The Role of Institutions in Economic Growth in Ethiopia: An Empirical Analysis Using the Autoregressive Distributed Lag (ARDL) Model

Abstract

The main goal of this research was to look at institution’s role in the performance of Ethiopian economy which is considered an underdeveloped economy. For this purpose the ARDL bounds testing approach to cointegration proposed by Pesaran et al. (2001) and updated with Kripfganz and Schneider (2020) critical values and approximate p-values was used. The short-run and long-run correlations between institutional and other macroeconomic and control variables over the period 1982-2022 were investigated. It made use of secondary data obtained from the World Bank’s World Development Indicators (WDI) for the macroeconomic and control variables and it used Freedom House’s Political Freedom Index for the institutional variable. In case of variables where the WDI has gaps other supplementary sources were used such as the YCharts, Federal Reserve Bank of St. Louis and the National Bank of Ethiopia. The empirical result obtained for the Ethiopian economy suggests the institutional variable takes the lion’s share in its impact on the economy and implies that once the institutional dynamics is introduced in the model the other macroeconomic variables loss their predictive powers.