DILLA UNIVERSITY

THE IMPACT OF RAPID POPULATION GROWTH ON

ECONOMIC DEVELOPMENT IN ETHIOPIA

A RESEARCH PROPOSAL SUBMITTED TO DEPARTMENT OF

ECONOMICS FOR PARTIAL FULFILLMENT OF BA DEGREE IN
ECONOMICS

BY:-

SELAMU GETAHUN

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ECONOMICS

ADVISOR: Tariku G. (MBA)

June 2023

Dilla, Ethiopia
 ACKNOWLEDGMENTS
First and for most all praise be to “Almighty God” who always help me in all aspect of my life. Then I
extend my gratitude to my advisor Tariku G. (MBA) for his advice, suggestion, guidance,
encouragement and over all assistance. I would like to thank FBE library workers for their support by
providing the reference books and also I would like to thanks my father and my Mother
W/roZynekiross for their moral, financial and lovely support from the beginning of OUR life up to
now.

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 TABLE OF CONTENTS
ACKNOWLEDGMENTS..........................................................................................................I
TABLE OF CONTENTS..........................................................................................................II
ABSTRACT.............................................................................................................................IV
CHAPTER ONE:.......................................................................................................................1
INTRODUCTION......................................................................................................................1
1.1 Background of the Study..................................................................................................1
1.2 Statement of the Problem.................................................................................................2
1.3 Objective of the Study......................................................................................................4
1.3.1 General objective......................................................................................................4
1.4 Scope of the Study...........................................................................................................5
1.5 Limitations of the Study...................................................................................................5
CHAPTER TWO.......................................................................................................................6
LITERATURE REVIEW...........................................................................................................6
2.1 Theoretical literature........................................................................................................6
2.1.1 Definition and Concepts............................................................................................6
2.1.2 Determinants of Population Change.........................................................................6
2.1.3 Evolution of Population Growth...............................................................................8
2.1.4 The Determinant of Economic Growth...................................................................14
2.2 Empirical Literature.......................................................................................................17
CHAPTER THREE..................................................................................................................20
METHODOLOGY OF THE STUDY.....................................................................................20
3.1 Types of data and source of data....................................................................................20
3.2 Model specification........................................................................................................20
3.3 Estimation procedures....................................................................................................21
3.3.1 Unit Root Test.........................................................................................................22
3.3.2 The Autoregressive distributed lag Model (ARDL)...............................................22
CHAPTER FOUR....................................................................................................................25
RESULTS AND DISCUSIONS..............................................................................................25
4.1 Descriptive Analysis.....................................................................................................25
4.1.1.1 Pattern of Ethiopian population growth............................................................25
4.1.2. Pattern of economic growth..............................................................................30
4.1 Results of unit root test..................................................................................................37
4.2 Diagnostic test................................................................................................................38
4.3 Test of Parameter Stability.............................................................................................39
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 4.4 Long Run ARDL Bounds Tests for Co-integration.......................................................39
4.5 Long Run ARDL Model Estimation..............................................................................40
4.6 Short Run Error Correction Model................................................................................41
CHAPTER FIVE......................................................................................................................44
CONCLUSION AND RECOMMENDATION.......................................................................44
REFERENCES..........................................................................................................................A

III
 ABSTRACT
The fast growing population of least developing countries in general and Ethiopia in
particular undermined economic growth as well as development of the country. The problem
of population growth is not a problem of numbers rather it is a problem of human welfare
and development since it raises the level of consumption and decreases the level of saving
which were the most determinant for the economic growth and development. The general
objective of the study was intended to assess the impact of population growth on the
economic development of Ethiopia. To achieve this objective the study employed secondary
sources of data that are collected from IMF, WB MOFED. The Data was analyzed by
descriptive and econometrics analysis method. The results of the finding showed that
population growth and inflation rate is negatively affect economic growth while gross capital
formation, expenditure of education and health and total export affects economic growth
positively. So, to solve this problem the government as well as the concerned authority may
exert their effort to balance the population growth and economic development.

IV
 CHAPTER ONE:
INTRODUCTION

1.1 Background of the Study

Population is several of living things in a definite geographic environment which has specific
habitant, living style and district social organization. Every year the number of people added
to the world population . The world population was estimated to be around six billion people
as the twenty first century began. According to UN projections, the population will reach
more than nine point five billion by 2050, with maximum of eleven billion by 2200. over
90% of that population will live in under develop countries (Todaro and Smith,2006). our
evidence shows large population cover most of under developed countries this have the
negative effect on our economy because this countries have low income level and rapid
population growth tends to depress savings per capita and retards growth of physical capital
per worker . the rapid population result underdeveloped countries are unemployment , higher
inflation like demand pull inflation ,exploitation labor and also national output remain below
the optimal level, since that available human resources are not able to contribute to the
production of the good and services.

The need for social infrastructure is also broadened and public expenditures must be absorbed
in providing the need for a larger population rather than in providing directly productive
assets. Population pressure is likely to intensify the foreign exchange constraints by placing
more pressure on the balance of payment.. The balance of payment problems of the
developing countries must be seen against the background of two circumstance that dominate
their entire economic being which are the endeavor to better the lives of their people and the
higher rate by which their population are increasing. The growth rate for the economies of the
developing countries and their future receipts from export of goods and services, it is possible
to deduce, as has been done in connection with UNCTAD conference, that they will be facing
a rising “foreign exchange gap.” in generally, rapid population growth touch the under
developing countries the balance of payment negative way. The need to import food will
require the development of new industries for export expansion and/or import substitution.
The rapid increase in school-age

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population and the expanding number of labor force entrants puts ever-greater pressure on
educational and training facilities and retards improvement in the quality of education, which
is a problem in developing economies. Also, too dense population aggravates the problem of
improving the health of the population and intensifies pressure on employment and the
amount of investment available per labor market entrant (Martin, 2013).

Africa has fast growing population in the world. Since Africa will experience the largest
percentage increment at 184%. Currently the total population of Africa is about 1.4266 billion
people, which will be double at 26 years. If this trend continues with such pace, the total
population of Africa is being estimated about 2.1 billion in 2050. This implies almost three
times form 1998 and ten times from 1950 population. Consequently, this hinders the
achievement of family planning implementation that is significant to moderate population
growth in the continent (CSA, 2016)

Ethiopia is one of the fast growing population countries in Africa. Since according to second
census carried out the population of Ethiopia was about 53.1 million at 3% growth rate and
23 years doubling time. Currently, the total population is around 115.0 million people in
2020(WB) at 3.02% growth rate. From this, 85% are living in rural areas and the remaining
15% lives in urban areas. (CSA, 2016,)

Ethiopia exhibit equal sex ratio almost 49.9 and 50.1for female and male, respectively.
However, the sex ratio for urban areas are slight smaller than rural primarily due to large
number of female immigration to urban areas for job seeking for the case of commercials sex
work, street working and etc. (CSA, 2014).

Developing countries in general Ethiopia in particular is characterized by high level of young

population and low level of old population due to low life expectancy, low living standard,
and poor economic privacy, Economically active people who are pillar of the country (15-65
age) and economically inactive population who are put burden on country’s development
activity that include children (0-15 age) consists of 45% and elder (>65 ages ) is about 3% the
dependency ratio for our country is 0.86 which means for 86 dependents need supports from a
signal active working people (CSA, 2014). In general rapid populations have great adverse
effect in developing countries like Ethiopia with respect to the achievement on education,
health and food.

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1.2 Statement of the Problem
The issue of population growth has got attention in less developing countries in general and
Ethiopia in particular. This is due to rapid population growth with unbalanced level of
economic development results serious socio- economic development such as low living
standard, low income, poor health care, poor education, etc. The problem of population
growth is not a problem of number rather it is a problem of human welfare and development.
If growth entails the improvement in people’s level of living-their, income, health, education
and general well-being and it also encompasses their self-esteem, respect, dignity, and
freedom to choose. It is important to consider population situation in many least developing
countries can contribute to or detached from their chances of realizing the goal of
development not only current generation but also for future generation (Todaro, 2003).

Kassahun Alemayehu analyze ”the impacts of population expansion on Ethiopia performance

from 1970/71 GC to 2012/13” using time series data. He conclude from the overall regression
results that the population issue was very contentious because it has a negative influence in
the near run but has a beneficial long run implication. This opens the door to looking at other
factors that affect economic growth , such as investment, the age dependency ratio, and the
labour force, to see if a correlation can be favourable in the long run. This rapid population
growth may pose a threat unless the country’s Economic performance compensates.
Econometric research has indicated that this population growth has had a major negative
impact in the short run but a favourable impact in the long run economic performance of the
country (kassahun Alemayehu ).

According to the trends, the combination between population pressures and the economy is a
major issue that may led to Ethiopia’s poverty trap perpetuation.

According to Meir (1995), the problem of population is much more than a food problem. It
has a wider ramification that makes it a general development problem. A high rate of
population growth not only has adverse effect on improvement in food supply, but also
intensifies the constraint development of savings, foreign exchange and human resources.
Moreover, two arguments are given regarding population growth on economic development
that belong to pro population growth according to conference conducted in 1974 at Cairo,
population growth had desirable phenomena as large population lead to greater economic
scale due to greater demand for goods and services that can be produced through abundant

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labor. In country Malthus suggest that high population means high stomach which in turn
reduce saving and investment domestically which were the most determinate of least
developing countries economic development (Hajela, 1967).

The other work in this regard is one conducted by Tsega (2005), to identify and quantify
impacts of demographic variables change on the economic growth; He attempts to model the
relationship between demographic change and economic growth. The focus of his research
was demographic variables change on the economic growth. The researcher used explanatory
variables such as capital formation and total export only without including service sector of
economic development indicator.

This study would also try to fill these gaps by incorporating the effect of expenditure of
education and health, and inflation on Ethiopian economic growth. Because the economic
development is measured by GNP, PYC or per capital income welfare, social indicators has
been adopted mainly from Jhingan (2007) . rapid population growth in developing countries
affect the GNP, PYC and also social indicators (health, education, food, water supply,
sanitation and housing.

As a result the purpose of this article is to investigate the relationship between population
growth and economic development . If population continues to increase at rapid rate, so will
increase economic development.

In line with this, the researcher formulated the following research questions to be answered
under this study:

 What are the determinants of rapid population growth in Ethiopia?

 What are the effects of rapid population growth on Ethiopia economy?

