ADDIS ABABA UNIVERSITY

SCHOOL OF GRADUATE STUDIES

Demographic Dynamics and Economic Development in Ethiopia

By: Ermias Bassie

February, 2021
Addis Ababa, Ethiopia

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 Demographic Dynamics and Economic Development in
Ethiopia

By: Ermias Bassie

A Thesis Submitted to the School of Graduate Studies of Addis Ababa University in Partial
Fulfillment of the Requirements for the Degree of Master of Science in Economics
(Development Economics)

Advisor: Dr. Mulugeta Gebremariam

Addis Ababa University School of commerce

Addis Ababa, Ethiopia

February, 2021

Addis Ababa, Ethiopia

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 Declaration
I, Ermias Bassie Yitayew, hereby declare that the thesis entitled “Demographic Dynamics and
Economic Development in Ethiopia”, submitted by me to the award of the degree of Master of
Science in Economics at Addis Ababa University, is my own original work and it hasn‘t been
presented for the award of any other Degree, Diploma, Fellowship of any other university or
institution.

The interpretation put forth are based on my reading and understanding of the original texts and
they are not published anywhere in the form of books, articles and reports. The other books,
articles and others, which I have used are acknowledged and properly cited at the respective
place in the study.

Declared by:

Name: Ermias Bassie Yitayew

Signature: _______________

Date: _______________

Confirmed by advisor:

Name: Dr. Mulugeta Gebremariam

Signature: ______________

Date: ______________

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 Letter of Certification

This is to certify that the thesis prepared by Ermias Bassie Yitayew, entitled: “Demographic
Dynamics and Economic Development in Ethiopia” and submitted in Partial Fulfillment of the
Requirements for the Degree of Master of Science in Economics (Development Economics)
complies with the regulations of the University and meets the accepted standards with respect to
originality and quality.

Approved by board of examiners:

1 __________________________________________ _______________________

Advisor Name Signature

2 __________________________________________ _______________________

Internal Examiner Name Signature

3 __________________________________________ _______________________

External Examiner Name Signature

Chair of Department or Graduate Program Coordinator

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Acknowledgments
I would like to thank the almighty God for giving me this opportunity, to explore every kind of
endeavor and for opening doors when it seemed impossible. I wish to extend my gratitude to my
advisor Doctor Mulugeta Gebremariam for his professional guidance starting from thesis title
selection, providing sound and critical comments and other advises up to the end.

Last but not least, I am grateful to my family and friends without their moral support my
achievement would not have been possible. I am also grateful to acknowledge my classmates and
friends for their brotherly and sisterly support and encouragement in all aspect of my work. I also
want to appreciate my office supervisor Addis Tiruneh for her moral, material and time support
during my work.

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Table of Contents
Declaration ..................................................................................................................................................... i
Letter of Certification .................................................................................................................................... ii
Acknowledgments........................................................................................................................................ iii
List of tables ................................................................................................................................................. vi
List of figure ................................................................................................................................................. vi
Acronym ..................................................................................................................................................... vii
Abstract ...................................................................................................................................................... viii
1. CHAPTER 1: INTRODUCTION ..................................................................................................... 1
1.1 Background of the study ............................................................................................................... 1
1.2 Statement of the problem .............................................................................................................. 4
1.3 Research Questions ....................................................................................................................... 6
1.4 Objectives of the study.................................................................................................................. 6
1.5 Significance of the study ............................................................................................................... 7
1.6 Scope and Limitation of the study ................................................................................................ 7
1.7 Organization of the study .............................................................................................................. 7
2. CHAPTER 2: LITERATURE REVIEW .......................................................................................... 8
2.1 . Theoretical Review ..................................................................................................................... 8
2.1.1. The Malthusian Population Trap............................................................................................... 9
2.1.2. The Demographic Transition .................................................................................................. 11
2.1.3. The Demand for Children in Developing Countries ............................................................... 13
2.1.4. Ethiopian Demographic Review ............................................................................................. 14
2.2. Empirical Review........................................................................................................................ 15
3. CHAPTER 3: MATERIALS AND RESEARCH METHODS ....................................................... 22
3.1. Types and sources of data ........................................................................................................... 22
3.2. Model specification ..................................................................................................................... 22
4. CHAPTER 4: DATA ANALYSIS AND DISCUSSIONS ............................................................. 25
4.1. Results of Descriptive Analysis .............................................................................................. 25
4.1.1. Trends of selected demographic variables in Ethiopia........................................................ 25
4.1.2. Economic development and Population Growth................................................................. 29
4.2. RESULTS OF ECONOMETRIC ANALYSIS ....................................................................... 34
4.2.1. Result of test of stationary .................................................................................................. 34

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 4.2.2. Co integration Test .............................................................................................................. 35
4.2.3. Granger causality test .......................................................................................................... 36
4.2.4. Error Correction Mechanism (ECM) .................................................................................. 38
4.3. Impulse Response Functions (IRF) ......................................................................................... 46
5. CHAPTER 5: Conclusion and Recommendation ............................................................................... 51
5.1. Conclusion .............................................................................................................................. 51
5.2. Recommendation .................................................................................................................... 52
6. Reference ........................................................................................................................................ 54
7. Appendices...................................................................................................................................... 57

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List of tables
Table 1 Result of Test of Stationary (stata result)....................................................................................... 34
Table 2. The optimal Lag selection result ................................................................................................... 36
Table 3. Results of Granger Causality- Wald ............................................................................................. 37
Table 4. Co integration Rank Test (stata result) ........................................................................................ 39
Table 5. Estimation result of VECM Regression ........................................................................................ 40
Table 6. The Long runs Equation Johansen normalization (stata result) .................................................... 42
Table 7 Results of LM Residual Serial Correlation Test (stata result) ....................................................... 44
Table 8 Co integration Rank Test using trace statistic and maximum Eigen value .................................... 45

List of figure
Figure 1. The Malthusian population traps (Todaro and Smith 2012, 282) .................................................. 9
Figure 2 Historical stages of the demographic transition in Western Europe (Todaro and Smith 2012, 279)
.................................................................................................................................................................... 12
Figure 3. Trend of Birth Rate and Death Rate (1990 – 2019)..................................................................... 25
Figure 4 Fertility Rate Trends of Ethiopia (1990-2019) ............................................................................. 27
Figure 5. Trend and size of Total Population (1990 – 2019) ...................................................................... 28
Figure 6. Ethiopia human development index ............................................................................................ 30
Figure 7. Trends of population growth and Real GDP ............................................................................... 32
Figure 8. Response of lnRGDPPC to innovations ...................................................................................... 46

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 Acronym

AIC=Akaike information criterion

BR=Birth Rate
CSA= Central Statistical Agency
CPR= Contraceptive Prevalence Rate
DR= Death Rate
DCs = Developed Countries
ECM=Error Correction Mechanism
FDRE=Federal Democratic Republic of Ethiopia
GDP= Gross Domestic Product
HDI=Human Development Index
IMF=International Monetary Fund
IUSSP= International Union for the Scientific Study of Population

LDCs= Less Developed Countries

RGDPPC = Real GDP per capita
TFR=Total fertility rate
UN=United Nations
UNFPA =United Nations Population Fund
VECM=vector error correction model
WB= World Bank

WEOD =World Economic Outlook Database

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 Abstract
The study is based on a time series data covering a time period of 1990 to 2019 and analyzed the
relationship between population (with other demographic variables) and economic development
(Real GDP per capita is used as a proxy). Considering econometric analysis, the study employed
different tests such as unit root, co-integration, and Granger causality tests and vector error
correction model.
According to the estimation result, population Granger causes real GDP per capita i.e. only
unidirectional causality which runs from population growth to economic development. Here
working age population and young population granger causes real GDP per capita but not vice
versa. But real GDP per capita didn’t cause them. On the other hand, real GDP per capita
causes life expectancy at birth and aged population but not vice versa.
In the long run population growth, working age population (WAPO) has positive and significant
effect on economic development while young population group (CHPO), aged group (AGPO)
has a negative and significant effect on economic development.

As the finding above shows Ethiopia is under stage two of demographic transition which is
characterized by lower death rate but higher birth rate. This shows the need to revise population
policy and decrease fertility rate by using different family planning technics and contraceptive
methods. So in line with decreasing fertility rate creating human capital development is a key for
countries economic development. so greater attention must be given to this since Ethiopia has a
promising segment of young population once very trained, educated and experienced its
economy will expand.

In addition to this improving the social and economic status of women is a key for a decrease in
fertility rate. The development of old-age and other social security systems outside the extended
family network can also be a solution to lessen the economic dependence of parents, especially
women, on their offspring since the study indicated that aged population affects economic
development significantly and negatively.

Keywords: Economic Development, Real GDP per capita, Population Growth, Fertility Rate,
Vector Error Correction Model

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 1. CHAPTER 1: INTRODUCTION

1.1 Background of the study

The debate on the relationship between population growth and economic development has a long
history. The impact of population growth on economic growth has been under discussion
following the seminal work of Malthus in 1798. So many economists argue about population and
its impact on countries economy whether it has positive or negative impact. For instance
economists such as, Coale and Hoover (1958) argue that population growth diverts resources
from savings and capital accumulation to current consumption of goods and services. Similarly,
Hammer (1986) and Kelley (1988) suggest that population growth redirects resources from
education and health services to current consumption.

According to Malthusian theory population has a universal tendency to grow at a geometric rate
doubling every 30 to 40 years unless checked by dwindling food supplies whereas because of
diminishing returns to the fixed factors food supplies could expand only at a roughly arithmetic
rate. Thus Malthus ignores the enormous impact of technological progress in offsetting the
growth-inhibiting forces of rapid population increases. This means countries can escape from
problem of population trap if rapid and continuing technological progress is employed and it can
be leads to an increase income.

On the other hand Bloom and Freeman (1998) differ with Malthusian theory noting that food
problem is more of a problem of poverty and inadequate income than a matter of high population
growth. Thus population and food problem can be solved when income is enough to buy
adequate food as prices provide adequate incentives to produce. On the other hand, developing
economies would have to export more, receive foreign aid or borrow from overseas to meet their
increased demand for food by increased imports. A high rate of population growth not only has
an adverse impact on improvement in food supplies, but also it has an effect on the economy by
depressing savings, foreign exchange, and human resources.

