SOCIAL SECTOR DEVELOPMENT AND ECONOMIC GROWTH IN ETHIOPIA

Abstract

This study examines the causal relationship between social development and economic growth in Ethiopia using time series data over the period 1974/75 to 2017/2018. The study adopted modern time series econometric techniques such as unit root test, lag selection criteria, Johansen co integration test, VECM, and granger causality, Wald test, impulse test, and variance decomposition. In the descriptive part of the analysis the study found that both the Dergue and EPRDF social development has been growing throughout the years under consideration. The found that in the long run, education expenditure, health expenditure, culture expenditure, social welfare expenditure, labor force and trade openness have positive and significant effect on economic growth in Ethiopia. In the long run social development has positive significant effect on economic growth in Ethiopia. In the short run, the empirical revels that one year lagged value of Labor force and Social Welfare is significant in affecting current growth in real GDP. The short run speed of adjustment coefficient of 0.5445 indicates that 54.45% of the short run adjustment made within a year. Empirical findings shows in both long run and short run, there is no causality running from either economic growth to social development or social development to economic growth in Ethiopia. Looking at the causality between components of SDU and Economic growth; there is no short run causality running from LNRGDP to LNHEAL, LNEDUC, and LNCULTU; vice versa is not true. Whereas there is a unidirectional causality running from LNWELFS to LNRGDP and vise verse is not true. In the long run, there is unidirectional causality running from LNRGDP to LNCULT, LNHEAL, and LNWELFS. The impulse analysis shows that expenditure on health and education has permanent effect on economic growth in Ethiopia in the ten years. The results of the variance decomposition indicate that a greater proportion of the variation in LNRGDP is due to its own innovations. Finally, the researcher recommend that government should improve the education quality, health of societies, encouragement of social welfare, credibility of societies culture, and encouragement of trade openness, and yet investment on social sector development does not reach to the poor section of the people , and government should re-examine its social development strategy.