 What looks like impacts of population in short and long run on Ethiopia economy

1.3 Objective of the Study

1.3.1 General objective

The general objective of study is to examine the impact of rapid population growth on
Ethiopian economic. Development’ using ARDL Model , with a focus on real GDP, total
population, inflation(INF), export of goods and services (ET), Human capital (EHE) AND
Investment

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1.3.2 Specific Objectives of the Study

To achieve the overall objective, the specific objectives of the study are:

 To identify the determinants of population growth

 To examine the effect of population growth on economic growth.

 To analyse the short run and long run relationship of economic development

 To identify the causal relationship between population growth and economic development

1.4 Scope of the Study

This study would focus only the impact of population growth on Ethiopia economic growth.
The study covered the period from 1990 GC-2022 GC.

1.5 Limitations of the Study

The population growth has many influences on Ethiopian economy. However, due to time
and financial constraint the study limit only on the economic impact of population growth
even though it has political and social effect. In addition, lack of adequate data within scope
estimated. Despite these limitations, the study exerts a maximum effort, to show the effect of
population growth on economic growth of Ethiopia.

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 CHAPTER TWO
LITERATURE REVIEW

2.1 Theoretical literature

2.1.1 Definition and Concepts
Population is the productive live and health of individual, couples, community and all the
people in a country. Population is group of people living in a definite geographic area.
Population concerned in terms of size, growth rate, structure, demographic and distribution of
people in the area human population is the main productive force and make of spiritual and
material. It includes gender equality and equity, as well as participation of community in
matter related to their wellbeing (Todaro, 2003). population dynamics refers to variable that
determine the level of population growth and those function are fertility, mortality, migration
in changing the size and structure of population of an area. Fertility and mortality are
biological factor, while migration is purely no biological in nature. The stage of socio-
economic and demographic development determinants the level of this factor. Population
dynamics is an increase in population size due to birth rate, death rate and migration.

2.1.2 Determinants of Population Change

Determinants of population change are known as component or dynamic of population
change. It determines the level of population growth or change in size and structure of
population of an area. Determinants population change bring about difference in size and
characterized of population of a given socio-environment .The basic population change
includes fertility, mortality and migration. The total population of any area at the end of a
given year equals to the population size at the beginning of the year plus all the death plus all
in migration or emigrant (Girma, 2003)

In Ethiopia the main determinant of population growth are fertility, mortality and migration
of people. Among those fertility and mortality rate are major determinant of population
growth, while international migration is in significant (Todaro, 2011).

Fertility: it refers to the actual performance of population .It brings live to being on the earth.
Fertility is being the actual child bearing performance of individual, couples, group of
population , measures the rate by which a population adds to itself through live birth
(Todaro, 2011).

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Mortality: is concerned with death occurrence. It forces lives to go out of being. Mortality
rate through decreasing is higher in developing country than developed country. These
different causes by variation in standard of living, nutrition, medical service, personal
hygiene and environment protection (Todaro, 2011).

Migration: it is the kinds of population movement, which involves permanent change of one
own residence. In other time migration is the movement of people across specific area or
boundary for the purpose of new residence. Geographer use different basis to classify the
migration movement of migration (Todaro, 2011).

There exist a close and reciprocal relationship growth and economic development in a
country. The population in one way constitutes a source of labor that could be utilized to
boost the country production. On the other hand, it could also be seen as a consumer group
that uses and exhausts a large quantity of the country’s resources. However , certain
economists is from the earliest times have pointed out that the increase of population and
rapid growth of population in a country is tied to its economy. But the opinion of some other
economists is that although the population can grow rapidly in a country , its natural and
physical resources are limited, and consequence this situation could prove to be an obstacle to
the economic development of the country . In midst of these arguments the demographic
transition theory attempt to clarify the relationship between population growth and economic
development from both optimistic as well as pessimists perspective The issue population is
argumentative that can create controversy among economic scholars whether it should be
considered as affirmative for economic development or should be seen as having a negative
impact on economic development. In general case, people are considered as material out of
which nations and societies are made; and concern over the number of people runs through
history from the early and undifferentiated writings of ancient times to the more elaborated
and specialized formulations found in political economy, modern economics and sociology
(Hutchinson, 1967: 1-2).

Due to this, from ancient statesmen and thinkers (like Confucius, Plato and Aristotle) to the
modern economists (like Malthus, D. Ricardo, K. Marx, etc.) have concerned with how the
condition of population growth can have influence on the economic development (UN, 1973:
33-34; Hutchinson 1949: 18-28). This concern invites us to investigate some economic
perspectives.

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As their perspective, economists argue the impact of population growth from the three
alternative ways: from consumption approach, from production approach and from aspect of
mobility (Dejene, 2011: 41; Bicanic, 1964).

The consumption approach gives more emphasis population pressure on carrying capacity of
land with related to production for a certain standard of personal consumption while the
production approach argues for the requirement of the number of people in excess of a
standard number of producers to produce optimal production. The third approach that is
called mobility concept emphasizes that the number of people whose productivity is zero (at
least near zero).

Although these approaches are highly controversial, most economists focus on the
consumption approach in order to investigate the relationship the population growth with
food supplies (Dejene, 2011: 41).

To examine the impact of population on the economic development, we can primary see
theoretical assessment in terms of theorization and argument, and then analyze what
empirical evidences has stated.

2.1.3 Evolution of Population Growth

1. Pessimistic View on Population Growth

The proponents of this view argue that, population growth is liability for LDC than assets.
They said that population growth not only has an adverse effect on improvement in food
supply but also intensifies the constraint development of savings, foreign exchange and
human resources. To them population growth is undesirable, because of the entire social and
economic consequences that excess population may result (Ray, 1998).

This group argues that economic growth cannot continue as it is now that is, there is limit to
economic growth. They also tell that economic system collapse in the future. According to
them the limit to growth is that several resources are fixed. But the demand for these
resources grows exponentially. This makes resources to be exhausted and growth without
these resources is impossible.

Countries with higher population growth rates have experienced faster conservation of land to
agricultural uses, putting additional pressure on land and natural habitual. For instance, in
many places (Ethiopia, southern Malawi, Eastern Nigeria, and sera Leon) farming is being
intensified through shorter fallow periods rather than through the use of better inputs or
8
techniques. Repaid population growth in these areas has led to the depletion of soil resources
and stagnating or declining yields. In some circumstance, especially in rural Africa,
population growth has been too rapid that traditional practices have been unable to adopt
means to prevent degradation. The result is thus, deforestation, depletion of natural resources
(like water resources, loss of natural habitat, etc.) they have their own implication on
economic development (Tientenberg, 2003).

2. Malthus’s Population View

The Malthusian trap is based on Malthus population argument. Malthus was one of 18th
century population scholars and considered as the first scholar to develop population theory
(UN, 1973:33) Malthus developed his ideas on on population mainly in his writing titled
“Essay on the principle of population”, first published in1798 (Ibid: 38). His writing
constituted an important factor in the subsequent development of population theory, and
made controversy between his proponents and opponents on the conscious of the need for
better understanding of population trends and their relations with socio-economic conditions
(Ibid: 39-40). Malthus core argument relied that:

A. “Population is necessarily limited by the means of subsistence.

B. Population invariably increases where the means of subsistence increase, unless prevented
by some very powerful and obvious checks.

C. These checks which repress the superior power of population and keep its effects on the
level with the means of subsistence are resolvable into moral restraint, vice and misery.”
(Ibid: 39 and Malthus, 1872).

What proposition he attempted to prove as after stating that strong impediments to population
growth are constantly in operation, Malthus inquires what would be the rate at which the
means of subsistence can be increased. From this basis, he drives his two basic propositions
that population tends to double itself every 25 years, thus increasing in geometric ratio, while
under favorable conditions agriculture product increases only in arithmetical ratio. Then he
concludes that “taking the whole earth(…) the human species would increase as the numbers
1, 2, 4, 32, 64, 256 and subsistence as 1, 2, 3, 4, 5, … 9. In two centuries, the population
would be to the means of subsistence as 256 to 9” (Ibid: 39 and Malthus, 1872). These rates
result in disequilibrium that each member of population would have less land to work
marginal contribution to food production would actually start to decline (Dejene, 2011: 44).

9
 Since the growth in food supply would not keep pace with the burden of population, per
capital income would have a tendency to fall so low as to lead to a stable population existing
barely at or slightly above the subsistence level (Dejene, 2011: 45 and UN, 1973: 40). The
trap can be

observed from the following figure.

Figure 1 the Malthusian population trap

According to figure first consider population growth . when income is very low, say, below
$250per year at purchasing power parity, nutrition is so poor that people become susceptible
to fatal infectious disease; pregnancy and nursing become problematic; and ultimately ,
outright starvation may occur. This show on left in figure 1 . But after this minimum level of
income per capital is reached, population began grow, eventually reaching a peak rate and
then the population growth rate begin to fall until at last a fairly stable population is reached
( a growth rate close to zero ). Note that is this pattern of population growth first increasing
and then decreasing as per capital income rises corresponds to the pattern of the demographic
transition.

3. Theory of Demographic Transition

This theory is portrayed the process by which morality and fertility rates eventually decline to
replacement levels. It also attempts to explain why all contemporary developed nations have
more/less passed through the same three stages of modern population history. Thus we can
see these four stages how the whole population growth is divided accordingly (Jhingan, 2002:
383-
10
386; Dejene, 2011: 42-44)

Figure 2: the demographic transition in less developing countries

Stage I

This stage is considered backward country and is characterized by high birth rate and high
death rate. The reason of high birth rate is considering children as God given and old age
guarantee while that of high death rate is high mortality due to disease and absence of proper
medical care. Since there is no as such economic development due to backwardness, the
population is somehow stable. It is so considered a primitive stage of economic development
with slow population growth.

Stage II

This stage is characterized by the high birth rate but low death rate. In this stage, economy
enters the phase of economic growth that manifests modernization, associated with better
public health uses, heal their incomes and other improvement, which lead to reduce mortality
rate. However, the stage is known as unbalanced and unstable stage because the growing
divergence between high birth rate and falling death rate lead to shoot population growth.
Because there are wide gap between birth rate and death rate due to very low death rate. This
also marks the transitional phase of population exploitation although it has had high burden at
the beginning.

Stage III

This last stage is characterized by low birth rate and low death rate due to the forces and
influences of advanced modernization and development such combining effects of
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urbanization, education expansion and use of contraceptive methods. Due to this, there is
little or no population growth in this stage although some time, low death rate may be greater
than low birth rate. Thus because of balancing to care the capacity of economy with good life
for the people, this stage is taken as attainable phase that ever country wants to achieve it.