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Rapid population growth tends to depress savings per capita and retards growth of physical
capital per worker. The need for social infrastructure is also broadened and public expenditures
must be absorbed in providing the need for a larger population rather than in providing directly
productive assets. Population pressure is likely to intensify the foreign exchange constraints by
placing more pressure on the balance of payment. The need to import food will require the
development of new industries for export expansion and/or import substitution. The rapid
increase in school-age population and the expanding number of labor force entrants puts ever-
greater pressure on educational and training facilities and retards improvement in the quality of
education, which is a problem in developing economies. Also, too dense a population aggravates
the problem of improving the health of the population and intensifies pressure on employment
and the amount of investment available per labor market entrant (Martin 2009).

In general population growth has a substantial impact on any country‘s economy. For example, it
is real that due to the declining population growth many developed countries face a serious
problem of dependent ageing society and experience labor shortage which puts a strain on their
pension systems. The dependency burden between developed countries (DCs) and least
developed countries (LDCs) here is different in case of aged dependent population. This is
mainly because of the variation of life expectancy. DCs has relatively higher life expectancy than
LDCs because they have good level of living with high per capita income(better standard of
living) and better health, sanitation and educational system while LDCs have low level of living,
low per capita income, poor health and educational systems. So aged dependency rate in LDC is
relatively smaller and has lower impact on the economy in relative to DCs Case.

On the other hand, many developing nations experience a rapid population growth with higher
youth dependency rate problem which highly affects their economic performance. The
importance of the relationship between population growth and economic development has been
recognized by many development economists. As Dawson and Tiffin (1998) put it: ―The
relationship between population growth and economic development has long been thought to be
fundamental to our understanding of less developed countries (LDCs). This is because to show
whether population growth stimulates or retards economic growth and the standard of living of
these countries which are known by their higher population growth.

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Economists advocating the positive side to population growth, say that the population growth
creates problems in the short run that include poverty, famine and unemployment. Yet, they also
state that in the long run, it leads to new developments through advancement in technology that
leave countries better off than if the short run problems never occurred. On the positive side,
there is a chain reaction of events caused by population growth. According to the neo-classical
growth model, population is beneficial to an economy due to the fact that population growth is
correlated to technological advancement. Rising population promotes the need for some sort of
technological change in order to meet the rising demands for certain goods and services. With
the increased population, economies are blessed with a large labor force, making it cheaper as
well, due to its immense availability. An increase in labor availability and a low cost for labor
results in a huge rise in employment as businesses are more inclined to the cheap labor. Low
labor costs results in a shift of money usage from wages into advancement through technology
(Coale and Hoover, 1958).

More people may mean a country can produce and consume more goods and services, leading to
economic growth. But this can only occur when employment opportunities grow at least as fast
as the labor force and when people have access to the necessary education and training. A larger
population may help overcome possibly diminishing returns to this generation‘s human capital in
the production of the next generation‘s human capital because greater population growth induces
more specialization and a larger market that raise returns to human capital and knowledge. If
human capital per capita were sufficiently large, the economy would move to steady state
growth, whereby in the steady-state growth path, consumption per capita would increase at a
slower rate than human capital if the population is growing and if the production of consumer
goods has diminishing returns to population. However, consumption per capita can still be
increasing, despite these diminishing returns, if the positive impact of the growth in human
capital on productivity in the consumption sector more than offsets the negative impact of
population growth. Thus, zero population growth is not necessary for sustainable growth in per
capita consumption, even with diminishing returns to population in the production of consumer
goods (Gerald and Meier, 1995).

In those developing countries where the relationship between population growth and
economic performance could be described as positive, the demographic trends stimulate

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economic development and promote a rise in living standards. This is because the
population growth encourages competition in business activities and, as the country‘s
population grows, the size of its potential market expands as well. The expansion of the
market, in its turn, encourages entrepreneurs to set up new businesses. A prominent
population economist, Julian Simon, stressed the positive side of population growth and
distinguished human beings as the vital and most essential element for economic
development. As Simon (1996, 589) put it: ―The ultimate resource is people – skilled,
spirited, and hopeful people who will exert their wills and imaginations for their own
benefit, and inevitably they will benefit not only themselves but the rest of us as well‖. This is to
show that skilled individuals are highly productive and vital for economic development.

1.2 Statement of the problem

According to UN estimates of 2020 Ethiopia‘s current population is about 115 million and is
expected to surpass 200 million by the end of 2049. Ethiopia‘s population is growing about 2.7%
annually with no projected peak year or period of decline. The birth rate in Ethiopia is 36 births
per 1,000 people. The fertility rate is 4.1 births per woman. The median age in Ethiopia is
approximately 17.9 years of age. 60% of the population in Ethiopia is under the age of 25. Only
49% of the population over 15 years of age is literate and many children only attend school for 8
or 9 years. This implies that almost half and above population of Ethiopia is under the age of 25
since there his high youth dependency ratio as many developing nations face it and this requires
quality educational system which is limited in LDC.

This rapid increase in school-age population and the expanding number of labor force entrants
puts greater pressure on educational and employment creation and retards improvement in the
quality of education, which is a problem in developing economies which is beyond the carrying
capacity of their economies. This disproportionality has hindered the economy‘s ability to grow
and develop at a more rapid pace due to the increased need for more resources. Ethiopia remains
one of the poorest countries in the world due to its rapid population upsurge.

As Ethiopia performance monitoring and evaluation services (EPMES) assessed on Ethiopian

development trends young, rapidly growing populations can be both a boon and a challenge for
countries like Ethiopia. A young, healthy, and productive population could help power

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Ethiopia‘s growth over the coming decades. But, the existence of large youth dominance can also
be a source of political and social instability if not properly managed. Harnessing the benefits of
an expanding, maturing population requires greater service delivery to ensure that these
additional people have access to new opportunities for economic growth. In the absence of
inclusive growth, large young populations entering working age without jobs or economic
opportunity can be a significant driver of social unrest.

Most of Ethiopian policies are highly economic policy and it gives less attention to Population
policies and this leads to limited data on Ethiopian population. For instance we know the last
Population and Housing Census were conducted in 2007. Although several works have made
regarding relationship of population growth and economic change of the country; I can clearly
observe two limitations in terms of timing and updating information. For instance, there are
demographic changes and new recording economic growth in the country. Thus this study aims
to fill what consequences have happened up to now.

Compared to the magnitude of population problem, in Ethiopia, there were few researches
specifically addressing population change, dynamics and consequences. The few studies
conducted dealt with mainly the impact of population growth on the environment, as a cause to
land fragmentation and change in livelihood strategies. However there are several attempts made
to show the major impacts of population growth on economic development most of them simply
shows the causal relationship between economic growth and population growth by giving little
attention for relevant demographic variables. But this study tries to use Real GDP per capita
which is a better proxy measure for economic development since it is a good indicator of
standard of living instead of economic growth measured by Real GDP alone. This study also
examines economic development and demographic dynamism by disintegrating population
variables in to different demographic dividends such as: population growth rate, age
composition, life expectancy, population density, migration level etc.

For instance Lachisa and Yirdaw (2013) investigated only the causal relationship between
population and economic development using vector error correction model (VECM). They found
that population Granger causes real GDP in the long run; there is no Granger causality from real
GDP to population. Alemu (2014) also find that population growth has had a significant negative

5
impact in the short run but a positive impact in the long run on the economic performance of the
country. Given continued divergence of opinions regarding the consequences of population
growth on economic development, this study tried to contribute more regarding demographic
variables which were given less attentions in most studies (population size, growth, age structure,
life expectancy and other demographic elements and their impact in economic development of
Ethiopia.

This study chooses Ethiopia as a case study to empirically examine a long-run relationship
between population growth and economic growth by employing time series method of
econometric analysis using VECM approach. Specifically, it evaluates the direction and strength
of the link between the growth of population and its components on one side and GDP per capita
on the other. The study covered a time period from 1990s to 2019.

1.3 Research Questions

The main research questions that this paper tried to address are:

i. Is there is a long-run relationship between Ethiopia‘s demographic structure and her

economic development?
ii. Which age structure has the most significant impact on economic development in
Ethiopia?
iii. In which stages of demographic transition does Ethiopia found and what is its
implication?

1.4 Objectives of the study

The general objective of this study is to assess economic performance of Ethiopia and its
demographic situation using time series analysis. The study will have the following specific
objectives

i. To show the causal relationship between demographic variables and Economic

Development in Ethiopia.
ii. To assess the impact of demographic variables on economic development.

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 1.5 Significance of the study
This study has the following significances

i. This study analyzed the impact of demographic variables on economic development and
tried to add important contribution to the existing theory.
ii. This study also suggests policy directions regarding population growth and economic
development in Ethiopia.
iii. At the end this study can provide useful information to those private and public agencies
that are in charge of designing projects and programs that are related with demographic
survey.

1.6 Scope and Limitation of the study

Given the big scope on the topic of demographic dynamics and economic development the study
is only limited to selected demographic variables and economic growth as a proxy of economic
development in Ethiopia. This study is also limited both in time and finance.

1.7 Organization of the study

This paper is structured as follows: chapter one provides an introduction, chapter two describes
the existing literature. The subsequent chapters are intended to deal with methodological issues
in chapter three; empirical findings and discussions in chapter four and finally, the main findings
of the study is summarized in a concluding section of chapter five.

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 2. CHAPTER 2: LITERATURE REVIEW

2.1 . Theoretical Review

The close link between economic development and economic growth is simultaneously a matter
of importance as well as a source of considerable confusion. The idea behind measuring
aggregate output of the country in terms of GDP is to show the total economic activity of the
country. GDP measures the market value of final goods and services produced by a country in a
given year (Mankiw, 2010).

On the other hand, economic development is any effect or undertaking which aids in the growth
of the economy. That is, it is the ―process‖ of developing and maintaining ―suitable economic,
social and political environment‖ in which ―balanced growth‖ may be realized increasing the
wealth of the community. Economic development refers to the multidimensional process of
reorganization and reorientation of the entire economic system for improving living standard. It
is something beyond economic growth. Economic growth indicates the change in the quantities
of goods and services. But economic development shows the change in quantity of output and at
the same time change in the living standard. Economic growth is one component of economic
development. The major indictors of economic development include increase in productivity,
decline in social inequality, change in attitude and institution and increase in modern knowledge.
However, using the aforementioned measures of economic developments is difficult to capture, it
is possible to choose measuring real economic output and per capital income are proxies for
economic development as indicated by Todaro and Smith (2012).

