The Dynamic Links between Investment, Trade and Growth: Evidence from Ethiopia

Abstract

The existing pool of evidence on the growth effects of investment and trade, as
well as the reciprocal effects, is hardly sufficient, rendering their connections to
remain inconclusive. The insufficiency of such studies is chronic when it comes to
the Ethiopian economy. The investment, trade and growth connections in the
Ethiopian economy have not been well researched, calling for such kinds of
studies. Targeting at characterising the patterns of impact flows between
investment, trade and growth in Ethiopia and contributing a little in filling some
aspects of the lacuna, this study becomes a short‐run causality analyses on their
dynamic links using time series data over the period 1955‐2003. According to the
estimated VAR results, there is no feedback between any pair of the variables,
out of the 3 hypothesised dynamic feedback links. Nonetheless, we have
observed two uni‐directional positive causalities that run from economic growth
to enhanced trade openness and from the latter to investment. However, the
evidence should not be interpreted as investment and trade do not contribute to
growth. Rather, it could be signalling the low investment and trade
performances of the country despite the unknown minimum thresholds of the
rate of investment and trade openness for their respective impacts to be
recognizable. Hence, measures that improve the performance of both activities,
their linkages and the contribution of trade to investment could help the
economy to build its productive capacity and then to grow faster.