The Impact of Governance Quality on Human Development: When Politics Drives the Economy (the Case of Ethiopia)

Government institutions related to maintaining political stability, respect for the rule of law, voice and accountability, regulatory quality, efficiency of government spending, control of corruption have a significant impact on human development opportunities, which is an important driver of economic growth and sustainable development of the country. This paper examines the impact of the integrated governance quality indicator on the Human Development Index (HDI) using Ethiopia as an example. The study employs time series data covering 46 semi-annual observations from 2000 to 2022. The research methodology includes both descriptive and econometric methods of analysis. Trend analysis showed that slowing economic growth, rising inflation, and declining spending on education and health in Ethiopia since 2018 have been accompanied by decreasing governance quality amid rising political and ethnic tensions, internal wars, and conflicts. The constructed Autoregressive Distributed Lag (ARDL) model showed that in the short run, the current government quality and the previous value of the HDI are important determinants of human development, which is consistent with the concept of path dependence. Econometric analysis also showed that in the long term, the government quality, economic growth rate, and government expenditures on education and health have a significant positive impact on human development, while the inflation rate has a negative impact. Human development in countries with fragile institutions like Ethiopia requires strengthening peace, political and ethnic harmony, developing federal state institutions, and fiscal and monetary policies aimed at increasing investment in education and health care and controlling inflation.