The Relative Significance of Foreign Aid and Domestic Saving Mobilization as a Strategy to Boost Economic Growth in Ethiopia

This study examined the relative importance of aid and domestic savings in boosting economic growth of Ethiopia by using quantitative estimation technique. The econometric analysis is based on annual data from 1970 to 2011. The long-run relationship between economic growth and explanatory variables is tested using Auto Regressive Distributed Lag co-integration model. The study found a statistically significant and positive effect of aid on per-capita output growth in Ethiopia in the long-run but a negative effect in the short-run. The domestic saving rate has much larger and statistically significant positive impact on per-capita output growth in the long-run while its short-run effect is positive, though statistically insignificant. Effect of aid turns negative though statistically insignificant when investment rate is controlled in growth estimation. This highlights the presence of some absorptive capacity constraints associated large aid money. Better management of aid funds and diversification of investment financings, mainly from domestic sources and foreign private investors are needed to grip more benefits. Such initiatives require stronger financial institutions, developments of capital market and incentive mechanisms in domestic saving mobilizations.