4. The Extremist Argument View

The extreme version of the population as problem position attempts to attribute almost all of
the world’s economic and social evils to excessive population growth. Unrestrained
population is seen as the major crises facing human kind today. It is seen as the principal
causes of poverty, low living of life, malnutrition, health, environmental degradation, and a
wide array of other social problems. Value-laden and incendiary term as ‘’population bomb:’’
or ‘’population explosion’’ is tossed around at will, indeed, dire prediction of world food
catastrophes and ecological disaster are attributed almost entirely to growth in world
numbers. Such as extreme position leads some of its advocates to assert that ‘’World’’ (i.e.
LCD) population stabilization or even decline is the most urgent contemporary task even if it
require severe and coercive measures such as compulsory sterilization to control family size
in some of the most populated developing countries like India, and Bangladesh
(Todoro,2003).

. 5. Theory of Consumer Behavior and Fertility

This theory argues that children should be considered as consumption or investment goods
like other commodities. Due to this, a person who be got a child can choose to determine
before to have his /her child. Because of choice and micro-economic determinants an d
family fertility behavior, the theory has been extended to include the choice of whether or
not to have a child on assumption that fertility behavior has the strong component of
economic rationality (UN , 1974 :481-482). This reveals what is called Leibenstein’s
economic theory of fertility (1975) decline, and that it has been the seed of inspiration to go
beyond economics can explore the relationship between personality and consumer behavior
(Albanese, 1993 ). Thus it can recently attract many economists.

According to proponents of the theory (Leibenstein, 1950, 1975; Albanese, 1993,

2002;Duesenberry, 1949) demand for children is directly related to house hold income and to
the price of all other goods, and indirectly related to the cost of children and to the test for
goods relative to children. Due to this, parents will demand fewer additional children, by
substituting quality for quantity. The reason is based on the assumption that the consumer
12
makes consistent choices over time and that goes beyond the requirement of a transitive
Preference ordering (Albanese, 2002).

In the third world nations, expanded efforts to make jobs, education and health more broadly
available to poverty groups will not only contribute their economy and psychic well-being but
it can also contribute substantially to their motivation for smaller family which is vital
reducing population growth rates.

4. The Theoretical Argument View

The population poverty cycle theory is the main argument advanced by economists who hold
that too rapid population growth yields negative economic consequences and thus should be
real concern for developing countries. Advocates start from the basic proposition that
population growth intensifies the economic, social, and psychological problems associated
with the prospects for that better life for the already born by reducing savings rate at the
household and national levels. It also severely draws down limited government revenues
simply to provide the most rudimentary economic, health and social services to the additional
people. This in turn further reduces the prospects for any improvement in the levels of living
of the existing generation and helps transmit poverty to future generations of low-income
families. Widespread absolute poverty and low levels of living are seen as a major cause of
lager family size, and large families retard economic growth, it follows that more egalitarian
economic and social development is a necessary condition for bringing about an eventual
slowing or cessation of population growth at low levels of fertility and mortality.

But, according to this argument, it is not a sufficient condition that is, development provides
people with the incentives and motivations to limit their family size, but family planning
programs are needed to provide them with the technological means to avoid unwanted
pregnancies. Even though countries like France, Japan, the United States, Great Britain, and
more recently, Taiwan and South Korea were able to reduce their population growth rates
without widespread family-planning, it is argued that the provision on these services will
enable other countries desiring to control excessive population growth to do so more rapidly
than if these family planning services were available (Ray, 1998).

There are three pessimistic conclusion of view; first suggest that within a time span of less
than 100 years with no major change in physical economic; of social relationships that have
traditionally governed world development society will turn out of the non-renewable resource
on which the industrial basic depends. Were the resource have been depleted, precipitous
13
collapse of economic system will result manifested in massive unemployment, decreased
food production and a decline in population as the death rates soars, there is no smooth, no
gradual showing down of activity; rather the economic system consumes successively large
amount of resource until they are gone. The characteristic behavior of the system is overshoot
and collapse.

The second conclusion of the study is that piecemeal approaches to saving the individual
problems will not be successful. To demonstrate this point, the author arbitrarily double their
estimates of the resource base and allow the mode to trace out an alternative vision based on
this new higher level of resources. In this alternative vision, the collapse still occurs, but this
time it is caused by excessive population generated by the increased place of industrialization
permitted by the greater availability of food would become the binding constraint.

The third and final conclusion, the study suggests that overshoot and collapse and can be
avoided by an immediate limit on population and pollutions, as well as cessation of economic
growth. The portrait pointed shows only two possible outcomes: The termination of growth
by self-restraint and conscious policy an approach that avoids the collapse or the termination
of growth by a collision with natural limits, resulting in the social collapse. Thus, according
to this study, one way or the other, growth will case (Tietenberg, 2003).

5. Optimistic View on Population Growth

In contrast to the proponents of pessimistic view, optimists argue that large population
enhances resource development. The propagators of such idea argued that there is no limit to
growth. All what is needed is better human institutions. They posited virtually unlimited
potential for the expansion of material resource necessary to support a growing population.
Thus, to them the sole constraint on the environment was the shacking effect of social relation
of production, geared to the needs either of a renter or a capitalist class. Once these social
relations were changed to the account of the needs of the majority then the elasticity of
economic development become unlimited (Breechin et al, 1993)

2.1.4 The Determinant of Economic Growth

1. Physical Capital Accumulation

Theoretically, the relation between capital formation and growth can be explained by ‘Q’
theory. As per this theory capital formation acts as the main driving force of economic
growth. Capital formation refers to the proportion of present income saved and invested in

14
order to enhance future output and income. It usually results from acquiring of new factory,
machinery, equipment and all productive capital goods. The rate of accumulation of physical
capital is one of the main factors determining the level of real output (GDP). Capital acts as
the most fundamental input in a production system. It provides the base of growth of an
economy. There exists a non- linear positive relation between capital formation and growth in
general depending on the degree of efficiency of the capital use within the economic system.
So, the level of capital used within these economies is not only important but also the way it
is used is also an important determinant of economic growth. The research conducted by
Tadesse (2011) during 1981 and 2009 found that the economic growth in Ethiopia was driven
by physical capital and human capital, which account 42 and 56 percent, respectively. On the
other hand a research done in Ethiopia (Weeks et al., 2004), indicates that the contribution of
physical capital to growth is found to be statistically significant in long run despite the growth
elasticity was less (0.30) comparing to Tadesse’s result (I.e. 0.42).

2. Expenditure of education and health

From the early 1990s, various studies have attempted to identify the determinants of
economic growth; long-run growth is endogenous rather than exogenous (Romer, 1986;
Lucas, 1988; Mankiw et al., 1992). The concept of human capital refers to the abilities and
skills of human resources of a country, while human capital formation refers to the process of
acquiring and increasing the number of people who have the skills, good health, education
and experience that are critical for economic growth.Thus, investment in education and health
are considered as human capital development. Human capital plays a special role in a number
of models of endogenous economic growth. In Romer (1990) human capital is the major
input to the research sector, which generates the new products or ideas that underlie
technological progress. Thus, countries with greater initial stocks of human capital experience
a more rapid rate of introduction of new goods and thereby tend to grow faster. Economic
theory suggests that human capital would be an important determinant of growth, and
empirical evidence for a broad group of countries confirms this linkage. Many economists use
different measurement to proxy human capital, however, the assumptions and results are,
nevertheless, basically the same. The study conducted in developing countries during 1960 to
1985 by Barro (1991) was the famous one. In his study the average number of years of
education attainment (School attainment) was used as measurements of human capital. The

15
result indicates that Countries that start with a higher level of educational attainment grow
faster for a given level of initial per capita GDP.

3. Total Export

Exports of goods and services represent one of the most important sources of foreign
exchange income that affluence the pressure on the balance of payments and create an
employment opportunities. An export led growth strategy aims to provide producers with
incentives to export 27their goods through various economic and governmental policies. It is
important to note that a large number of studies on the importance of exports in economic
performance and the relationship between exports and aggregate economic activity (economic
growth) have been conducted over the years, particularly in recent years. It is gratifying to
observe that in recent times, there has been great and increasing interest in the study of
exports and economic growth within the context of developing countries. Numbers of studies
have been conducted to examine the link between exports and economic growth. These
studies have been proved that there exists a strong relationship between exports and economic
growth positively (Iqbal and Zahid, 1998; Faye, 2001; Khaled R.M. et al., 2010; Ndambiri
H.K. et al., 2012; Ugochukwu and Chinyere, 2013; Biswas and Saha, 2014).However a study
done by Tadesse (2011) based on time series empirical analysis, which analyzed source of
economic growth during the period 1981 to 2009 found out that the economic growth of
Ethiopia was driven by labor force, which account for 56 percent during the period under
considerations. Despite the result here with statistically significant and positively related with
economic growth, human capital was peroxide differently. Therefore active labor force (both
employed and unemployed, people aged 15 and more) as percentage of total population was
used to proxy human capital. More or less most literature reviewed here indicates that human
capital is the main determinants of economic growth, whatever the magnitude differs.

4. Inflation

Currently, the word inflation is a major problem of the world. It is a monster that threatens all
economies because of its undesirable effect and developed countries named as number one
public enemy in the 21th century (Asmamaw, 2011). According to classical theories inflation
occurs in an economy when the overall price level increases and the demand of goods and
service increases. Based on the Keynesian theories inflation occurs when demand exceeds the
potential output of the economy. recently many empirical evidence show that there is a
negative relationship between inflation and Economic growth (Khan and Senhadji, 2000;
16
Michael and William, 1996; Barro, 2013; Bawa and Abdullahi, 2010; Saliand and
Gopakumar, 2008; Veiga et al., 2014; Asmamaw, 2012). Although the magnitude of the
inflation is different in different studies, high inflation rate slows down the growth rate. Barro
(2013), classified the threshold of inflation in to three categories namely below 15% low
inflation, 15 up to 40% medium rate and above 40% is high inflation rate and affected the
growth rate negatively. Similarly, Michael and William (1996), say that the threshold
inflation rate is not exceeding 40%.

2.2 Empirical Literature

Bloom (1999) conducted a research on demographic changes and economic growth in Asia
using cross-country regression equations. The sample spans from 1965-1990. The authors try
to account for the effects of demographic variables on growth by introducing a number of
demographic variables such as growth rates of total population and working age population,
the population of the initial working age population to total population, life expectancy, and
population density.

