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.