The balance of payment-constrained economic growth in Ethiopia

Abstract

The objective of this paper is to empirically test the validity of the simplified version of the balance of payment-constrained economic growth model for Ethiopia during the period 1971-20082. According to the model, economies only grow at a pace allowed by the constraints imposed by the requirement of balance of payment. Import demand function is estimated for the same period in order to estimate income elasticity; co-integration test between GDP and export is conducted using the Engel Granger two step technique3 and the effect of liberalization on import income elasticity is incorporated into the analysis. The finding shows that the average economic growth over the sample period is 2.84 percent, whereas the economic growth as suggested by Thirwall’s law is 7.42 percent. These finding show that Ethiopia’s economy has been growing at a low rate as compared to the model’s predicted growth rate. Achieving persistent and sustainable economic growth depends upon the strategies that relate to institutional and technological progress along with the other significant factors such as sound infrastructure and continuity in policies.

Keywords: Economic growth; Balance of payment-constrained growth; Demand-oriented growth.