The Private Investment, And Economic Growth Nexuses in Ethiopia: Using Vector Autoregressive Approach

Abstract

Higher private capital boosts labor productivity, resulting in elevated wages and reduced interest rates. This, in turn, fosters increased work and incentivizes higher investments in private capital. Vector Autoregressive approach was employed to investigate the relationship between private investment, and economic growth. From the descriptive analyses, the trends of Ethiopian investment show that the investment rate in Ethiopia doubled from about 18% of the Gross Domestic Product in the second half of the 1990s to about 33% of the Gross Domestic Product in 2020. This due to the government's commitment to economic reforms, including the privatization of state-owned enterprises, has stimulated investor confidence, fostering a more conducive business environment. From econometric analysis, the Wald Test result revealed that Real Private Investment jointly has a relationship with Real growth rate. From the result of VAR Long Run Estimation, the impact of real public investment and real private investment on economic growth is found to be positive and statistically significant. From the result of the Granger Causality test, there exists a unidirectional causality from Real Private Investment to Real Gross Domestic Product. Recognizing that increased private investment contributes positively to economic growth, policymakers may prioritize initiatives that create an environment conducive to business investment. Overall, a strategic focus on encouraging and sustaining private sector participation will be integral to achieving robust and inclusive economic growth in Ethiopia.