The best-known theory linking population growth and economic growth is Malthusian theory.
The famous theory that agricultural production progresses arithmetically, while population
increases geometrically-is familiar to most social scientists. This theory has convinced many
students of economic development, demographers, and policy analysts that rapid population
growth retards economic development by tightening job markets, breeding underemployment,
and hindering labor force mobility across economic sectors (Coale 1986).This is because of the
difficulty of creating employment opportunity, fulfilling quality education and health system and
food supplies for the rapidly growing population.

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 2.1.1. The Malthusian Population Trap
Malthus postulated a universal tendency for the population of a country, unless checked by
positive checks (starvation, disease, wars, dwindling food supplies, catastrophes, etc.) to grow at
a geometric rate, doubling every 30 to 40 years. At the same time, because of diminishing returns
to the fixed factor, land, food supplies could expand only at a roughly arithmetic rate. Modern
Economists have called it the low-level equilibrium population traps or, more simply, the
Malthusian population traps. Diagrammatically, the basic Malthusian model can be illustrated by
comparing the shape and position of curves representing population growth rates and aggregate
income growth rates.

Per capita income growth is the difference between income growth and population growth—
hence the vertical difference between these two curves. In the Harrod-Domar (or AK) model,
whenever the rate of total income growth is greater than the rate of population growth, income
per capita is rising; this corresponds to moving to the right along the x-axis. Conversely,
whenever the rate of total income growth is less than the rate of population growth, income per
capita is falling, moving to the left along the x-axis. When these rates are equal, income per
capita is unchanging (Todaro and Smith 2012).

Figure 1. The Malthusian population traps (Todaro and Smith 2012, 282)

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According to modern-day neo-Malthusians, poor nations will never be able to raise much above
their subsistence levels of per capita income unless they initiate preventive checks (birth control)
on their population growth. So here Malthusian population trap is criticized based on the
following two main grounds.

First, the model ignores the enormous impact of technological progress in offsetting the growth-
inhibiting forces of rapid population increases. Countries can escape from problem of population
trap if rapid and continuing technological progress is employed and it can be represented by an
upward shift of the income growth.

The second basic criticism of the trap focuses on its assumption that national rates of population
increase are directly (positively) related to the level of national per capita income. According to
this assumption, at relatively low levels of per capita income, we should expect to find
population growth rates increasing with increasing per capita income. As a result of modern
medicine and public health programs, death rates have fallen rapidly and have become less
dependent on the level of per capita income. Moreover, birth rates seem to show no rigid
relationship with per capita income levels. (Todaro and Smith 2012).

On the contrary to Malthusian theory Ester Boserup (1965) basically argued that population
would never out strip food supply technology will continue to improve and keep up with
demand. She argues that population growth will give to the society an opportunity to invent new
technology in the intensification of agriculture with socioeconomic change that results in
improving soil fertility . She considers population growth as autonomous force of exogenous
factor that causes to technological progress in agriculture and postulates that aggregate
agricultural production function in the long run will always shift upwards in response to
population pressure to maintain output per capita though there may be diminishing return to the
agricultural labor in the short run. Thus for her, the primitive agricultural communities are
subject to continuing change in agricultural technology. She encourages Short fallow cultivation,
bush fallow cultivation, annual cropping multi cropping etc.

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 2.1.2. The Demographic Transition
The process by which fertility rates eventually decline to replacement levels has been portrayed
by a famous concept in economic demography called the demographic transition. The
demographic transition attempts to explain why all contemporary developed nations have more
or less passed through the same three stages of modern population history.

Before their economic modernization, these countries for centuries had stable or very slow-
growing populations as a result of a combination of high birth rates and almost equally high
death rates. This was stage 1. Stage 2 began when modernization, associated with better public
health methods, healthier diets, higher incomes, and other improvements, led to a marked
reduction in mortality that gradually raised life expectancy from under 40 years to over 60 years.
However, the decline in death rates was not immediately accompanied by a decline in fertility.

As a result, the growing divergence between high birth rates and falling death rates led to sharp
increases in population growth compared to past centuries. Stage 2 thus marks the beginning of
the demographic transition (the transition from stable or slow-growing populations first to
rapidly increasing numbers and then to declining rates). Finally, stage 3 was entered when the
forces and influences of modernization and development caused the beginning of a decline in
fertility; eventually, falling birth rates converged with lower death rates, leaving little or no
population growth (Todaro and Smith 2012). The figure below depicts the three historical stages
of the demographic transition in Western Europe.

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Figure 2 Historical stages of the demographic transition in Western Europe (Todaro and Smith 2012, 279)

Stage 1: before their economic modernization countries had stable or very slow-growing
populations because of high birth rates & almost equally high death rates Stage 2: when
modernization starts better public health methods, healthier diets, higher incomes, and other
improvements, leads to reduction in mortality that gradually raised life expectancy. However, the
decline in death rates was not followed by a decline in fertility. As a result, the growing
divergence between high birth rates and falling death rates led to sharp increases in population
growth compared to past centuries. This stage thus marks the beginning of the demographic
transition (the transition from stable or slow-growing populations first to rapidly increasing
numbers and then to declining rates). Stage 3: this stage was entered when the forces and
influences of modernization and development caused the beginning of a decline in fertility;
eventually, falling birth rates converged with lower death rates, leaving little or no population
growth.

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 2.1.3. The Demand for Children in Developing Countries
Children in poor societies are seen partly as economic investment goods in that there is an
expected return in the form of both child labour and the provision of financial support for parents
in old age. Families in LDC consider children as investment because they consider and think
about the benefit for the source of income when they become older. It‘s common that most of
developing countries are more or less agrarian and this countries are characterized by low level
of living, higher illiteracy, low health access, low education access, low family planning,
religions and traditions and others leads to a higher fertility in these countries since they consider
children as an asset (Todaro and Smith 2012).

Tradition, culture and religions have their own role on higher population growth of least
developing countries since they are against modern birth control mechanisms such as
contraceptive and other biological methods. For instance, Sundararajan et al. (2019) identified
that many studies have demonstrated the complex and variable relationship between religious
faith and beliefs about family planning in sub-Saharan Africa. In case of Tanzania they founded
that a major reason for poor acceptance of family planning and other modern birth control
methods is that women and their partners are uncertain about whether pregnancy prevention is
compatible with their religious beliefs. This is also true that religion plays its own role in higher
fertility in Ethiopia. Here families believe that using modern birth control methods and
contraceptives are assumed as a sin and they consider these as if it is against their religious
teachings especially in the rural community.

The other instrument commonly used to identify the consequences of fertility on the welfare of
families relies on the sex composition of births, and has serious drawbacks. This variable may
significantly affect parents‘ decisions on whether to have further children, and it may be assumed
to be approximately independent of parent preferences or family constraints if there is no sex-
selective abortion or infanticide. But this variable may not satisfy the criteria for a valid
instrument, because the social and economic consequences of a child‘s sex involve many
culturally distinct costs and benefits for his or her parents, such as the provision of dowries for
daughters in some parts of the world. Thus, the sex composition of early births is likely to
involve lifetime wealth effects for parents, in addition to affecting fertility, giving rise to many
changes in family time allocation, expenditure patterns, and life-cycle savings (Rose, 2000).

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According to United Nations Population Fund (UNFPA) (2011) estimates the LDCs have the
largest and most rapidly growing youth population which is mainly because of their high fertility
and high population growth. Today about 60% of the population in LDCs is under the age of 25.
The group of young people between 10 and 24 years continues to grow rapidly in the LDCs.
However, in the LDCs the number will continue rising and there is not a maximum figure before
2050. The estimate also suggests that the number of young people in these countries will increase
by more than 60 per cent between 2010 and 2050. A large and growing share of young
population can support the economic and social development of countries, but can also cause
considerable challenges, where countries do not have the capacity to ensure adequate investment,
especially in their health and education, and where economies do not generate sufficient
productive and remunerative employment for young people.

But here in case of some developed countries the government prepares pronatalist population
policies and some initiatives to have children for parents. This is mainly because of their
population composition is mainly senior and aged which leads higher aged dependency rate since
their fertility rate is very low. So they prepare initiatives for having enough babies to keep their
population steady. Examples of such countries includes: Germany, Turkey, Japan, Russia,
Taiwan etc.

2.1.4. Ethiopian Demographic Review

Despite its long history of humankind in Ethiopia, there were no estimates of human population
prior to the 1930s except few evidences. The growth rate of population was slow until 1970 and
step up thereafter. In the beginning of 1900s, Ethiopia had five million people that have increased
by twenty times within one century. The first and the second population and housing census were
conducted in 1984 and 1994 with equivalent population size of 42.6 and 53.5
million. Nevertheless, the annual growth rate of population has declined from 3.3% in 1984 to
2.9% and 2.6% in 1994 and 2007. The growth rate of population is estimated to be
2.3%. Currently, Ethiopia is the second population giant among ten countries in Africa that
account 61% of the total population of the continent. Nigeria and Ethiopia contribute 15.3% and
8.3% of the total population in Africa, respectively (Mekuria 2018).

14
The temporal dimension of population changes in terms of size and structure, and spatial
distribution of population due to births, deaths, migration, and settlement patterns refers to
demographic change. Since 1970, child and adult mortalities have declining trends for three
decades. Considerable change is observed for maternal mortality from 1250 in 1990 to 353 for
every 100, 000 live births in 2015. More than 70% Ethiopian population is under 30 years of age
while close to 50% are under the age of 15. A women‘s fertility rate has declined steadily from
7.4 children in 1980s1 to 5.9, 5.4, 4.8, 4.1 children in corresponding years of 2000, 2005, 2011
and 2014. The fertility rate is expected to decline by 3.11 and 1.99 in the 2020s and 2060s,
respectively. Reductions in fertility, child mortality, crude birth and death rates have accelerated
the transition and demographic dividend (Mekuria 2018).

The net reproduction rate of surviving a daughter per women has declined from 2.3 in the 1980s
to 2.0 in the 2010. Infant mortality rate has declined from 140 children in the 1980s to 50
children per 1000 in the 2010s. Child mortality is likely to decline from 32 in the 2020s to 15
children in the 2060s, respectively. Females have higher life expectancy (65 years) at birth than
males (61.3 years) in the 2010s. All these changes, particularly population‘s age opens up a
window of opportunity to Ethiopia that capture the demographic dividend given that favourable
socio-demographic and economic policies and conditions exist. Population growth is
accelerating whereas the birth and mortality rates are decelerating (Mekuria 2018).

