The Link Among Foreign Direct Investment Electricity Consumption And Economic Growth In Ethiopia

In Ethiopia context, electricity consumption – foreign direct investment – economic growth nexus is not well studied and the knowledge gap needs to be studied and filled. This paper explores the link among the use of electricity, foreign direct investment and economic growth in Ethiopia, using annual data from 1988 to 2018. The study applies the augmented Dickey Fuller test for stationarity and Johansson co-integration test used to determine whether there is a long run relationship between variables. The Johansson co-integration test result recommended the presence of relationship between the variables in long run. Moreover, Vector Error Correction model is applied to estimate both short and long run models related with Real Gross Domestic Product per capita of Ethiopia. The empirical results suggest that in the long run, electricity consumption, foreign direct investment and money supply have been found to have positive effect on economic growth while government expenditure has negative impact. In the short run, Government expenditure, population growth at two period’s lag affect economic growth positively while foreign direct investment, money supply at two period’s lag are found to have negative impact on real Gross Domestic Product Growth. However, electricity use and population growth do not have a short-term and long-term effect on economic growth. The magnitude of the Error Correction Term coefficient is -0.2625 justified about 26% of the disequilibrium annually converge towards long run equilibrium in the following year. The Granger causality test indicates a uni-directional causality between Electricity consumption and economic growth running from electricity consumption to economic growth in Ethiopia for the period under study. The result supports growth hypothesis; meaning an increase in electricity consumption could cause an increase in Gross Domestic Product Growt level. Therefore, electricity consumption has a vital role in production process of Gross Domestic Product Growt that confirm the importance of heavy hand of the government in the energy sector.

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