Economic Analysis of the Impact of Development Aid : An Application of Error Correction Modelling (ECM) to Ethiopia

Foreign aid inflows have grown significantly in the post-war period. Many studies have tried to assess the effectiveness of aid at the micro- and macro-level. While micro evaluations have found that in most cases aid ‘works’, those at the macro-level are ambiguous. This paper investigates the impact of foreign aid on economic growth in Ethiopia using time series data for the period 1981 to 2015. The main objective is to identify the relationship that aid has with the developmental path of the country and whether one can reasonably link outcomes to aid inputs. To this end, the study used the production function initiated by Solow-Swan model and cointegration analysis. The study is able to demonstrate the existence of long-run relationship between the official development assistance and economic growth of Ethiopia. The study found that there is negative relationship between ODA and economic growth in the short run and tend to be positive in the long run.