2.2. Empirical Review

In this section different empirical literatures has been included which are founded by many
researchers with different findings regarding the relationship between demographic dynamism
including population growth with economic development. Even though the relationship between
population growth and economic development has been studied by different researchers some of
selected evidences are included here which goes in line with our specific title. For example,
Bucci and La Torre (2007) used a two-sector endogenous growth model. They pointed out that
population growth may have a negative or ambiguous effect on a country‘s economic
development. In other words, when physical capital and human capital are substitute, the
population growth has a negative impact on the economic development. On the other hand, when
physical capital and human capital are complementary, the effect of population growth becomes

15
ambiguous. Mankiw et al. (1992) has also found that by including the role of human capital (in
line with the endogenous growth theories) population growth negatively affects growth in GDP
per capita.

In their study on the Chinese economy, Gao and Shao (2016) analyzed the impact of
demographic structure in China provinces on economic growth. The result supports the
demographic dividend hypothesis. The findings of Zhang (2014) also support the demographic
dividend hypothesis and revealed that the evolution of age structure accounts for about one-fifth
of GDP per capita growth where a change in the internal demographic composition of the labor
force accounts for over 50 percent. It was also found that the dynamics of age structure across
provinces accounts for over one-eighth of the persistent inter-provincial income inequality.

Similarly, by incorporating age structure dynamics into the growth equation and applying it to
China‗s provincial-level data, Wei and Hao (2010) examined the economic implications of
demographic change in China. They found that demographic structure changes, specifically a
decline in fertility rate, have helped fuel the growth of the Chinese economy. The channel
through which demographic change affects income growth is primarily through its impact on
steady state income levels and it is more evident in provinces where market forces operate. The
result also showed a significant feedback effect between demographic behaviors (birth rates, life
expectancy and marriage age) and economic growth.

Furthermore, Agrawal et al. (2015) examined the impact of changing population age structure on
performance of the Chinese and Indian economy. They found that unlike China, the slow pace of
decline in birth rate had adverse effects on India's savings and growth potential, together with the
magnitude and timing of her first demographic dividend. They further argued that high domestic
savings and investments in the demographic dividend phase are crucial in neutralizing the
adverse effects of population ageing and to foster sustainable growth. Also, Bloom et al. (2007)
studied that increases in the proportion of the working age population can yield a demographic
dividend that enhances the rate of economic growth.

16
Song (2013) found a negative influence of young population growth on economic growth of
Asian economy but supports the demographic dividend hypothesis. This suggests that the
favorable demographic structure accounts for the rapid growth of the Asian economies. Their
result indicates that negative effects of growth in the total population and the young population
on economic growth while showing positive effects of growth in the working-age population and
the working-age population ratio. Mason and Lee (2008) remarked that longer life, lower
fertility, and population aging all raise the demand for wealth to provide for old age consumption
in East Asian countries.

Coale and Hoover (1958) elaborated a theory stressing family economics and capital formation.
According to this theory, rapid population growth forces families to consume what otherwise
would be savings, adversely affecting national saving rates and thus capital formation and
investment rates as well. Moreover, high youth dependency ratios force nations to invest scarce
capital in a game of "catch-up" as they attempt to provide education, infrastructure, and jobs for
burgeoning populations (Simmons 1988:129-31). Allocating capital to nonproductive segments
of the population (e.g., educational expenditures) forces a nation to undercapitalize its existing
labor force (Bloom and Freeman 1988).

In fact, people are producers as well as consumers of wealth, roles that are influenced by the life
course. While growth in the number of children may retard economic production as the
population invests scarce capital in goods and services that yield few immediate economic
multipliers, growth in the economically active population should cause no such problem. In fact,
some evidence suggests that population growth can have a short-term negative effect on
economic growth because of youth dependency, but has a long-term positive effect resulting
from labor force growth and a subsequent boost in aggregate demand (Bloom and Freeman 1988;
Barlow 1994).

Neoclassical economic theorists consider growth in the labor force a requisite for economic
growth (Todaro 1989:116). Common arguments for a positive correlation between economic
development and labor force growth revolve around scale effects and demand effects. A growing
labor force encourages scale effects in terms of: a larger domestic market, a more complex
division of labor, a greater volume of diffused information, technology, and skills and lower per

17
capita costs associated with public infrastructure (e.g., roads, ports) because of the volume of use
(Simon 1981). On the demand side, the Kuznets cycles of U.S. economic history suggests that
an increase in population has (until recently) been associated with an increase in economic
production. This relationship may be attributable to the increased demand for consumer goods in
the wake of family formation (Easterlin 1968).

Wongboonsin and Phiromswad (2017) found that demographic structure affects economic
growth differently in developed and developing economies. For developed countries, they found
that an increase in the share of middle-aged workers has a positive effect on economic growth
through institutions, investment and education channels. On the other hand, an increase in the
share of the senior population has a negative effect on their economic growth. In case of
developing countries, they found that an increase in the share of younger segment of the
population has a negative effect on economic growth through investment, financial market
development and trade channels.

Eniang (1977) founded that in case of Nigeria rapid population growth has a disadvantage for an
economy for two major reasons. First, it retards capital formation by depressing saving and
second, it changes demographic structure such that there is an increase in youth population and
the low skilled and unskilled labor in the labor force. Similarly, Brunow and Hirte (2006)
examined the relationship between age structure and regional economic growth and found
evidence in favor of a strong positive impact of population age structure on real GDP per capita
growth where the labor force below 45 years exerts the strongest positive impact. The result also
supports the learning effects was found that a region with a relatively high share of individuals
between 45 and 74 years have a relatively better performance than the average of its country
whereas a high share of the young labor force have no significant impact. Musa (2015) also
found that the relationship between population growth and economic growth in India is positive
and there exist a unidirectional relation, running from economic growth to population growth.

Humair et al. (2010) examined the prospects for economic growth in Nigeria from a
demographic change and human capital perspective. They found that Nigeria has a substantial
demographic opportunity on the horizon however, she lacks policy options with which to harness
her demographic transition into indefinite sustained growth and unemployment, low job

18
productivity, and low levels of human capital are highlighted as the major roadblocks to
achieving these benefits. Similarly, Tartiyus et al. (2015) evaluated the impact of population
growth on economic growth in Nigeria. The result revealed a positive relationship between
economic growth and population, fertility and export growth and an inverse relationship between
economic growth and life expectancy as well as crude death rate.

As Wako (2012) studied, the causal relationship between demographic factors and economic
development in Ethiopia revealed a negative long run relationship between per capita income
and population growth and a positive relationship between the former and growth of workers
with bidirectional causality in both cases. From our neighbor Kenya Gideon et al.(2013) founded
that population growth and economic growths are both positively correlated which means there
exists bi-directional causality from population growth to economic growth, and vice versa. They
conclude that in Kenya population growth promotes economic growth and subsequently
economic development. Here the study result shows the existence of a long-run relationship
between population and economic growth in Kenya. On the other hand Ethiopia is one of the
most populous countries in Africa next to Nigeria followed by Egypt and Democratic Republic
of the Congo. According to World Bank 2017 report adult literacy rate in Ethiopia (% of people
ages 15 and above) is nearly 51.77% while Kenya‘s was 81.5% which is better than Ethiopian
case. So that countries population with higher literacy number is more likely to support their
economy.

Lachisa and Yirdaw (2013) investigated the causal relationship between population and
economic development using vector error correction model (VECM). Their results shows that
there exists unidirectional long run causal relationship from economic development to population
but, no long run causal relationship exists from population to economic development. The short
run causality tests further suggest that population Granger-causes economic development;
however, there is no reverse short run causality form economic development to population.
Kassahu (2014) also founded that population growth has had a significant negative impact in the
short run but a positive impact in the long run on the economic performance of the country. He
also suggested that realistic population policies should be designed and implemented to

19
adjust/control high rate of population growth and make it a beneficial resource for the economy.
For instance minimizing high birth rate can be an effective policy instrument since high birth rate
can be a burden on the economy.

Most of the studies in the literature above show that negative influence of young population
growth on economic growth and it requires higher attention for child care, schooling and health
system expenses and aged populations have also similar effects. As we have mentioned earlier
almost half and above population of Ethiopia is under young age population category which is
unproductive and requires huge investment now since it supports the economy in the long run
once properly grown, schooled and trained.

Many theoretical analyses argue that high population growth creates pressures on limited natural
resources, reduces private and public capital formation, and diverts additions to capital resources
to maintaining rather than increasing the stock of capital per worker. Others point to positive
effects such as economies of scale and specialization, the possible incentive to favorable
motivation caused by increased dependency, and the more favorable attitudes, capacities, and
motivations of younger populations compared with older one.

The interaction between population growth and economic development has been quantitatively
studied by different scholars with different respective results; many of these academic
investigations have used cross-section regression to analyze the relations between the two
variables and some others use time series regressions.

Studies on the relationship between per capita income and population growth that employed
cross-section regression analyses are more likely to suffer from the problem of
heteroskedasticity. But here in this study most of the data since the end of the 1990s is available
and it allows conducting time-series regress on analysis to examine the long-run relationship
between population and economic development. The availability of high-quality data sets
encourages further research on the topic by using standard econometric tools for time-series
data, such as unit roots test, Johansen co integration test (1988), Granger causality test (Granger
1969).

20
For instance, as mentioned above Dawson and Tiffin (1998), Thornton (2001) used time-series
data to analyze a long-run relationship between population growth and economic development in
India, Argentina, Brazil, Chile, Colombia, Mexico, Peru, and Venezuela. Therefore this study
has applied the augmented Dickey-Fuller (ADF) unit root test, Johansen co integration test and
mainly vector error correction model (VECM) and it investigates the causal relationship between
population and economic development.

21
 3. CHAPTER 3: MATERIALS AND RESEARCH METHODS

3.1. Types and sources of data

This study has used secondary data on population and the per capita real Gross Domestic Product
(GDP) comprising of time series observations over the period 1990,s to 2019. The data employed
here in this study is collected from a variety of sources such as IMF (2017), World Economic
Outlook Database (WEOD 2019), United Nations World Population Prospects (UNWPP 2017)
and others.

3.2. Model specification

As indicated by Todaro and Smith (2012), real GDP per capita income is good proxy measure or
indicator for economic development. So that this study has used real GDP per capita income is
used to proxy for economic development.

Real gross domestic product (GDP) per capita is currently the best indicator of national wealth
with regard to its standardization in constant international dollar, its adjustment for the actual
purchasing power of national currencies. GDP per capita is gross domestic product divided by
midyear population.

