa, held in Kalamazoo, Michigan (WMU), August 2-4, 2007

Document Type

Paper

Presentation Date

8-2007

Abstract

Ethiopia is one of the countries receiving large proportions of aid, especially since the introduction of the policy changes (1992) there is a substantial amount of aid flows. This lead to raise government expenditure on various productive activities, contribute either directly to the improvement of economic growth of the country (accelerator) and/or to the development of services (multiplier). In both ways I deem that the undergoing efforts made by the government using aid as an additional resource are contributing to the enhancement of the economic development of the country. But I still argue that the achievements made are not up to the expectation of the government and the donor. Therefore this study is trying to answer the question: What role has aid played in the economic growth and poverty reduction process in Ethiopia since the introduction of policy change (1992/93)? Main hypothesis of this paper falls on the idea of: for aid to be effective, change in policy or development strategy is not the only factor but there are various domestic and foreign factors (aid coordination, allocation and disbursement, and earmarking criteria) that needs more attention. In order to answer this question I used quantitative method; traditional production function with special emphasis to the new (endogenous) growth model. But in order to examine aid effectiveness in a detail manner aid is disaggregated into loan and grant component and is estimated using time series data for the period 1981 to 2003. Following the third generation aid studies this work tried to examine whether aid effectiveness is conditional on policy (macro and institutional) or not. My empirical model is estimated using the Error Correction cointegration approach proposed by Engle and Granger (1987). The findings provide little evidence of aid impacts on intensive economic growth in Ethiopia. According to the model economic growth of the country is influenced by human capital. The result strongly supports the above hypothesis. In the case of intensive growth (considering all variables used in the model in per capita term), there is no significant relationship between aid given in the form of loan and economic growth, but the relationship between aid given in the form of grant and economic growth of Ethiopia is negatively related and significant whereas in the case of extensive growth foreign aid given in the form of grant does have some positive impact on growth.

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