Is Foreign Trade Promoting Economic Growth in Ethiopia?

Abstract

This paper examines the impact of foreign trade on economic growth using in Ethiopia as a case study. Theoretical postulations assert the positive effect of trade on economic growth, but empirical evidences are inconclusive. While some studies find trade to be beneficial to all countries engaging in it, others argue that trade has only benefitted developed countries at the expense of less developed ones. Contributing to this argument is the core of this study. This study makes use of the ordinary least square techniques to examine the effect of trade on economic growth in Ethiopia using data from 1982 to 2013. The result of the study shows that trade, foreign direct investment, government expenditure, export, labor force, and capital formation have a significant positive impact on economic growth in Ethiopia while exchange rate and import has a negative impact. Based on the finding, we recommend that government should create an enabling environment that would facilitate trade and foreign direct investment. Efforts should also be geared towards improving expenditure and ensuring exchange rate stability.