The study reveals that variables such as the growth of working age population and life
expectancy has a positive effect on growth while total population and population density has
a negative effect on economic growth, impacts of total population giving statistically
insignificant. Thus the authors conclude that though the overall rate of population growth had
little effect on economic growth, most of the East Asia’s economic ‘miracle’ is explained by
demographic transition.

Tesfay (2009) conduct research that describes population growth has both positive and
negative impact on economic growth. Population growth has positive factors on stimulating
economic growth. Population growth increasing large labor force means more productive
workers and a large overall population increases the potential size of domestic market and
productive capabilities of a growing population and its consumption demands. In areas of
population a large number ofcustomer lived within a relative small territory. Direct contract
with customers was possible and transport cost for product could be kept at a minimum.
Manufacturing industries required skilled workers and traders as well as the the financial
services and administrative skill which were concentrated in urbanized areas. Directly
productive investments are supplemented by investments is growth social and economic

17
infrastructure,roads, electricity, water, sanitation, communication and the like which facilities
and integrates economic activities.

Population growth has negative effect in economic growth. population growth means that a
given level of output must be divided among an increasing number of people, so that an
increase in population growth rates beings down in the size of the per capital lower the
aggregate rate of saving increase the dependency ratio in family because children consume
more than they produce, increase the poverty. It will also worsen inequality of income among
people, under pricing of infrastructure resources. Government provided education; health and
public transportation may all be subsidized. Direct transfers may be infeasible because it may
be impossible to credibly identify the poor. The people will be low level of income, lack of
facilities (education, health, roads etc). Increase the global demand for the fore see able
future.

Todaro (2003), on his part conducted a research on this area. He identified seven negative
consequences of rapid population growth or economic development. These are economic
growth, poverty and inequality, education, health, food, the environment and international
migration.

A. Economic Growth

According to Todaro (2003), rapid population growth lowers per capital income growth in
most LDCs, especially those that are already poor, dependent on agriculture, and
experiencing pressures on land natural resources.

B. Poverty and Inequality

Even though aggregate statistical correlations between measures of poverty and population
growth at the national level are often inconclusive, at the house hold level the evidence is
strong and compelling. The negative consequences of rapid population growth fall most
heavily on the poor because they are the ones who are made landless, suffer first from cuts in
government health and education programs, bear the brunt of environment damage, and are
the main victims of job cats due to the slower growth of the economy. Poor women once
again bear the greatest burden of government austerity programs, and another vicious cycle is
set in motion. To the extent that large families perpetuate poverty. They also exacerbate
inequality.

C. Education

18
Todaro agreed that large family size and low incomes restrict the opportunities of parents to
educate all their children. At the national level, rapid population growth causes given
educational expenditures to be spread more thinly, lowering quality for the sake of quantity.
This in turn feeds back on economic growth because the stock of human capital is reduced by
rapid population growth.

D. Health

High fertility harms the health of mother and children. It increases the health risks of
pregnancy, and closely space births have been shown to reduce births weight and increase
child mortality rates.

E. Food

According to Todaro (2003), feeding the world’s population is made more difficult by rapid
population growth-over 90% of additional LDCs food requirements are caused by population
increase.

F.Environment

Rapid population growth contributes to environmental degradation in the form of forest

encroachment deforestation, fuel wood depletion soil erosion, declining fish and animal
stocks, inadequate and unsafe water, air population and urban congestion.

G. International Migration

Todaro consider the rapid increase in internal migration, both legal illegal, to be one of the
major consequences of both legal and illegal, to be one of the major consequences of
developing countries population growth. According to him, though many factors many
factors caused migration, an excess of job seekers (caused by rapid population growth) over
job opportunities in the ideas economic is surely one of them.

19
 CHAPTER THREE
METHODOLOGY OF THE STUDY

3.1 Types of data and source of data

Regarding data type, the study used secondary time series data for about 45 years obtained
from internal and external sources. The selection of this sample size is made based on the
availability of data for each of the variable included in the model for the entire time horizon
while its sufficiency is taken into consideration as well. The major sources of data for the
problem under investigation were Ministry of Finance and Economic Cooperation (MoFEC),
publications of National Bank of Ethiopia (NBE), Central Statistics Authority (CSA) of
Ethiopia, Ministry of Education and Ethiopian Revenue and customs authority (ERCA). In
addition to these domestic sources, some variables for which there are no sufficient data from
the domestic sources are collected from external sources, especially from IMF and WB
databases.

3.2 Model specification

According to the third neo-classical growth model, output growth results from effective
allocation of one or more of three factors: labor in terms of quantity and quality through
population growth and education, increase in capital through saving and investment, and
improvement in technology (Todaro, 1994: 86). The assumption of this model is that poor
economies with lower values of capital and output tend to catch up with the initial rich ones.
This model also assumes that population and technology as exogenously determined and
production functions are assumed to satisfy the law of diminishing returns. Although the neo-
classical growth model has its limitations in some aspects, it can be applied by some
modification of population exogenous assumptions and is better for this study.

The standard neoclassical model of economic growth concerns rates on the Cobb-Douglas
production function in the form of:

𝑌=𝐴𝐾𝐿 − − − − − − − − − − − − − − − − − − − − − − − − − − − − − −(3.1)

Where: Y is total output, K denotes capital, L represents labor, A is total factor of

productivity, 𝜕is elasticity of output with respect to capital and β is elasticity of output with

20
respect to labour But, according to the objective of the study, labor can be considered as part
of population (not as special productive force). Therefore, labor is replaced by total
population and equation (1) can be written as:

𝑌=𝐴𝐾𝑃 − − − − − − − − − − − − − − − − − − − − − − − − − − − − − −(3.2)

Furthermore, the effect of technology (A t) is divided into constant term 𝛽 and country
specific deviation 𝜀(Imoughele et al., 2013).

𝑙𝑛𝑌 = 𝛽 + 𝛼𝑙𝑛𝐾 + 𝛽𝑙𝑛𝑃 + 𝜀 − − − − − − − − − − − − − − − − − − − − − (3.3)

Rather than taking the entire unexplained variable in the technology which is exogenously
determined, including additional combination variables in the model that should be a proxy
for technology is important because it makes the model more predictable and appropriate to
know the accurate effects these variables on economic growth (Imoughele et al., 2013).
Therefore, 𝜀 = 𝑋 + 𝑈 , the above equation can be rewritten as below when control variables
are included;

𝑙𝑛𝑌 = 𝛽 + 𝛼𝑙𝑛𝐾 + 𝛽𝑙𝑛𝑃 + µ𝑋 + 𝑈 − − − − − − − − − − − − − − − − − −(3.4)

Where K is total capital stock proxied by gross investment as % of GDP and Pt is Total
population proxy for population growth whereas X t is a vector of control variables namely
inflation and trade openness.

GDP = F (population, investment, inflation, trade openness)

Since all the variables under study were transformed into Log data so as avoid
heteroscedasticity (Gujarati., 2004) and to show elasticity of the variables; the growth
function of equation can be re-written as:-

𝐿𝑁𝑅𝐺𝐷𝑃 = 𝛽 + 𝛽 𝐿𝑁𝐺𝐶𝐹 + 𝐵 𝐿𝑁𝑃𝑂𝑃 + 𝐵 𝐼𝑁𝐹𝐿𝐴𝑇𝐼𝑂𝑁 + 𝐵 𝐿𝑁𝑇𝑂 + 𝑈 − −(3.5)

Where, GDP= real Gross Domestic Product

POP= Total population

GCF= capital stock accumulation proxied by Gross capital formation

INF=Inflation proved by consumer price index

TO= Trade openness which is the summation of Export + Import dived by GDP.
U= Disturbance term (factors that are not explained) t= time period

21
3.3 Estimation procedures
3.3.1 Unit Root Test
The necessary condition to be addressed for testing unit root test is to check whether the
variables enter in the regression are not order two (I.e. I(2)). Therefore, running any sort of
regression analysis is impossible without testing for time series variables. So, the first step in
this study is testing unit root before running regression analysis.

The testing procedure for the ADF unit root test is specified as follows:

𝑋 = 𝛼 + 𝛿𝑡 + 𝜇𝑋 + 𝜆∆𝑋 +𝜀 (3.6)

Where is𝑿𝒕 a time series variables which are mentioned above in this model at time t, t is a
time trend variable; Δ denotes the first difference operator; is the error term; 𝜌is the optimal
lag length of each variable chosen such that first-differenced terms make 𝜀 a white noise.
Thus, the ADF test the null hypothesis of no unit root (stationary)

which is expressed as follows

𝐻 : 𝜇 = 0; 𝐻 : 𝜇 ≠ 0 (3.7)

Regarding decision of unit root test, if the t value or t-statistic is more negative than the
critical values, the null hypothesis (I.e. H0) is rejected and the conclusion is that the series is
stationary. Conversely, if the t-statistic is less negative than the critical values, the null
hypothesis is accepted and the conclusion is that the series is nonstationary. Failure to reject
the null hypothesis of unit root test leads to take the test on the difference of the time series to
come up out with stationary variable for analysis.

3.3.2 The Autoregressive distributed lag Model (ARDL)

There are numbers of advantages of using ARDL model also called ‘Bound Testing
Approach’ instead of the conventional Engle-Granger two-step procedure (1987), Maximum
likelihood methods of cointegration (Johansen, 1988) and Johansen and Juselius (1990).

First, the ARDL model is the more statistically significant approach to determine the
cointegration relation in small samples as the case in this study (Pesaran et al., 2001;
Narayan, 2004). A second advantage of the ARDL approach is that while other cointegration
techniques require all of the regresses to be integrated of the same order; the ARDL approach
can be applied whether the regresses are purely order zero [I(0)], purely order one [I(1)], or
mixture of both. Third, with the ARDL approach it is possible to capture different optimum
22
number of length for different variables. Finally, Appling the ARDL technique we can obtain
unbiased and efficient estimators of the model (Narayan, 2004). Therefore, this approach
becomes prevalent and appropriate for investigating the long-run relationship and extensively
applied in empirical research in the recent years.