Evaluating the cause-effect relationship between population and economic performance lies in
establishing a theoretical relation between the two. Using size or growth rate of total population
however may ignore the heterogeneity within the population in terms of age (dependents versus
independents) and economically active (those who are under the range of working age) among
others.
So, separating the effect of population growth into the effects of population (size or growth rate)
in various age groups most notably into dependent and working-age populations – emerged. So
that the demographic structure (labor) will be disaggregated into: labor force (working age
population) which is mostly economically active (15-64 years) and dependent population
[children population (0-14years) and the aged population (65 years and above)]. Beyond the age
structure demographic structure also includes population density, migration, fertility, mortality

22
rates, birth rate, death rate, life expectancy at birth etc. Hence, estimations and tests about the
relationship between demographic and economic variables involved the following variables:

Based on the foregoing and the theoretical framework employed in different studies, the
mathematical model for this study can be presented as follows in two main models the first
model contains Real GDP per capita and total population while the second model shows the
relationship between RGDPPC and other demographic variables. It is because of population and
other demographic variables are highly correlating by their nature so that two models are used in
order to see their impacts individually:
The first empirical models to be estimated which is aimed to show causations between the two
main variables in the study are.

…..……………………………………….. …. (1)

…..……………………………………..……... (2)

Where ln𝑅𝐺𝐷𝑃PC is the logarithm of real GDP per capita, lnPOGR is the logarithm of
Population, α‘s and β‘s represent parameter estimates, and t is the error term

The second model shows the relationship between RGDPPC and other demographic variables.

Where:

lnRGDPPC = log of Real GDP per capita (as a measure of economic performance per head
income of the whole population )

lnCHPO= log of dependent population [children population (0-14years) or youth population

lnWAPO= log of working age population [population (15-64 years)

lnAGPO = log of dependent population [aged population (65 years and above)
lnLEXP= log of Life Expectancy at birth

23
And (a0, a1….a4) parameter estimates

E=Error term

Real GDP per capita is measured at constant International Dollars i.e. its adjusted for the actual
purchasing power of national currencies and population size, child population or younger
population , working age population and aged population are in millions while life expectancy at
birth is measured by the number years stayed at birth.

It is expected that population growth and dependent population (aged and young) will have a
negative impact on the economy being a developing country while (working age) economically
active population and life expectancy will have positive impact on the economy. So that the
expected sign for the growth rate of the total population will be negative and the expected sign
for working-age population will be positive, as people in that group are more likely to be
economically active in the sense that they work and save more than they consume (Bloom and
Williamson 1998). One the other hand , both young population and elderly populations are
expected to have negative signs since these two age groups are considered dependent population
that consumes more than they produce and depends on the output and savings generated by the
working-age population (Higgins and Williamson 1997, Bloom and Williamson 1998).

Having our economic models above the study applies both descriptive and econometric analysis.
Descriptive analysis tries including tables, charts, and figures to show the trend and
characteristics of major demographic elements. While Econometric analysis will use time series
secondary data ranging from the year 1990,s-2019, and preliminary tests of stationary such as
unit root test will be conducted on each variable in the model. The unit root test would be carried
out using Augmented Dickey Fuller (ADF) to determine the level of stationary of the variables
and Johansen co integration test to see the relationships between the two variables. The study
mainly used vector error correction model (VECM) and investigated the causal relationship
between demographic variables including population and economic development. The existence
of Cointegration implies the existence of Granger causality at least in one direction (Granger,
1988). Thus if cointegration exists using VECM is an appropriate model to examine long run and
short run dynamics in our study.

24
 4. CHAPTER 4: DATA ANALYSIS AND DISCUSSIONS

4.1. Results of Descriptive Analysis

4.1.1. Trends of selected demographic variables in Ethiopia

A. Fertility rate, Birth Rates and Death Rates

As we have mentioned in the literature review part about demographic transition when countries
economy starts to grow and modernization starts better public health methods, healthier diets,
higher incomes, and other improvements leads to reduction in mortality that gradually raised life
expectancy. However, in case of Ethiopia the decline in death rates was not immediately
followed by a decline in fertility. As a result, the growing divergence between high birth rates
and falling death rates led to sharp increases in population growth which is exactly the same as
with Ethiopian case as we can see from the graph below. Here we can observe that Ethiopia is at
stage two in case of stages of demographic transition since there is a falling death rate but
relatively higher birth rate causing a rapid population growth still.

70

60

50

40
Birth rate
30
Death rate

20

10

0
2014
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012

2016
2018

Source: Authors computations based on United Nations - World Population Prospects 2019

Figure 3. Trend of Birth Rate and Death Rate (1990 – 2019)

25
As the trend from the graph indicates even though there was a continuous decrease in death rate
from 1990 to 2019, the birth rate tries to decline only since mid of 1990‘s. The trend depicts
significant difference between birth rate and death rate which adds more on the size to the
population of the country. This can also be evidenced by the deviation in an average birth rate of
around 40.3 and death rate of around 11.9 per 1,000 Population for the time period covered. This
significant difference is an implication of alarmingly growing population in the country. In 1990
the total population of Ethiopia was around 47 million and in 2019 it becomes almost around 112
million. This shows that it strictly increases by more than double within this short period time
nearly within 30 years

Total fertility rate represents the number of children that would be born to a woman if she were
to live to the end of her childbearing years and bear children in accordance with age-specific
fertility rates of the specified year. I.e. Fertility rate means total (births per woman). So as we can
observe from our data Ethiopia‘s fertility rate was very high i.e. 7.2 births per woman in the early
1990s before decreasing to 6.5 in 2000 and 4.12 in 2019. This is because of the introduction of
family planning services, improvements in female economic status; educational status etc. plays
a greater role in decreasing fertility rate. But population growth continues to increase even after
the fall in birth rates because the large existing youthful population expands the population‘s
base of potential parents which is commonly known as the hidden momentum of population
growth. It is true that high birth rates cannot be altered substantially overnight and religious,
social, economic, and institutional forces that have influenced fertility rates over a long period of
time do not simply handled with in a short period of time.

According to FDRE ministry of health 2020 report Ethiopia has shown remarkable progress in
reaching women and men with voluntary family planning (FP) services. Thus this brings a
decline of maternal mortality ratio by 53% from 871/100,000 in 2000 to 412/100,000 in 2016 per
100,000 live births. Similarly, infant mortality decreased by 50% from (97/1,000 in 2000 to
48/1,000). The Contraceptive Prevalence Rate (CPR) has increased by 37% (8% in 2000 to
41.1% in 2019 whereas, TFR has declined from 5.5 children per woman in 2000, to 4.6 children
per woman in 2017.

26
Despite the significant progress in CPR, there is a huge variation among urban and rural
communities, different regions and across socio demographic status. For example, urban women
are much more likely than their rural counterparts to use any modern method of contraception
(50 percent versus 38 percent).

In conclusion, family planning saves the lives of women and children, improves the quality of
life for all and reduces morbidity and mortality from pregnancy. Child Health Benefits having
too many children places children's health at risk. In developing countries, evidence shows that
achieving birth spacing of more than two years between pregnancies could reduce child death by
up to a third. On the other hand infant born to a teenage mother is more likely to be born too
early and weigh too little at birth and is 24 percent more likely to die in the first month of life
than an infant born to a mother aged 25-34 years. Families with fewer, healthier children can
devote more resources to providing their children with adequate food, clothing, housing, and
educational opportunities. In addition to the benefits listed above family planning programs are
very effective in decreasing fertility rates which through time leads to a decrease in the
composition of youth age population.

4 TOTAL FERTILITY
3 RATE(TFR)

0
2010
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008

2012
2014
2016
2018

Source; World Population Prospects 2019

Figure 4 Fertility Rate Trends of Ethiopia (1990-2019)

27
 B. Trend and size of Ethiopian population

12

10

8
Total Population( in Ten
6 Millions
Population Growth
4

0
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
Source: Constructed based on data from World Development Indicator (2019).
Figure 5. Trend and size of Total Population (1990 – 2019)

As World Development Indicators (2019) data depict, with a total population of around 47
million in 1990, Ethiopia experienced a population explosion which resulted in above 112
million people by 2019. Here, Ethiopian population size doubled itself almost within 24 years i.e.
from 1990 and 2013 showing a doubling time of about 24 years. According to UN estimates
Ethiopia‘s current population is nearly about 115 million and is expected to surpass 200 million
by the end of 2049.

Even though the Ethiopian total population size was increasing at the beginning, it seemed that
the rate at which population size rises has recently stabilized at about 2.5% per annum as per our
data source indicates. But here Ethiopian population growth rate declining doesn‘t mean that
Ethiopia has overcame the corresponding impacts of population on its economy but after a time
when its population age structure is adjusted she may overcame by some angle given other
economic limitations.

28
 4.1.2. Economic development and Population Growth

a. Population growth and human development index

The effect of population growth on the economic performance of a country or a region is also
reflected in changing HDI, which is designed to particularly reflect long-term changes in human
development as opposed to short-term fluctuations. The Human Development Index (HDI) is an
index that measures key dimensions of human development having three main dimensions which
include measures of achievement in education, a long and healthy life as well as decent standard
of living which means adjusted real GDP per capita (real GDP divided by midyear population).

The HDI attempts to rank all countries on a scale of 0 (lowest human development) to 1 (highest
human development) based on three goals or end products of development: longevity as
measured by longer life expectancy at birth, knowledge as measured by a weighted average of
adult literacy (two-thirds) and gross school enrollment ratio (one third), and standard of living as
measured by real per capita gross domestic product adjusted for the differing purchasing power
parity of each country‘s currency to reflect cost of living and for the assumption of diminishing
marginal utility of income. Using these three measures of development countries HDI is ranked
into four groups: low human development (0.0 to 0.499), medium human development (0.50 to
0.799), high human development (0.80 to 0.90), and very high human development (0.90 to 1.0)
(Todaro and Smith 2012).

So according to the data employed in this study and depicted in the graph below Ethiopia is
grouped to the first group indicating that Ethiopia is still under low human development (0.0 to
0.499) category.

