The Nexus between Working Population and Economic Growth in Ethiopia (1981-2013)

Abstract

The Nexus between Population and Real GDP growths is an age old question that remains controversial in the literature. The controversy is on, if population complements or retards economic growth momentums. One spectrum of such a debate is, if the composition of population (as opposed to dynamics in total population) has indeed a varying effect on Real GDP. In lee of this, the paper intends to investigate whether growth in working age population (age 15-64) affects the long and short run trends of GDP growth in Ethiopia. The Johansson Approach of Co-integration is followed, in a Vector Error Correction Framework. Besides, Granger causality test has been conducted to get a sense of causality among variables. Time series data (1981-2013) was obtained from the World Bank’s World Development Indicators Database for Real Gross Domestic Product ( proxy for economic growth); Working Age Population as share of total population (WAPOPL); Financial Deepening ( M2 as percent of GDP), and Openness (total trade share of GDP). Stationary test using Augmented Dicky Fuller test revealed that all variables are non-stationary at their level but all of them become stationary at first difference. Hence variables are integrated of order one I (1) indicating the possibility of long run relationship among them, which was verified by both Trace statistic and Maximum Eigen value of the Johansson Co-integration testing approach. Both trace statistics and maximum Eigen value test reveals that, there is co-integration among the independent (predictable) variables and the dependent variable at 5% level of significance, suggesting that there is co-integrating or (or long run) relationship among them. VECM is found appropriate model to see the short run dynamics. The results revealed existence of both long and short run relationships between composition of WAPOPL and Real GDP growth. Working age population, Money supply, and openness all are found to have a positive and significant effect on the economic growth in the long-run. However, in the short-run the effect of money supply is not statistically significant indicating the fact that the economic effect of money supply on the real GDP is the long run one. The coefficient of error correction term (EC) is -0.667which is highly significant at 1% significance level. This clearly shows that, the speed of adjustment is quit fast with approximately 66.7 percent of its previous period’s disequilibrium in the real GDP will be corrected in the next year.