Hence, ARDL model can be specified as:

∆𝐿𝑁𝑅𝐺𝐷𝑃 = 𝛽 + 𝛽 𝐿𝑁𝑃𝑂𝑃+ 𝛽 𝐿𝑁𝐺𝐶𝐹 + 𝛽 𝐿𝑁𝐶𝑃𝐼 + 𝛽 𝐿𝑁𝑇𝑂 +∑ 𝛼

∆𝐿𝑁𝑅𝐺𝐷𝑃 +

∑ 𝛼 ∆𝐿𝑁𝑃𝑂𝑃 +∑ 𝛼 ∆𝐿𝑁𝐺𝐶𝐹 +∑ 𝛼 ∆𝐿𝑁𝐶𝑃𝐼 +

∑ 𝛼 ∆𝐿𝑁𝑇𝑂 + 𝑈 (3.8) o Where the symbol  is the first difference

operator; p, q, r, s, and v are the lag length with their respective variables and U t error term
which is assumed to be serially uncorrelated.

o 𝛽 , 𝛽 , 𝛽 , 𝛽 indicates coefficients that measure long run elasticies between the variable
whereas 𝛼 , 𝛼 , 𝛼 , 𝛼 , 𝛼 indicates coefficients that measure short-run elasticities among the
variable.

The first step involved in ARDL model is to test the null hypothesis of no cointegration
relationship which is defined as 𝐻 = 𝛽 = 𝛽 = 𝛽 = 𝛽 = 0 against the alternative hypothesis of 𝐻
≠ 𝛽 ≠ 𝛽 ≠ 𝛽 ≠ 𝛽 ≠ 0 of the existence of co integrating relationship between the variables.
According to Pesaran et al. (2001), there are two sets of critical value bounds for all
classifications of regressors’ namely upper critical bound value and lower critical bound
value. The critical values for I (1) series are referred to as upper bound critical values; while
the critical values for I (0) series are referred to as lower bound critical values. If the
calculated F statistic is greater than the upper bound critical values, we reject the null
hypothesis of no long run relationship among the variables. If the calculated F statistic is less
than the lower bound critical values, we can’t reject the null hypothesis rather accept the null
hypothesis of no co integration among the variables. However, if the calculated F statistic is
between the upper and lower bound critical values, inference is inconclusive and we need to
have knowledge on the order of integration of underling variables before we made conclusive
inference (Pesaran et al., 2001).

Accordingly, with the existence of cointegration, the short run elasticities can also be
manipulated through building the error correction of the series as stated the follows.

23
∆𝐿𝑁𝑅𝐺𝐷𝑃 = 𝛽 + 𝛼 ∆𝐿𝑁𝑅𝐺𝐷𝑃 + 𝛼 ∆𝐿𝑁𝑃𝑂𝑃 + 𝛼 ∆𝐿𝑁𝐺𝐶𝐹 + 𝛼 ∆𝐿𝑁𝐶𝑃𝐼 + 𝛼 ∆𝐿𝑁𝑇𝑂 + 𝑈
(3.9)

Here all variables are as previously defined. The order of the lags in the ARDL Model is
selected by either the Akaike Information criterion (AIC) or the Schwarz Bayesian criterion
(SBC) automatically, before the selected model is estimated by ARDL model.

Table 1 variable description and hypothesis

Variable Description Variable Expected
name sign
Real GDP Real gross domestic product rGDP
Population Total population Pop -ve/+v
e
Gross capital Capital stock proved to gross GCF +ve
formation capital formation
Inflation Inflation proved by consumer Inf -ve
price index
Trade openness Trade openness is the To +ve
summation export and import
dived by GDP

24
 CHAPTER FOUR
RESULTS AND DISCUSIONS
4.1 Descriptive Analysis
4.1.1 Patterns of Ethiopian Population and Economic Growth

In the previous chapter, we have seen theoretical and empirical review of studies. In this
section, we present data on patterns of Ethiopian population growth and economic growth.

4.1.1.1 Pattern of Ethiopian population growth

Ethiopia is endowed with a large and fast growing population and is globally acknowledged
and included among the largest countries in the world (EEA, 1999/2000: 53).According to
the 2010 revision of the UN's World Population Prospects, Ethiopia’s total population was
82.95 million in 2010, compared to 18.43 million in 1950.It is believed that the projected
population of 169 million for 2050 will make the country the 9 th most populous nation in the
world and the 2nd in Africa following Nigeria.

Although there were several guesses before the 1984 population census, that year was the
first in its kind in Ethiopia and bringing to an end the guesses and serving as basis to estimate
different projections. The 1984 population census data shows that the total population was
40.2 million, out of which 20.3 million (51.4%) were males and 19.9 million (49.6%)
females. The second census of the country was carried out in 1994 and the total population
reached 53.5 million, out of which 26.9 million (51.3%) were males and 26.6 million (49.7%)
females. Accordingly, the data showed that 13.4 million people were added for the country
within ten years. The third census was carried out in 2007. According to the PCC’s
population and housing census report in December 1, 2008, Ethiopian population was
recorded about 73.85 million, out of which 37.3 million (50.5%) were males while 36.6
million (49.5%) were females. The census showed that 20.4 million people were added from
the 1994 census and 33.7 million from the 1984 census (CSA, 1984, 1994 and 2007).

These three censuses also revealed that Ethiopian population was mostly rural based as
overwhelming majority about 35.6 million (88.6%) of the population resided in rural area
while that of only about 4.5 million (11.4%) were urban in 1984. Similarly, out of 53.5
million about 46.2 million (86.4% were rural based while that of about 7.3 million (13.6%)
were urban residents in 1994. The same is true for 2007 census. Of 73.9 million population,
about 62 million (83.9%) were rural people while that of 12 million (16.1%) were urban

25
inhabitants. Although the size of population increased about 62 million in 2007 from 35.6
million in 1984 and 46.23 million in 1994 in rural area, the percentage was decreasing 83.5%
in 2007 from 88.6 in 1984 and 86.3 in 1994. The proportion of the urban population was
increasing in the respective years. The reason is that people migrate from rural to urban areas
due to push and pull factors in the respective areas.

Table 1: Population by Residence and Sex

1989 1999 2012

Distribution by
Size Size size
Sex/ Year % % %
(in mill) (in mill) (in mill)

Total 40.2 100 53.5 100 73.8 100

Male 20.3 50.5 26.9 50.3 37.2 50.5

Female 19.9 49.5 26.6 49.7 36.5 49.5

Urban 4.5 11.2 7.3 13.6 11.9 16.1

Male 2.2 48.9 3.5 47.9 5.9 49.7

Female 2.3 51.1 3.8 52.1 6 50.3

Rural 36 89.6 46.2 86.4 61.9 83.9

Male 18.1 50.3 23.4 50.6 31.3 50.6

Female 17.5 49.7 22.8 49.4 30.6 49.4

Source: CSA, 1989; OPHCC/CSA, 1999; CSA, 2012

Moreover, the sex ratio (male/female ratio) was closely the same in the three censuses. In
particular it was 1.02, 1.01 and 1.02 in 1989, 1999 and 2012, respectively. Sex ratio in urban
areas was lower about 0.96, 0.92 and 0.99 than in rural areas about 1.03, 1.03 and 1.02 in
1989, 1999 and 2012, respectively. The reason includes the fact that females are more
migrants from rural to urban areas due to different social, cultural and economic problems
which affect them in rural places(Ibid).

The growth rate of population is determined by two important factors such as fertility rate
and mortality rate though migration is taken as insignificant determinant for the growth of
Ethiopian population (EEA, 1999/2000: 59). Although the fertility level in Ethiopia is among
26
the highest in the world, for example the World Bank ranked her 40 th in 2011; it shows
significant reduction for recent years. For example, total fertility rate (TFR) declined by 12%
from 7.5 to 6.7 and 37% from 6.7 to 4.2 birth per-woman between 1984 and 1994, and
between 1994 and 2007, respectively. The reason for the decline in the TFR is related with
the adoption of use of contraceptives and exposure to the benefits of family planning in rural
and urban areas. Although TFR has shown a declining trend in the recent years, it is still
higheven by African standards.

The second significant determinant of population growth is mortality. According to CSA

reports, the infant mortality rate (IMR) increased from 110 in 1984, to 116 in 1994 and then
declined to 60 in 2007.

As is the case in LDCs in general, Ethiopia is dominated by a young population. According to

the recent census report of 2007, 14.6% of the total population is less than 5 years old, 30.8%
less than 10 years old, 45.0% less than 15 years old, and 56.9% less than 20 years old in
2007. On the other hand, only 3.2% of the total population is 65 and above years old. The
remaining 40% of total population is found between 20 and 64 years old. The census also
shows that the size of young population is continuously increasing.

For instance, the population in the age bracket between 0-14 years reached 33.2 million
(45%) in 2007 from 19.4 million (48.4%) in 1984 and 24.1 million (45.4%) in 1994 censuses.

Table 2: Age Structure of Ethiopian Population

Under 15 65 and above

15-64 Years Dependency Ratio
Years Years
number number number
years % % % Young Elderly Total
(in mill) (in mill) (in mill)
1984 19.4 48.4 19.2 47.8 1.9 4.8 101.3 10 111.3
1994 24.1 45.4 27.3 51.4 1.7 3.2 83.8 6.6 90.4
2007 33.2 45 38.3 51.8 2.4 3.2 86.8 6.1 92.9
Source: CSA 1984, 1994, & 2007 Censuses’ reports

From table2, one can see a decline in dependency ratio due to decrease in the old and young
population overtime. The 1984 census revealed that the total population dependency ratio
was111.3; out of which 101.3 was young while 10 was the old dependency ratio. But the
dependency ratio declined to 90.4 in 1994 showing a 20.7 difference in dependency ratio.
From the 1994 dependency ratio, the young constituted 83.8 while it was 6.6 for the old ones.
In 2007, dependency ratio reached 92.9 out of which 86.8 was for young dependents while
27
6.1 was the old dependency ratio. From the 2007 census, the decline in dependency ratio
emerged from decrease in the proportion of the young population since the old dependency
did not change from the 1994 of 3.2. The difference in dependency ratio from 1984 was 20.7
in 1994 and 18.4 in 2007.

Although the dependency ratio seems to decline overtime except the recent 2007 census
result, it is among the highest in the world. Such a high dependency structure has important
implications on the economic development of the country. It is because of the burden it
imposes on the working age population. In 1989, for example, the dependency ratio of 111.3
implies that working age person would support more than one additional person. It is even
true that not everyone in the working age population is gainfully employed due to lack of
employment opportunity or disability.

