Abstract

The main research question here is to address drivers of economic growth in Ethiopia using the time series data from 1970 to 2016 where the complementarity of aid and policy index is critically assessed. The empirical result from cointegration test confirms the existence of long run relationship among the variables entered in the per capita growth equation. In the long run, foreign aid inflow entered alone has a positive and significant impact on economic growth. Again, aid interacted with policy appears to have a positive contribution showing that both aid and policy are complementary to each other. The results of the study calls for devising policies for checking the apparent link and dynamics between population growth and economic growth, capacitating and maintaining institutional qualities, and proper allocation of financial and infrastructural resources to enhance human capital, comprehensible selection and priority for productive public investment for foreign aid to be more effective, putting more efforts to achieve macroeconomic stabilities via use of prudent fiscal, monetary and trade polices used in amalgamations to complement both aid and policy.

Key words: Economic growth, policy index, foreign aid.