Unpacking the Impact of Political Instability on Economic Growth in Ethiopia: Analysis of the Direct and Indirect Pathways (1995-2020)

Political stability is extensively recognized as a crucial determinant of economic growth and development in a broader context. Grounded in this assertion, this research endeavor sought to explore the correlation between political instability and economic growth within the Ethiopian context from 1996 to 2020. Throughout the duration of the study, Ethiopia has implemented various institutional reform initiatives aimed at fostering economic growth and establishing a stable political environment. Macro-level trend analyses substantiate that, over the last twenty years, Ethiopia has achieved significant economic growth, albeit hampered by macroeconomic mismanagement; nevertheless, the federation has not succeeded in attaining a stable political framework. In this context, employing the Autoregressive Distributed Lag (ARDL) approach, this investigation has revealed a long-term co-integration between political instability and economic growth in Ethiopia, with political instability exerting a negative and significant impact on economic growth in both the short and long term. Additionally, the study has identified that political instability adversely influences economic growth by diminishing investment, human capital, labor, and the country’s exports. Consequently, it is proposed that ensuring political stability constitutes one of the essential prerequisites for achieving sustainable and accelerated economic growth in Ethiopia.