INSTITUTIONAL QUALITY AND ECONOMIC GROWTH IN ETHIOPIA: EVIDENCES FROM AN ARDL MODEL.

Abstract

This study examined the relationship between institutional quality and economic growth in Ethiopia over the period from 1985 to 2020. For this purpose ARDL and NARDL models and Granger-causality test is employed on a data collected on the variables under study. The result of ARDL model indicated that governance quality has a statistically significant negative effect on the country’s economic growth in both short-run and long-run. In addition, political freedom has a statistically significant negative effect on economic growth in the short run while, its effect is positive in the long-run. The NARDL result revealed that in both short-run and long-run the positive and negative shocks on institutional quality have no equal effect on economic growth. Furthermore, in the long-run positive component of governance quality has greater negative impact than the negative component while in short-run the positive shock has insignificant impact. Similarly, in both short-run and long-run the negative component of political freedom has insignificant impact but positive shock has significant positive and negative impact in the long- run and short-run respectively. The study also found that there is threshold of 4.90 and 5.27 point for governance quality in the long-run and short-run respectively, and for political freedom 3.21 point in the short-run. If the governance quality and political freedom exceeds the threshold, it causes the positive effect on the growth. The Granger-causality test result revealed that there is a bi-directional causality between political freedom and economic growth and unidirectional causality running from positive and negative components of political freedom and governance quality to economic growth. It is recommended that a threshold level of governance quality and political freedom should be met for it to stimulate economic growth of our country.