In addition, since young dependency ratio is high but the old dependency is very low, we can
observe that the national life expectancy is likely to remain at low level. For instance, only
2.8% of the total population is 65 and above implies that the lion’s share of 97.2% would die
before reaching at age of 65 years old.

Another implication of high young dependency is that there is high burden on the government
to expand education, health, employment, and other opportunities for the large number of
children. If government left its responsibilities, high unemployment and other socio-
economic problems would be created. To avoid these problems, government is forced to
incur high expenditure for the construction of these infrastructures.

However, population growth with increase in labour force has been considered as a positive
factor in stimulating economic growth since high labour force refers to the presence of high
productive manpower. According to the CSA definition of labour force by 1989 and 1989
census, person age 10 years and above are considered as labour force. The definition added a
short reference period of the seven days prior to the census date in 2012 census. Thus it is
defined as “all persons aged ten years and over who were productively engaged or available
to be engaged during the reference week were considered as economically active. “However,
it includes the people who are economically active, and those who are economically inactive.
Within economically active people, population is included in three categories: employed,
unemployed and not in the labour force. Unless the economic system of the country has
ability to absorb the labour force efficiently, economically inactive and unemployed
population can create socioeconomic problems for the country.
28
According to CSA,51 million people (69% of total population) in 2012 were in labour force
compared with 21.9 million (51%) in 1989 and 36.6 million (69%) in 1999. The increase in
labour force in 2012 was 14.4 from 1999 and 29.1 from 1989 between 13 and 23 years,
respectively. The propositions of the male and female members of the labour force were
almost the same in the three censuses. Regarding activity status, from the total labour force
67.2% in 1989, 72.5% in 1999 and 69.2% in 2012 were considered economically active. The
activity rate was higher for male members of the labour force 79.2%, 82.1% and 75.1% for
male in 1984, 1994 and 2007 respectively compared with the figures for female members of
the labour force which were 55.5% in 1989, 62.9% in 1994 and 63.4 in 2012.

Furthermore, members of labour force in urban area were estimated at 3.3 million (68% of
the total population) in 1984, 5.5 million (75.8%) in 1999 and 9.4 million in 2012 censuses.
In terms of activity rate, 43.5% in 1984, 49.9% in 1999 and 54.9% in 2007 were considered
as active among the total labour force. And among the urban male members of labour force,
58.2%, 62.2% and 61.8% were economically active while the corresponding figures for
females were 31.2%, 39.1% and 48.1% in 1989, 1999 and 2012, respectively.

Regarding employment condition, among active population, over 98% were employed in
1989. However, the figure declined to 97% in 1999 and 96.3 in 2012. In urban area, about
92% of the total economically active population was employed in 1984, but the figure
declined to 78% in 1994 and slightly to 83% in 2012.The adverse living condition due to low
productivity and low income of labour in rural areas of the country seems to lead employed
people to migrate to urban areas by expecting to get better job and living. For example,
observing two censuses 1984 (48.4%) and 2012 (47.6%) revealed that migrants to Addis
Ababa. The highest proportion (58% in 1984 and 55% in 2012) came from rural areas.
However, the danger is that urban areas have also experienced rapid expansion of
unemployment and further other related complicated problems. Due to this, unemployment in
urban areas of the country is higher and increasing.

In Ethiopia, unemployment is measured on the assumption that there is no unemployment in

rural areas and that unemployment is exclusively an urban phenomenon. Based on these
assumptions, we can see the phenomenon of unemployment during three census periods. In
1984, the total 14.7 million economically active population, 170 thousands (1.2%) were
unemployed. In 1994, among the 26.5 million economically active people, 770 thousand
(2.9%) were unemployed. And in 2007, from 35.3 million economically active people, 1.34

29
million (3.8%) people were unemployed. This reveals that the number of unemployed people
nationally increased by 600 thousand, representing 35.3% during ten years period, and
increased by 570 thousand (54.4%) between the second and the third censuses (1994 and
2007). The age and sex distribution of unemployment seems to be almost the same for the
first period (between 1984 and 1994) while a slight difference was observed in 2007.
Regarding age group, the highest rate of unemployment in 1984 was 15-20 with 2.5% while
the highest rate in 1994 was observed for 20-24 age-group with 6.6%.The highest
unemployment rate in 2007, however, was recorded for age-group 2024 age group with
5.9%. In the three censuses, the proportion of female unemployed was higher than that of the
male. This might be due to tradition and culture that favours male employment than female.

In terms of educational status, about 78.2 thousand unemployed people were illiterate in 1984
and the size of illiterate unemployed people increased to 279.6 thousand in 1994. The people
who completed grade 12 educational level were trapped by unemployment problems. In
1984, 28.5 thousand unemployed people completed grade 12 and size of this educated
unemployed people increased to 189.9 thousand in 1994. In short, the three censuses reveal
that unemployment was increasing with population growth and increasing in labour force and
development of the country.

4.1.2. Pattern of economic growth

1. 4.1.2.1. Pattern HDI’s Performance
According to world HDI report in 2012, value of Ethiopia’s HDI for 2012 was 0.396, which
was categorized in the low human development category, positioning the country at 173 out
of 187 countries. However, the index value increased from 0.275 to 0.396 between 2000 and
2012, an increase of 44% or average annual increase of about 3.1%. The rank was improved
from ranked position of 174 to 173out of 187 countries.

However, even the trend reveals that the country HDI has registered some improvement. For
instance, the life expectancy at birth, expected years of schooling, GNI 1 per capita and HDI
value in Ethiopia from 51.7, 4.4, $519 and 0.275 in 2000have been improved to 59.7, 8.7,
1,017 and 0.396 in 2012, respectively. Table 3 shows the consistency of improvement over
time.

Table 3: Ethiopian HDI overtime

1 GNI, Gross National Income

30
 GNI per
Life Expected Mean
capita
Years expectancy at years of years of HDI value
(2005
birth schooling schooling
PPP$)
1980 43.9 2.4
1985 44.5 3.2 503
1990 47.1 3.5 540 0.172
1995 49.3 2.6 479 0.252
2000 51.7 4.4 1.5 519 0.275
2005 55.2 6.7 1.5 630 0.316
2010 58.7 8.7 2.2 928 0.387
2011 59.3 8.7 2.2 974 0.392
2012 59.7 8.7 2.2 1,017 0.396
Source: UNDP, HDI report 2012

Although there has been improvement of HDI overtime, the country is in the group of low-
income countries. For example, Ethiopia’s 2012 HDI of 0.396 is below the average of 0.466
for countries in the low human development group and below the average of 0.475 for
countries in Sub-Saharan Africa. Among the Sub-Saharan Africa countries, which are close
to Ethiopia in 2012 HDI, rank, Rwanda, and Uganda, which have HDIs ranked 167 and 161,
respectively.

Table 3:4 shows Ethiopia’s HDI for 2012 relative to selected low-income countries (Rwanda
and Uganda) in Africa and groups (Sub-Saharan Africa, very high HDI, high HDI, medium
HDI, Low HDI and world’s HDI).

Table 4: Comparison of Ethiopian HDI with Others

Mean GNI per

Life Expected
HDI HDI years of capita
expectancy years of
value rank schoolin (PPP
at birth schooling
g US$)
Ethiopia 0.396 173 59.7 8.7 2.2 1,017
Rwanda 0.434 167 55.7 10.9 3.3 1,147
Uganda 0.456 161 54.5 11.1 4.7 1,168
Sub-
Saharan 0.475 54.9 9.3 4.7 2,010
Africa
very High
0.905 80.1 16.3 11.5 33,391
HDI
High HDI 0.758 73.4 13.9 8.8 11,501
Medium
0.640 69.9 11.4 6.3 5,428
HDI
31
 World's
0.694 70.1 11.6 7.5 10,184
HDI
Low HDI 0.466 59.1 8.5 4.2 1,633
Source: UNDP, HDI report 2012

The table 4 portrays that Ethiopia’s HDI is almost 1/3rd of very high level HDI, 1/2nd of
world’s HDI and lower than low income HDI countries. Even among Sub-Sahara African
countries, like Rwanda (167) and Uganda (161) have been better positions than Ethiopia.
Regarding life expectancy measure, Ethiopia is higher position 59.7 than Sub-Sahara African
countries, which is registered 54.9, and Rwanda 55.7 and Uganda 54.5, and slightly similar
with low-income countries of life expectancy in average. This is found in improving position
from 51.7 in 2000. Expected years of schooling is very low from sub-Sahara African
countries, 9.3 and almost similar with low-income countries. Regarding per capita income,
each Ethiopia could be expected to get 1,017 US dollar per annum, which was lower from
low HDI and Sub-Sahara African countries average per capita income. Even an average
person in Sub-Saharan countries could have had slightly twice an average person who lives in
Ethiopia, very high HDI 33 times and World in general 10 times greater than of an Ethiopian
citizen. Implication is that although Ethiopia has improved, she is still categorized under the
poorest group. This results in the vicious cycle of poverty as main feature. For instance about
1/3rd of the total population (29.6%) in the country lived under poverty line in 2010/11.

2. 3.1.2.2. Pattern of GDP growth and per capita GDP

According to MoFED official report, since 2004/05, Ethiopia has registered fast , double digit
economic growth. Before we discuss about GDP growth, it is better to see the features of the
Ethiopian economy focusing on which sector is dominating the economy. It is obvious that
agriculture has dominated for long period of time as share of GDP for the country’s
economy. During the Derg regime, agriculture contributed about 53% of the GDP on average
between 1980/81 and 1990/1991 with the value of 58.1% at the beginning and 56.3% at the
last year of the period. The average share of agricultural contribution to GDP has declined to
about 48.4% in the years between 2003/04 and 2012/13. The industry sector also seems to be
decline from average share from 13.6% in the period between 1980/81 and 1990/1991 to the
average share 10.8% in the period between 2003/04 and 2012/12. By contrast, the service
sector average share has come to increase from 34.8% in the period between 1980/81 and
1990/1991 to 41.8% in the period between 2003/04 and 2012/13 years. The comparison
shows that although the share of agriculture has declined, it can remain with role of

32
dominancy in GDP and account for higher contribution than industry and service sectors. The
decline in the share of the industry sector in GDP is a problem. The implication is that the
sectoral transformation is abnormal. The reason is that the service sector has expanded
without industrial establishment even if the industrial sector should be mediator for
agricultural and service sectors. The general figure is depicted by the following two charts,
figure 3 and figure 4.

