Savings, investment and economic growth in Ethiopia: Evidence from ARDL approach to co-integration and TYDL Granger-causality tests

Abstract

This paper examines the causal relationship among savings, investment and economic growth in Ethiopia using annual time series data from 1969/70-2010/11 in a multivariate framework. Results from the PP unit root test shows that all variables under consideration are I(1). Result from the ARDL Bounds Testing indicates that there exists co-integration among gross domestic savings, gross domestic investment, real gross domestic product, labor force and human capital when RGDP is taken as dependent variable. Labor and investment have significant positive effect on economic growth of Ethiopia both in the short-run and long-run while GDS and human capital are statistically insignificant. Moreover, Toda-Yamamoto and Dolado-Lutkepohl as well as Innovative Accounting Techniques (i.e., IRFs and FEVD) approach to Granger causality analysis shows that there exists bidirectional causality between gross domestic investment and economic growth as well as between gross domestic savings and gross domestic investment. Granger causality running from investment to savings and from investment to growth is stronger as witnessed from impulse responses and variance decompositions. Although there is unidirectional Granger causality running from economic growth to gross domestic savings, it is weak. To attain high and sustained growth in the country, increased savings and especially investment are required due to its dual effect.