Impact of Foreign Capital inflows on Economic Growth and Self-employment in Ethiopia

University essay from Lunds universitet/Ekonomisk-historiska institutionen

Abstract: This paper examines the impact of foreign capital inflows on economic growth and self-employment in Ethiopia; using self-employment as a proxy for poverty reduction. It employs a descriptive statistics in the first part and Granger causality Wald tests in the second part. In the first part, 1961 to 2010, the findings indicate that there is an increase in the average growth rates, especially in the six economic sectors, agriculture, mining, trade services construction, transport services and dwellings. However, there is a significant increase in growth elasticity of self-employment in agriculture and trade services. Likewise, an evidence of reduction in absolute poverty ($1.25 per day) from 63 percent in 1990 to 37 percent in 2010 but poverty under $2 per day remains high, 72 percent. In the second part, 1992 and 2012, our results show that in the short run, foreign direct investment (FDI) has a direct positive effect on the real GDP, but no evidence that FDI has a direct positive effect on self-employment. In contrast, development assistance (DAC) has no direct effect on the real GDP, but it has a direct positive effect on self-employment. Suggesting that foreign capital inflow into the economy from 1992-2012 has stimulated economic growth, self-employment and poverty reduction. The policy implication of these results is that Ethiopia requires foreign capital inflow into the economy to sustain the current economic growth, self-employment and poverty reduction.

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