Source: MEDAC, National Income Account Revised Series, 1998

33
Source: MoFED, GDP Estimates series 2005

As we can see from tables 3.5 and 3.6, the aggregate performance of Ethiopian economic
growth has fluctuated overtime, especially during Derg regime. Population growth, however,
has been increasing with alarming rate until 1990/91 although the rate is increasing at
decreasing rate since 1990/91.

Table 5: Economic and population growth from 1970/71-1990/91

GDP POP pcGDP

Year/Item (in million Growth (in Growth (in Growth
Birr) rate million) rate Birr) rate
1970/71 33,229.26 29.8 1,115.08
1971/72 33,266.72 0.11 30.5 2.3 1,090.71 -2.23
1972/73 34,114.66 2.49 31.2 2.24 1,093.42 0.25
1973/74 34,839.27 2.08 32 2.5 1,088.73 -0.43
1974/75 35,109.69 0.77 32.7 2.14 1,073.69 -1.4
1975/76 35,255.27 0.41 33.5 2.39 1,052.40 -2.02
1976/77 35,549.05 0.83 34.4 2.62 1,033.40 -1.84
1977/78 35,134.47 -1.18 35.3 2.55 995.31 -3.83
1978/79 36,855.30 4.67 36.2 2.49 1,018.10 2.24
1979/80 38,708.22 4.79 37.2 2.69 1,040.54 2.16
1980/81 39,095.59 0.99 36.35 -2.34 1,075.59 3.26
1981/82 39,056.37 -0.1 37.23 2.36 1,049.14 -2.52
1982/83 42,952.68 9.07 38.13 2.36 1,126.54 6.87
1983/84 40,158.25 -6.96 38.87 1.91 1,033.17 -9.04
1984/85 36,059.27 -11.37 41.1 5.44 877.27 -17.77
1985/86 39,703.73 9.18 42.38 3.01 936.87 6.36
1986/87 45,501.01 12.74 43.69 3.01 1,041.40 10.04
1987/88 45,304.95 -0.43 45.05 3.01 1,005.73 -3.55
1988/89 45,124.31 -0.4 46.44 3.01 971.61 -3.51
1989/90 46,888.65 3.76 47.88 3.01 979.23 0.78
1990/91 44,827.47 -4.6 49.37 3.01 908.03 -7.84
Average 38,892.10 1.34 38.06 2.48 1,028.86 -1.2
Source: MoFED and CSA, partly own computation

As it is depicted in table 3.5, during the period between 1970/71 and 1990/91, the pace of
economic growth was considerably very slow. Per capita GDP growth was actually negative
in average of this period although there were some progressive years within the period. The
GDP of Ethiopia was often increasing for the period 1971/71-1977/78 with decreasing rate of
growth. Thus until 1977/78, the growth rate of GDP was very small. For instance, the

34
progressive rate of growth was registered at 2.49% in the third year (1972/73) while the least
growth at 0.11% in the second years. After the third year of the period, the growth rate of
GDP was starting again to decline and reach at lower rate 0.41% in 1975/76. This may be due
to that, there were internal conflict in preceding two years (due to the overthrow of Haile
Selassie regime) and external war with Somalia.

The period between 1978/79 and 1982/83 was characterized by growth rates of GDP. This
may be partly because of annual development campaigns of the period by Derg regime.
However, the situation was followed by the catastrophic drought and famine in the years
1983/84-1984/85. Therefore, the GDP of the country declined to be registered from 42.95
billion (9.07%) in 1982/83 to 40.16 billion (-6.96%) in 1983/84 and then 36.06 billion (-
11.37%) in 1984/85. However, high economic growth was recorded in 1985/86 (9.18%) and
1986/87 (12.74%). This may be partly due to favourable conditions after famine. After that,
the growth rate was declining and fluctuated from 1987/88 (-0.43%) to 1990/91 (-4.6%)
although the rate was positive (3.76%) in 1989/90. This may be due to civil wars in the
country that marked the end of military regime and the command economy system.

Regarding population issue, however, annual growth rate of population was continuously
increasing rate of 2.48 with beginning year at 2.3% and with last year of 3.01% within the
period between 1971/72 and 1990/91. Because of this population growth and fluctuation of
economic growth, the growth rate of per capita GDP was unstable with (-1.2%) on average in
the period. As a result, per capita GDP was very low (1,028.86 birr on the average), and
1,115.08 birr at the beginning in 1970/71 and 908.03 in the last year of 1990/91. During the
period, the highest per capita GDP was registered about 1,126.54 birr in 1982/83 while the
lowest was about 877.27 birr in 1984/85.

In general term, we can systematically observe that not only the per capita GDP was very low
but also it was declining with fluctuation overtime. The implication is that the growth of
population tends to retard per capita GDP and that since per capita GDP is one of the
determinants of standard of living of the people, the country was characterized by this low
standard of living. And constantly increasing population could lead to increase demand for
food products and other primary needs. For this case, the famine of 1984/85 was good
witness that registered -17.77% growth rate of per capita GDP. Since the supplies of these
needs are impossible, the standard of living deteriorated and brings abject poverty with result
in vicious circle of poverty.

35
Table 6: Economic and population growth from 2001/02-2012/13

GDP POP pcGDP

Year/Item GDP (in Pop (in
growth growth pcGDP growth
mill. Birr) mill.)
2001/02 201,374.09 1.6 67.21 2.53 2,996.37
2002/03 197,148.22 -2.1 68.95 2.53 2,859.17 -4.8
2003/04 220,272.43 11.7 70.75 2.53 3,113.57 8.17
2004/05 248,124.14 12.6 72.16 1.96 3,438.48 9.45
2005/06 276,756.11 11.5 74.04 2.53 3,738.08 8.01
2006/07 309,399.21 11.8 73.85 -0.26 4,189.85 10.78
2007/08 344,012.20 11.2 75.73 2.49 4,542.79 7.77
2008/09 378,555.54 10.0 77.67 2.5 4,874.08 6.8
2009/10 418,557.93 10.6 79.66 2.5 5,254.30 7.24
2010/11 466,214.82 11.4 81.7 2.5 5,706.28 7.92
2011/12 507,425.95 8.8 83.79 2.49 6,056.29 5.78
2012/13 556,462.52 9.7 85.89 2.45 c 6.52
Average 343,691.93 9.07 75.95 2.23 4,437.34 6.69
Source: MoFED and CSA, party own computation

In the post 1990/91, however, we have lagged 10 years information in the middle here to
incorporate the trends of population and economic growths. However, both trends since
2001/02 have been combined and are depicted in table 6.In the period, the GDP of the
country has experienced an increasing trend with an exceptional decline in 2002/03.
Especially, the consecutive eight years between 2003/04 and 2010/11 have exhibited double-
digit registration of economic growth. This may be partly because of stability, partly because
of government tendency for development through planning transformation program and
partly due to delaying (lack of) cyclical drought in the period. To compare the trend, the
growth rate at the beginning (2001/02) was estimated 1.6 while at the last year (2012/013)
was registered 9.7% annually. In the period, the highest growth rate was recorded in the year
of 2004/05 (12.6%) while the lowest one was in 2002/03 (-2.1%).

On the other hand, the trend shows that there was slight decline in growth rate of population
while the size of population was increasing in the period. The population size was 67.21
million (2.53%) at beginning of 2001/02 which increased to 85.89 million (2.45%) in
2012/13. Due to high economic growth with decreasing rate of population growth, per capita
GDP have also increased. Per capita GDP that was registered 4,437.34 on the average
2,996.37 birr at the beginning increases to 6,478.86 birr with growth rate of 6.52 at the last

36
year. Although the highest growth rate of per capita GDP was registered at 10.78% in
2006/07 (4,189.85 birr), the highest per capita GDP has been recorded at 6,478.86 birr in the
last year of 2012/13. This reveals that there was improvement of standard of life comparing
with previous period over time with assuming other things are constants.

From above descriptive analysis, we can conclude that population growth can negatively
affect if its growth rate is very high compared with economic level and growth rate.
Especially, the first period of the Derg regime witnessed rapid population growth over
stagnant economic performance can bring negative consequence on the life of people. The
following chapter examines the link between population and economic growth using a more
rigorous method.

4.1 Results of unit root test

Stationarity of the data is the prerequisite for the next steps in time series analysis. Therefore,
accordingly by using ADF test method. When we check stationarity of variable by ADF, all
variables is non-stationary at level so they are differenced. From the augmented dickey fuller
test, the variables are integrated at different order and none of the variables is integrated of
order two.

Table 2: ADF stationary test

ADF test at level ADF test at 1st differenced
Variables
t-static Critical value t- Critical value
static
1% 5% 10% 1% 5% 10%
Ln RGDP 3.71 -3.63 -2.95 -2.61 -5.32* -3.64 -2.955 -2.61
Ln POP -0.96 -3.63 -2.95 -2.61 -5.61* -3.64 -2.955 -2.61
Ln GCF 1.73 -3.63 -2.52 -2.61 -7.16* -3.64 -2.955 -2.61
Ln CPI 0.16 -3.63 -2.52 -2.61 -5.81* -3.64 -2.955 -2.61
Ln TO -0.95 -3.63 -2.52 -2.61 -4.90* -3.64 -2.955 -2.61
Source: Author’s computation of E view 9.5 result, 2022

Notes: The sign of ‘*’ represents the rejection of the null hypothesis of non-stationary at 1%
significant level respectively.

For the model, since all values of ADF test statistics (in absolute value) are greater than all
critical values, the variables are non-stationary at this level. However, each series can pass the
37
test at their first difference because the critical values of each series are greater than ADF test
statistic at 1%, 5% and 10% in absolute value with significant p-value. Therefore, we can
reject the hypothesis because the data are stationary in this difference; that means any
variable by itself is an I(1) time series

4.2 Diagnostic test

Before generalizing diagnostic test, it was prerequisite to conduct model specification

problem, normality in the residuals and heteroscedasticity. One of the assumptions of CLRM
(classical linear regression model) is the disturbance “Ui” are Homoscedasticity that is they
all have the same variance (δ2). If this is not the case indicating that it is varying from
observation to observation, we have a situation of heteroscedasticity or non-constant variance
in the presence of heteroscedasticity, the usual hypothesis testing routine is not reliable,
raising the possibility of drawing miss leading conclusion of making a variable insignificant
because it will make OLS estimates to have larger variance and wider confidence interval.
Therefore, it’s important to consider it (Gujarati, 2004).