29
 Human development index of Ethiopia(2000-2019)

0.6

0.5

0.4

0.3 HDI

0.2

0.1

0
2000 2003 2006 2009 2012 2015 2018

Source: United Nations Statistics Division (2020) and World Bank (2020).
Figure 6. Ethiopia human development index

Thus Human Development Index (HDI) is an index measuring national socioeconomic

development, based on combining measures of education, health, and adjusted real income per
capita or decent standard of living

b. Population growth and Economic growth

Here this section assesses the consequence of persistent increase of population growth in
Ethiopia on Ethiopian Economy. Population growth is a debating issue that many researchers
advocate its benefit and others preaches its negative impact on countries economy. Todaro and
Smith (2003) indicated that the debate over the seriousness of the consequences of rapid
population growth is not yet solved. So this study tried to evaluate the effect demographic
variables in general and population growth in particular on Ethiopian economic development.
Before we are going to see the econometric results let see the descriptive part concerning
population growth and RGDPPC which is obtained from RGDP using the midyear population

30
through trend graphs. As we have mentioned in the model above real GDP per capita is a good
proxy measure for economic development and better indicator of welfare and standard of living.

As we can see from our graph below there exists almost a constant population growth rate with a
nearly constant trend since the mid-1990, s to 2014. After 2015 there exist a relatively slighter
decrease in population growth rate but almost persistent. On the contrary real GDP growth rate
doesn‘t show nearly constant growth rates as population growth did. Thus Ethiopia‘s real GDP
shows up and down trends with higher fluctuations. Several factors can be mentioned for these
fluctuations in a specified period. In the beginning of 1990,s following the fall of the Dergue
regime a transitional government called EPRDF (Ethiopian people democratic revolutionary
democratic front) was established. During the last era of the military regime Ethiopia was almost
unstable and it was under higher political tensions in all directions in which both internal and
external parties were a threat which highly retards the economy. Due to all this transitional and
pre transitional periods Ethiopian economy was highly affected and its Real GDP growth rate
was very low even negative in the beginning of 1990,s.

But after 1995 EPRDF government tried to establish a federal constitutional framework in order
to resolve political and economic tensions in Ethiopia. And the then government of Ethiopia
EPRDF tried to transform Ethiopian economy by adopting new Economic Policy and structural
changes in the economy which mainly aimed to reduce the public sector dominance in critical
sectors of the economy and creating conditions by which market forces determine the supply and
demand of goods and services and promote private sector participation in the production and
distribution of such goods and services. In addition to these attentions was given in boosting the
agricultural output taking into account the predominance of small holder farmers at that time and
the predominant agrarian structure of the country.

So at these periods Ethiopian economy starts to recover and revive until it starts to decline
sharply following the Ethio-Eritrean war by border conflict which takes place for about two
years since 1998 to 2000. It is again followed by another crises during Ethiopian parliamentary
elections of May 2005 and its aftermath also have its own impact on Ethiopian economy as well
it was leading to higher political instability and economic stagnation as we can see from our
graph. But starting from 2005 Ethiopian economy has started to grow by 7% at minimum and

31
12% percent maximum. All the trends of Population growth, real GDP growth and Real GDP per
capita are depicted as follows below.

15

10

-5

-10
1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

2019
RGDP POGR

Source: IMF and United Nations - World Population Prospects 2019

Figure 7. Trends of population growth and Real GDP

As indicated in the above Figure, there was a fluctuation of RGDP and on average there was a
continuous growth in RGDP. On the other hand, population looks stably growing overtime more
which more likely indicates existence of positive relationship between economic growth and
population.

32
Per capita real GDP is often derived from Real GDP i.e. real GDP divided by the midyear
population. Per capita Real GDP considers both a country's GDP and its midyear population. A
country may have consistent economic growth but if its population is growing faster than its
GDP, per capita GDP growth will decline.

Real GDP per capita(RGDPPC)

2,500.00

2,000.00

1,500.00
Real GDP per
1,000.00 capita(RGDPPC)

500.00

-
2006
1990
1992
1994
1996
1998
2000
2002
2004

2008
2010
2012
2014
2016
2018

Source: World development indicator (2020)

Figure 8. Trends of Real GDP per capita (1990-2019)

33
 4.2. RESULTS OF ECONOMETRIC ANALYSIS

4.2.1. Result of test of stationary

This section reports the stationary test result of our time series study. It is important to make sure
that variables are stationary, if not spurious result will be happened which means meaningless.
Here a stationary time series has three characteristics namely finite mean, variance and auto
covariance overtime (Guajarati, 1995). To test for the stationary (non-stationarity) of the data in
the study used for econometric modeling the most common and usual test Augmented Dickey-
Fuller test is applied. The test has given the following results which are tabulated below.

Table 1 Result of Test of Stationary (stata result)

Augmented Dickey Fuller test for Variables
level First difference

Variables Constant without Trend Constant with Constant without Constant with Trend
Trend Trend

t-statistics 5% critical t-statistics 5% critical t-statistics 5% t-statistics 5%

value value critical critical
value value
lnRGDPPC -2.004 -2.989 -3.132 -3.584 -4.156** -2.992 -4.639 ** -3.588

lnPOGR -0.368 -2.989 -2.208 -3.584 -3.118** -2.992 -4.620** -3.588

lnCHPO -2.179 -2.989 -1.214 -3.584 -3.094** -2.992 -5.561** -3.588

lnWAPO -1.119 -2.989 -0.948 -3.584 -4.737** -2.992 -4.877** -3.588
lnAGPO -0.620 -2.989 -1.994 -3.584 -6.015** -2.992 -7.114** -3.588
lnLEXP -0.207 -2.989 -2.432 -3.584 -5.984 ** -2.992 -6.844 ** -3.588
**stationary at 5% critical value

Ho: Variable has a unit root

H1: variable is stationary

The result shows that we fail to reject the null hypothesis of unit root for variables at level
implying non-stationarity of the variables. However, using their first difference the variables
resulted in rejection of the null hypothesis and imply all variables are stationary at first

34
difference. So the variables are, integrated of order one I (1). So that it will help us to have good
regression results with the stationary variables after differencing.

Once we have checked variables are stationary at first difference I (1), the then test for co
integration is required to have valid estimate with non-stationary series. This is possible if the
linear combination of non-stationary series is stationary.

4.2.2. Co integration Test

Once the variables are difference stationary, it is possible to estimate the model by first
difference. However, this gives only the short run dynamics in which case valuable information
concerning the long run equilibrium properties of the data could be lost So as to get both the
short run and long run relationship one can use the so called co integration (Kennedy, 1992).

Co integration among the variables suggests the presence of long run relationship in the system
and long-run causality at least in one direction. So we need to test for Co integration because
differencing the variables to attain stationary generates a model which doesn‘t show the long run
behavior of the variables. Here, testing for Co integration is the same as testing for long-run
relationship. Considering the assumption of endogenity of variables, the Johansen co integration
test is used to test for co integration and to determine the number of co integrating vectors. Here
we have developed two models above and we are going to test all econometric tests for these
models individually. The first one is the model containing economic development and population
growth while the second one is the model containing economic development and selected
demographic variables.

Before we are going to test the Johansen test of co integration we have to select our optimal lag
length to be included in the model. There are so many tests that can be used to choose a lag
length, however AIC and HQ are usual and the efficient ones. According to this criterion, the
VAR estimate with the lowest AIC in absolute value is the most efficient one. Therefore, this
study mainly used AIC test to choose the appropriate lag length for the model. Using this
selection criteria‘s lag order of four is appropriate for the model. Using these criteria‘s the
optimal lag result is shown below in the table.

35
Table 2. The optimal Lag selection result (stata result)

4.2.3. Granger causality test

We can test short run Granger causality test from our VAR estimate results: since VAR by its
nature has a good framework for examining Granger causality. Here impact of lagged population
considered independently may not have a significant effect on the RGDPPC as a one period
increment in population (new birth) has no contribution to the economy of the country. However,
the cumulative effect of population on real GDPPC can be tested using the well-known Wald test
on the estimated coefficients as presented in Table 2 below. Here the null hypothesis is no
granger causality. I.e. RGDPPC doesn‘t cause POGR and POGR doesn‘t cause RGDPPC. The
null hypothesis is accepted when the p value is greater than 0.05 and rejected when p value is
less than 0.05.

36
Table 3. Results of Granger Causality- Wald

Source: stata calculation

37
According to the result of the tests listed above it is clear that between RGDPPC and POGR, we
have only a unidirectional Causality running from population growth to economic development.
The first and very strong causality relationship between RGDPPC and POGR supports our
hypothesis stated in the paper that population growth has an effect on economic development. So
here population growth strongly causes economic development but there is no causality running
from economic development to population growth as shown above at granger causality result.

There is also a causal relationship between real GDP per capita and some selected demographic
variables. Here working age population and young population granger causes real GDP per
capita. But real GDP per capita didn‘t cause them. On the other hand, real GDP per capita causes
life expectancy at birth and aged population but not vice versa. I.e. there is a unidirectional
causality from real GDP per capita to life expectancy at birth and aged population. This causality
result is found in the appendix.

4.2.4. Error Correction Mechanism (ECM)

If two variables are not co-integrated or proved to have no long run relationship, the testing
procedure will stop and we will not the construct an error correction model. But if they are co-
integrated or checked to have a long run relationship we can construct our error Correction
mechanism. A very important theorem, known as the Granger representation theorem, states that
if two variables Y and X are co-integrated, then the long term or equilibrium relationship that
exists between the two can be expressed as ECM (Gujarati 2004). The existence of Cointegration
implies the existence of Granger causality at least in one direction (Granger, 1988).
Thus the error correction mechanism (ECM) is a mechanism used to correct any short run
deviation of the variables from their long run equilibrium. In other words error correction term
has important implication in linking the short-run periods to the long run period. It simply shows
the adjustment of the short-run disequilibrium to achieve a long-run equilibrium. So our ECM is
explained below after checking the presence of co-integration between variables listed in our
model.
Once we have tested cointegration and Granger Causality Tests, we decided to run the ECM test
in order to assess long-run relationship between population variables and per capita income.
Wooldridge (2012) explained that cointegration between two series implies a particular kind of

38
model, called an error correction mechanisms or error correction model, for the long and short-
term dynamics the error correction mechanism (ECM) was first used by Sargan and later
popularized by Engle and Granger to correct for disequilibrium. The existence of Cointegration
implies the existence of Granger causality at least in one direction (Granger, 1988). This enables
us to use error correction model evaluates the short-run and long-run dynamics in the
relationship between the dependent variable (real GDP per capita) and the independent variable
(demographic variables).

Case 1: Co integration Test and VECM models for lnRGDPPC & lnPOGR

So proceeding to our co-integration test we have two types of co-integration tests which are
given in Table 4 below with the null hypothesis of no co-integrating vector.

