Poverty and economic growth in Ethiopia: a multivariate causal linkage

Abstract

This paper investigates the dynamic causal linkage between poverty reduction and economic growth in Ethiopia during the period from 1970 to 2014. To address the omission of variable bias, the study includes financial development and investment as intermittent variables – thereby creating a multivariate Granger-causality model. The study uses two proxies to measure the level of poverty in Ethiopia, namely: household consumption expenditure and infant mortality rate. Using the newly developed ARDL bounds testing approach to cointegration and the ECM-based causality model, the study finds that there is short-run bidirectional causality between economic growth and poverty reduction – irrespective of which variable is used as a proxy for poverty reduction. However, in the long run, the study finds unidirectional causality from economic growth to poverty reduction; but it fails to find any causal relationship between household consumption expenditure and economic growth. The study therefore concludes that while poverty reduction and economic growth are mutually beneficial in the short run; in the long run, it is economic growth that leads to poverty reduction when infant mortality rate is used as a proxy for poverty reduction.