The above table indicates that the long run ARDL model estimated in this study passes all the
diagnostic tests. To be sure whether the model fulfills the null-hypothesis or not, we can
check residual appropriateness in three different ways. As the criteria, if the variables have
relationship, the residual (a) shouldn’t be serially correlated (non-auto correlated), (b) should
not be heteroscedastic and (c) should be normally distributed, d) model is correctly specified;
otherwise the model can violate the assumption of null hypothesis.

Table depicts that the above three criteria are fulfilled because all of them are insignificant
since p-values for three obs.*R2s and Jaque-Bera statistic are greater than 5%; so that we
should reject the null-hypothesis. The implication is that there are stable relationships
between the variables in the long-run.

Table 3: Long run ARDL Diagnostic Tests

Tests LM-version F-version

Statistic P-value Statistic P-value
A:Serial Correlation: Breusch- 2 (2)= 4.2477 0.1895 F(2, 27)= 0.1731
Godfrey serial correlation LM test 2.9973
Heteroskedasticity: Breusch- 2 (10)= 8.3604 0.7841 F(10, 29)= 0.4311
Godfrey test 0.548321

38
 Normality: Jarque-Bera test 2(2)= 0.2264 0.8434 Not applicable
Functional Form: Ramsey RESET 2(1)=.281947 0.8844 F(1, 0.8844
test 31)= .1294
Source: Author’s computation of E view 9.5 result, 2022

4.3 Test of Parameter Stability

The stability of the model for long run and short run relationship is detected by using the
cumulative sum of recursive residuals (CUSUM) which helps as to show if coefficient of the
parameters is changing systematically and the cumulative sum of squares of recursive
residuals (CUSUMSQ) tests which is useful to indicate if the coefficient of regression is
changing suddenly. Accordingly, if the blue line cross redline which is critical line and never
returns back between two critical line, we accept the null hypothesis of the parameter
instability whereas the cumulative sum goes inside the area (can returns back) between the
two critical lines, then there is parameter stability in the short run and long run.

Figure 2: Plot of Cumulative Sum of Squares of Recursive Residuals (ii)

4.4 Long Run ARDL Bounds Tests for Co-integration

Since we determined the stationary nature of the variables, the next task in the bounds test
approach of counteraction is estimating the ARDL model specified in equation (chapter 3)
using the appropriate lag-length selection criterion. According to Pesaran and Shine (1999),
as cited in Narayan (2004) for the annual data are recommended to choose a maximum of two
lag lengths for small data because when the lag length increases the observation fail to show
the appropriate long run relationship among variables because to show the long run
relationship the number observation must be greater than 30.

39
As we discussed so far, the F-test through the Wald-test (bound test) is performed to check
the joint significance of the coefficients specified in equation (ARDL equation chapter 3).
The Wald test is conducted by imposing restrictions on the estimated long-run coefficients of
POP, GCF, CPI, and TO. The computed F-statistic value is compared with the lower bound
and bound critical values provided by Pesaran et al. (2001) and Narayan (2004)

Table 4: bound test to cointegration

Lag F statistics Decision
1 6.04484 Co integration
Significance level Lower bound Upper bound
10% 2.45 3.52
5% 2.86 4.01
2.5% 3.25 4.40
1% 3.74 5.06
Source; own computation from EViews 9.5 result, 2020

From the above table calculated F statistics (6.044841) is higher than both the Pesaran et al.
(2001) and Narayan (2004) upper bound critical values at 1% level of significance. This
implies that the null hypothesis of no long -run relationship is rejected; rather accept the
alternative hypothesis (there is long-run relationship) based on critical values at 1% level of
significance. Therefore, there is cointegration relationship among the variables in long run.

4.5 Long Run ARDL Model Estimation

After confirming the existence of long-run co-integration relationship among the variables,
the next step is running the appropriate ARDL model to find out the long run coefficients,
which is reported in table below.

Table 5: Long Run Coefficients co integrating equation

Variable Coefficient Stan.error t-statistics Probabilities
LNPOP 0.403949 0.476434 2.847859 0.028
LNTO 0.162561 0.147305 1.105367 0.2780
LNGCF 0.490158 0.136299 3.596198 0.0011
LNCPI 0.779140 0.261877 2.975211 0.0055
C 11.146541 8.022849 1.389349 0.1743
Source; own computation from EViews 9.5, 2022

Note: the sign *, ** and *** indicate that the variables are significant at the level of 1%, 5%
and 10% respectively.
40
The result of the above table indicates that all the variables except CPI entered in the
regression have the expected signs regardless of their significance level. As expected from
economic theory, a population growth has positive impact and significantly affects GDP in
Ethiopia. The long run responsiveness of growth domestic product (GDP) to the change in the
total population is 0.40395. This coefficient shows that assuming other things held constant, a
percentage change in population size would increase growth domestic product by on average
0.40395 percent in the end. The justification for positive impact represent that economy can
adjust in the end and absorb existing people as labor force and that the burden of population
can be avoided so that people can play as active actor of economic development of the
country.

The responsiveness of GDP toward the change growth capital formation (investment) is
0.49016 which is statistical significant to affect the economic growth. The coefficient reveals
1% increase in growth capital formation leads increase GDP by 0.49016 in the country
economy. The positive responsiveness of this relationship leads high employment creation,
higher income level which followed to higher aggregate demand of goods and services.
Aggregate demand automatically increases because of expanded investment and employment.
Therefore, finally, the economy experienced by increased GDP.

The other significant determinant of GDP is inflation (consumer price index). The
responsiveness of GDP to the change in inflation is 0.77914. Meaning that 1% increase in
inflation leads GDP to increase by 0.77914. A rise in the inflation since it have a positive
response to the increases in Real GDP, in turn lead to increase in the country money supply,
investment, national income and aggregate demand. However, the long run responsiveness of
GDP to the change in trade openness (export + import) has positive relationship but
insignificantly affect Ethiopia’s GDP.

4.6 Short Run Error Correction Model

After the acceptance of long-run coefficients of the GDP equation, the short-run ECM model
is estimated. The error correction term (ECM), as we discussed in chapter three, indicates the
speed of adjustment to restore equilibrium in the dynamic model. It is one lagged period
residual obtained from the estimated dynamic long run model. The coefficient of the error
correction term indicates how quickly variables converge to equilibrium. Moreover, it should

41
have a negative sign and statistically significant at a standard significant level (i.e. p -value
should be less than 0.05)

Table 4.5 short run error correction

Variable Coefficient Standard error t-statistics Prob.
D(LNPOP) -1.7615 1.30938 -2.3453 0.0180
D(LNGCF) 0.10798 0.0502 2.1508 0.2270
D(LNCPI) 0.4410 0.08255 5.34226 0.0391
D(LNCPI(-1)) 0.29022 0.079995 3.62798 0.000
D(LNTO) 0.0358 0.02907 1.2318 0.0010
ECM(-1) -0.220287 0.07214 -3.05306 0.0045
Source; own computation from Eview 9.5 result, 2022

Note: the sign *, ** and *** indicate that the variables are significant at the level of 1%, 5%
and 10% respectively. R2=0.733275 ADJ R 2= 0.666593 F-STA= 10.997(0.0000)
DW STAT= 2.0407

The coefficient of determination (R-squared) is high explaining that about 73 % of variation

in the GDP is attributed to variations in the explanatory variables in the model. In addition,
the DW statistic does not suggest autocorrelation and the F-statistic is quite robust. The large
number F-statistic implies overall jointly significant the independent variables in the model.
Furthermore, the results also reveal that CPI including one year lag and trade liberalization
measured by trade openness are positive and significant determinant of the GDP in Ethiopia
in the short run.

Surprisingly, population size growth is significant and negatively affecting economic growth
in Ethiopia at least in the short run. This result is agrees with the study’s expectation which
stated that population grow has a negative effect on economic growth of Ethiopia. This is
based on the fact that as the population increases, the young population (below 15 years) also
increases along with it and as such takes time for them to mature to become economically
active. Now they are entirely dependent on the active labour force for their livelihood. This is
because at this stage they do not produce anything to add up to GDP growth but rather
consume what already exist. The empirical result is consistent with Razin and Sadka (1995)
who reported a negative relationship between population growth and economic growth. The
empirical result again corroborates with Dao (2012) who revealed that population has
negative impact on economic growth.

42
If the variables are cointegrated, their dynamic relationship can be specified by an error
correction representation in which an error correction term (ECT) computed from the long-
run equation must be incorporated in order to capture both the short-run and long-run
relationships (Engle and Granger, 1991). The error correction coefficient, estimated at -0.22
is highly significant, has the correct negative sign, and implies a very high speed of
adjustment to equilibrium. Moreover, the coefficient of the error term implies that the
deviation from long run equilibrium level of GDP in the current period is corrected by 22% in
the next period to bring back equilibrium when there is a shock to a steady state relationship.

43
 CHAPTER FIVE
CONCLUSION AND RECOMMENDATION
The general objective of the paper was stressed to assess the determinant and over all issues
of rapid population growth and its impact on economic growth in Ethiopia. The variables
used in model were, population, consumer price index, gross investment proxies by gross
capital formation and trade openness as explanatory variables and real GDP proxy for
economic growth used as dependent variable. To check stationarity properties of the data
augmented duller unit root test was used and the result indicates all the variables are non-
stationary at level and become stationary at first difference. Regarding to cointegration test,
ARDL bound test used to test the existence of long-run association among the variables and
the result confirmed that there is long run relationship among real GDP and explanatory
variables. The empirical result obtained from ARDL Model revealed that population issue is
very controversial because although it has negative impact in the short run, implication is
positive in the long run as we have seen. The short run implication explains that large number
of economically inactive people with high growth rate of population depresses the GDP
growth of the country whereas economy can adjust in the long run and absorb existing people
as labour force and that the burden of population can be avoided so that people can play as
active actor of economic development of the country.

As obtained from the result, high rate of population growth has held per capita GDP of the
country at low level in the short run. Therefore, government should reduce rapid population
growth in the country through well conducted population policy that can address the main
population growth impact through successfully accomplish of plans such as; expanding job
opportunity, social service distribution, infrastructure facilities, proper utilization or
mobilization of resource, protection of environment and reduction of rural- urban migration.

Moreover, Government should motivate participation of private and NGOs investment by

creating better conducive environment for investment to expand more job opportunity, to
increase production of good and services, to reduce dependence ratio and unemployment,
increase per capital income and improving living standard of the society.

44 | P a g e
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