Table 4. Co integration Rank Test (stata result)

**Null hypothesis H0: no or 0 co integration

**Alternative hypothesis H1: there is co integration

Decision criteria: If trace or maximum statistic is greater than 5% critical value rejects the null
hypothesis. So this implies there is co-integrating equations. So that counting the no of ranks
which satisfies this criteria and we have found one co integrating vector.

39
The result from the above two tests indicates rejection of the null hypothesis of no co integrating
vector. Instead the result indicates that the model has single co integrating vector. So that our test
suggests that our set of co-integrated time series has an error-correction representation, which
shows the long run adjustment mechanism. So to estimate our VECM using the number of co
integrating vectors we have to use our optimal lag L* which highly help us to describe the long
run relationship of variables in the model. Here in VECM estimation all variables should be
endogenous.

The long run and short run causalities between Real GDP (RGDPPC) and population growth
(POGR) is analyzed using VECM. Here the advantage of testing causality using VECM enables
us to analyze both the long run and short-run dynamics of the economic development and
population growth. So from VECM estimation short run dynamics and relationship of economic
development and population growth is presented in Table 3 below.

Table 5. Estimation result of VECM Regression

Dependent ΔlnRGDPPC ΔlnPOGR
Variable
Regressors Coefficients
ECt-1 -.3403809 ** - .0026381
ΔlnRGDPPC(L1) -.000749
.1248047

-.0001614
-.14509
ΔlnRGDPPC(L2)
.0455429 .0002488
ΔlnRGDPPC(L3)
ΔlnPOGR (L1) 23.62285 .9010981

ΔlnPOGR (L2) -21.69324 .1904569

ΔlnPOGR (L3) 27.93429 -.5180923

C .0000454 . .0058519

Source: stata calculation

40
When we consider our target variable lnRGDPPC as dependent variable

Short run effects are captured through individual coefficients of the differentiated term in which
coefficient of the VECM variable contains information about whether the past values of
variables affect the current values of the variables under study.

The size and statistical significance of the coefficient of the error correction term, measures the
tendency of each role in determining the current outcomes captures the long-run impact. When
the error correction term is statistically significant and negative it works to push the dependent
variable back toward the equilibrium Gujarati (2008).
From the first model where economic development (RGDPPC) is considered as dependent
variable the coefficient ECt-1 (Error Correction term)) is -0.3403809, which is negative and
statistically significant at five percent significance level. So the coefficient -0.3403809 indicates
disequilibrium in the previous year is adjusted by around 34.0389 percent per annum to the long
run equilibrium. That is the speed of adjustment of economic development to its equilibrium
level variable to return to the equilibrium.

However, considering population POGR as dependent variable the error correction term (ECt-1)
is negative but statistically insignificant which means that the error correction term (EC t1)
does not contribute to explain the changes in POGR.

41
Table 6. The Long runs Equation Johansen normalization (stata result)

Source: stata calculation

This table shows the long run equation often called the johansen normalization restriction from
where our error correction term is generated and our target variable is lnRGDPPC.

Here since there is normalization process, the sign of coefficients are reversed to enable proper
interpretation. From the above econometric equation population growth has a positive and
significant impact on economic development in the long run. Considering ceteris paribus
assumption, when population increases by 1% economic development will increase nearly by
2.95%. So that in the long run population has a positive role for Ethiopian Economy and we can
mention various reasons for this. This is also consistent with others finding such as Tartiyus et al.
(2015) in Nigeria, Musa (2015) in Nigeria, Gideon et al.(2013) in Kenya, Lachisa and Yirdaw
(2013) in Ethiopia which are discussed in the literature review above.

Some diagnostic tests

The results of time series analysis under OLS regression to be unbiased, consistent and efficient
outcomes there are preliminary criteria‘s. These include normality, hetroskedasticity and serial
correlation tests. Therefore, to check the validity of our result in this study these diagnostic tests
are used.

42
The Jarque-Bera test (JB) of normality is used and the result showed that the error term from the
VECM estimate indicates that the error terms are normally distributed since their p value are
greater than five percent significant level as shown in the table below.

Table 7. Jarque-Bera test of normality (stata result)

In the dynamic form of hetroskedasticity where lagged dependent variable is considered as

explanatory variable, Engle suggested what is called autoregressive conditional hetroskedasticity
(ARCH) model. The test result in this particular study rejects the null hypothesis of no ARCH
effect meaning there is no autoregressive conditional hetroskedasticity problem.

The other test, serial correlation occurs in time-series studies when the errors associated with a
given time period carry over into future time periods. Residual Serial Correlation LM Test fails
to reject the null hypothesis of no serial correlation at lag order of four since all the p values are
greater than 0.05 so error terms are not serially correlated. The result is showed in Table 7
below.

43
Table 7 Results of LM Residual Serial Correlation Test (stata result)

Case 2: Co integration Test and VECM models for lnRGDPPC and selected demographic
variables

Accounting for this, here also lets use two types of co integration tests which are given in Table
8 below with the null hypothesis of no co-integrating vector.

Decision criteria: If trace or maximum statistic is greater than 5% critical value rejects the null
hypothesis. So this implies there is co integrating equations. So that counting the no of rank
which satisfies this criteria we have found four co integrating vector. So to estimate our VECM
using the number of co integrating vectors we have to use our optimal lag L* which highly help
us to describe the long run relationship of variables in the model.

44
Table 8 Co integration Rank Test (stata result)

**Null hypothesis H0: no or 0 co integrating equation

**Alternative hypothesis H1: there is at least one co integrating equation

Decision criteria: If trace or maximum statistic is greater than 5% critical value rejects the null
hypothesis. So this implies there is co integrating equations. So that counting the no of rank
which satisfies this criteria we have found four co integrating vector. So to estimate our VECM
using the number of co integrating vectors we have to use our optimal lag L* which highly help
us to describe the long run relationship of variables in the model.

Here this study only considers the first co integrating equation which relates RGDPPC to other
selected demographic variables since our concern is to examine the impact of selected
demographic variables on economic development. So from VECM estimation short run

45
dynamics and relationship of economic development and demographic variables is presented in
the table at the appendix.

Considering lnRGDPPC as our co integrating equation

From estimate result in the appendix economic development (RGDPPC) is considered as

dependent variable with the coefficient ECt-1 (Error Correction term)) is -0.222085. So the
coefficient -0.222085 indicates disequilibrium in the previous year is adjusted by around 22.2085
percent per annum to the long run equilibrium. That is the speed of adjustment of economic
development to its equilibrium level.

Here when we see aged population (AGPO) as a co integrating equation its error correcting
coefficient -.0729574 is both negative signed and significant. So this coefficient indicates that
disequilibrium in the previous year is adjusted by nearly 7.29 percent yearly to the long run
equilibrium.

4.3. Impulse Response Functions (IRF)

The Impulse Response Function (IRF) shows the response of a variable to a unit standard
deviation shock to itself and other variables in the model. It shows how a variable respond in to
time horizon to shock (a sudden unexpected change) in the variables and other variables in the
model (Abubakar and Bala, 2016). The following figure shows the shock response of RGDPPC
to lnPOGR, lnCHPO, lnWAPO, lnAGPO and lnLEXP.

Figure 8. Response of lnRGDPPC to innovations

46
Table 9. The Long run Equation Johansen normalization (stata result)

This table shows the long run equation often called the johansen normalization restriction from
where our error correction term is generated and our target variable is lnRGDPPC. After
imposing this normalization restriction by the Johansen method, the co-integrating equation for
real GDPPC growth is estimated.

All the variables which are expected to explain economic development (lnRGDPPC) are
significant except life expectancy at birth (lnLEXP).
The child population (CHPO) which is economically dependent (aging 0-15) has a negative sign
and is statistically significant in explaining economic development in the long run. That can be
interpreted as when young aged population increases by 1% economic development (RGDPPC)
decreases by 1.22%, Ceteris paribus. The finding of this study shows that an increase in
younger population discourages economic development i.e. RGDPPC in the long run.
This implies that when there is higher fertility rate in a given period of time the proportion of the
young age population (i.e. below 15) grows higher relative to the working age population (aged

47
15-64) population. This change in age composition has an adverse impact on Ethiopia economy
by diverting resources to non-productive segments of the population for food supplies, schooling,
health care, other infrastructures etc. so that it has an effect on economic development by
depressing savings, investment, foreign exchange, and human capital. Thus our finding is
persistent in line with our hypothesis and reviewed literatures.

According to the result of our long run equation the reverse is true for working age segments of
the population(WAPO) when fertility rates decline over a period of time the proportion of the
working age population (i.e. over 15) grows relative to the economically dependent youth
population. This change in age composition creates a good opportunity for a country in which it
can potentially raise its level of savings and investment. This finding encouraged a subsequent
reconsideration of the potential importance of reducing fertility in pursuit of growth.

Thus our econometric result also shows that the middle aged population (WAPO) which is
economically active has a significant and positive impact on economic development. Thus it can
be interpreted as when economically active population or the middle aged population increases
by 1% RGDPPC will increase by 15.88% at Ceteris paribus.
Though there is employment problem this median age group contributes positively to the
economic development which means the higher median age or economically active segments of
the population the higher economic development they are matured to work, there becomes cheap
labor force and strive a lot then help the economy. The higher segment of the median age implies
the availability of cheap labor force resource for Ethiopia since higher labor force implies the
existence of high productive man power which is a key for countries economy if utilized
properly taking in to account for the growing new labor force entrants.

As literatures suggested above this segment of the population leads to the accelerated economic
growth due to changes in the age structure of a country‘s population as it shifts from high to low
birth and death rates during a demographic transition which is commonly referred to as
demographic dividend lead growth. This economic growth results from a decline in a country‘s
mortality and fertility and the subsequent changes in the age structure of the population. As a
country‘s working-age population grows in compared to the number of young dependents, the
country has a good opportunity for stronger economic growth.

48
But this age group needs greater attention since unemployment problem is a threat by itself. Here
in this age group there are three main categories to be handled properly by the government of
Ethiopia: employed, unemployed and not in labor force. So unless the economic system or the
government handled it properly this may cause socio economic and political crises since
unemployed individuals are highly exposed to social unrest activities which have also been a
case to Ethiopia.
Here this working age segment of the population in a demographic dividend needs appropriate
policies and efficient use of resources. The policies and strategies of the country should not only
focus on creating employment, but also selective, essential and productive employment has to be
created. In line with this employment creation, policy actions should be able to address the root
causes of underemployment such as low productivity and low access to resources. The most wise
and effective interventions in this regard should focus on skills development through quality
education, training, and increased access to means of production for active labor force.
The government also must give greater attention for foreign direct investment (FDI) and private
sectors by creating conducive business environment with strong quality institutions and
macroeconomic policies since they can create a good and productive employment opportunity.

To sum up, our finding on the above demographic variables i.e. working age population and
young population age groups is consistent with the findings of Song (2013), Wongboonsin and
Phiromswad (2017), Bloom et al. (2007), etc. who founds a negative influence of young
population growth on economic growth and positive effects of growth in the working-age
population .

Here according to the econometric result in the long run aged population (AGPO) has a negative
and significant effect for economic development. Its coefficient can be interpreted as when aged
population increases by 1% economic development will decrease by 11.39%, ceteris paribus.
This is because as we have mentioned in our modeling section this segment of the population is
aged population which are one of the dependent section of the population which has a negative
impact on economic development. Here this section of the population is dependent since as a
developing country Ethiopia lacks social welfare services, retirement incomes, pensions and
other social security means. So this section of the society faces miserable life since they didn‘t

49
have previous formal income which can help them when they became old. Mason and Lee
(2008) also founded that the longer life span the higher old age consumption which affects
countries economy negatively. By these and other reasons these section of the population
becomes dependent and retards the economy which is also in line with our literature above.

The last variable in this model is life expectancy at birth and it is signed positive but the result
shows that its impact is insignificant. Life expectancy in Ethiopia may have insignificant effect
on economic development since income may not increase as life span increase.

50
 5. CHAPTER 5: Conclusion and Recommendation

5.1. Conclusion
The study is based on a time series data covering a time period of 1990 to 2019 and analyzed the
relationship between population (with other demographic variables) and economic development
(Real GDP per capita is used as a proxy). Both descriptive and econometric methods of analysis
were employed. The descriptive analysis shows existence of high population growth in Ethiopia.
This is evidenced by persistent and large gap between birth rate and death rate where the birth
rate is on average was greater by around 27 per 1,000 Population. In addition, the doubling time
of the population is declining. Based on the trend of population and economic growth while there
exist a persistence increment in population size and real GDP, there is slight fluctuation in the
real GDP overtime.

Considering econometric analysis, the study employed different tests such as unit root, co-
integration, and Granger causality tests and vector error correction model. The unit root test
indicates that the variables considered are stationary at first difference. The co-integration test
using Johansen test (trace and maximum eigenvalue tests) shows that population and real GDP
per capita has co-integrating vector and also real GDPPC has also co-integration with the above
mentioned selected demographic variables.

Based on this, a VECM with an optimal lag length of four were estimated considering real GDP
per capita and Population as dependent variables in two different models. According to the
estimation result, population Granger causes real GDP per capita i.e. Only unidirectional
causality from population to economic development, there is no Granger causality from real
GDP per capita to population. On the other hand, taking economic development as dependent
variable the short run speed of adjustment as measured by the coefficient of error correction term
adjusts that a previous year shock (disequilibrium) 34.0389 percent per annum in the model.

There is also a causal relationship between real GDP per capita and some selected demographic
variables. Here working age population and young population granger causes real GDP per
capita. But real GDP per capita didn‘t cause them. On the other hand, real GDP per capita causes

51
life expectancy at birth and aged population but not vice versa. I.e. there is a unidirectional
causality from real GDP per capita to life expectancy at birth and aged population.
In the long run population growth, economically active (working age) segment of the population
(WAPO) has positive and significant effect on economic development while young population
group (CHPO), aged group (AGPO) has a negative and significant effect on economic
development.

5.2. Recommendation

The economic, social and political status of women has direct bearings on the level of fertility in
any society. Where women's roles are exclusively defined in terms of household management
and marital duties, as is the case in Ethiopia, they are subjected to the expectation that they
replenish the race by bearing a large number of children and assume full responsibility for
maintaining them almost single handedly.

Once we have concluded that still there is higher population growth in Ethiopia i.e. an increasing
birth rate (implying higher young age dependency) with ups and downs in real GDP per capita.
As the finding above shows Ethiopia is under stage two of demographic transition which is
characterized by lower death rate but higher birth rate. This shows the need to revise population
policy and decrease fertility rate by using different family planning technics and contraceptive
methods. In addition to this improving the social and economic status of women is a key for a
decrease in fertility rate. The development of old-age and other social security systems outside
the extended family network can also be a solution to lessen the economic dependence of
parents, especially women, on their offspring since the study indicated that aged population
affects economic development significantly and negatively.

High fertility and rapid population growth exert negative influences on economic and social
development and low levels of economic and social development provide the climate favoring
high fertility and hence rapid population growth.

Once we have still growing population it is better to decrease growing population growth rate
and expanding education, health and standard of living to have healthy, productive and
successful population. So in line with decreasing fertility rate creating human capital

52
development is a key for countries economic development so greater attention must be given to
this. Ethiopia has a promising segment of young population once very trained, educated and
experienced its economy will expand

Generally, in order to design and implement realistic policies regarding population issues that
affect economic performance of the country, further researches should be studied. Moreover,
effective policies should be prepared to adjust/control high rate of population growth and make it
beneficially resource of the economy based on the results of reporting the researches.

53
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United Nations Population fund (UNFPA) (2011). Conference on Least Developed
Countries, outlines major population dynamics in LDCs and addresses their
implications for development and poverty reduction
United Nations - World Population Prospects Report (2019).
United Nations Statistics Division and World Bank Report (2020).
Zhang, H. (2014). Demographic Age Structure and Economic Development: Evidence
from Chinese Provinces. Journal of Comparative Economics 43: 170–185.

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 7. Appendices
Data Employed
year RGDPPC POGR CHPO WAPO AGPO LEXP lnRGDPPC lnPOGR lnCHPO lnWAPO lnAGPO lnLEXP
1990 767.01 47.89 22.17 24.20 1.51 46.92 6.64 3.87 3.10 3.19 0.41 3.85
1991 687.54 49.61 23.05 24.99 1.56 47.30 6.53 3.90 3.14 3.22 0.44 3.86
1992 605.77 51.42 24.07 25.74 1.61 47.69 6.41 3.94 3.18 3.25 0.48 3.86
1993 661.31 53.30 24.85 26.79 1.66 48.07 6.49 3.98 3.21 3.29 0.51 3.87
1994 659.09 55.18 25.73 27.74 1.71 48.60 6.49 4.01 3.25 3.32 0.54 3.88
1995 676.59 57.05 26.57 28.71 1.76 49.12 6.52 4.04 3.28 3.36 0.57 3.89
1996 736.95 58.88 27.47 29.59 1.82 49.65 6.60 4.08 3.31 3.39 0.60 3.90
1997 737.33 60.70 28.32 30.49 1.88 50.17 6.60 4.11 3.34 3.42 0.63 3.92
1998 691.22 62.51 29.15 31.42 1.95 50.70 6.54 4.14 3.37 3.45 0.67 3.93
1999 706.16 64.34 30.37 31.97 2.01 51.28 6.56 4.16 3.41 3.46 0.70 3.94
2000 727.77 66.22 30.77 33.40 2.05 51.86 6.59 4.19 3.43 3.51 0.72 3.95
2001 765.81 68.16 31.29 34.75 2.12 52.45 6.64 4.22 3.44 3.55 0.75 3.96
2002 755.43 70.14 32.67 35.29 2.18 53.03 6.63 4.25 3.49 3.56 0.78 3.97
2003 718.33 72.17 33.99 35.93 2.24 53.61 6.58 4.28 3.53 3.58 0.81 3.98
2004 793.09 74.24 34.56 37.37 2.31 53.01 6.68 4.31 3.54 3.62 0.84 3.97
2005 862.36 76.35 35.35 38.62 2.30 55.80 6.76 4.34 3.57 3.65 0.83 4.02
2006 929.69 78.49 36.26 39.75 2.47 56.89 6.83 4.36 3.59 3.68 0.90 4.04
2007 1,008.14 80.67 37.16 40.94 2.57 57.99 6.92 4.39 3.62 3.71 0.94 4.06
2008 1,086.70 82.92 37.94 42.31 2.67 57.20 6.99 4.42 3.64 3.75 0.98 4.05
2009 1,150.21 85.23 38.67 43.78 2.78 60.00 7.05 4.45 3.66 3.78 1.02 4.09
2010 1,259.02 87.64 39.38 45.37 2.89 60.93 7.14 4.47 3.67 3.81 1.06 4.11
2011 1,360.94 90.14 40.03 47.11 3.01 61.85 7.22 4.50 3.69 3.85 1.10 4.12
2012 1,437.38 92.73 40.67 48.93 3.12 62.78 7.27 4.53 3.71 3.89 1.14 4.14
2013 1,545.18 95.39 40.92 51.22 3.24 63.70 7.34 4.56 3.71 3.94 1.18 4.15
2014 1,656.63 98.09 41.92 52.81 3.36 64.15 7.41 4.59 3.74 3.97 1.21 4.16
2015 1,779.08 100.84 42.53 54.83 3.48 64.61 7.48 4.61 3.75 4.00 1.25 4.17
2016 1,894.90 103.60 43.22 56.78 3.52 65.06 7.55 4.64 3.77 4.04 1.26 4.18
2017 2,021.56 106.40 43.89 58.80 3.71 65.52 7.61 4.67 3.78 4.07 1.31 4.18
2018 2,103.51 109.22 44.55 60.86 3.82 65.97 7.65 4.69 3.80 4.11 1.34 4.19
2019 2,219.71 112.08 45.21 62.93 3.94 66.34 7.71 4.72 3.81 4.14 1.37 4.19

Note: Real GDP per capita is measured at constant 2017 International Dollars and population
(POGR), CHPO(child population), WAPO(working age population) and aged
population(AGPO) are in millions while LEXP(life expectancy at birth is measured by the
number years stayed at birth)
Source :world development indicators(2019) , world population prospects 2019, united nations
- world population prospects(2020)

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Table 2: Results of Vector auto regression ( lnRGDPPC and lnPOGR)

58
 Table 3: Estimation result of VECM Short run Dynamics

Dependent lnRGDPP LnCHPO lnWAPO lnAGPO lnLEXP

Variables C
Regressors Coefficients
ECT-1 -.222085** -.0116723 .0123986 -.0729574** .0143319

D.lnGDPPCL1 .2192984 -.0761818 .0629232 -.031816 .1417191***

D.lnGDPPCL2 -.2409114 -.0123085 .0012383 -.047199 .1144422

D,lnGDPPCL3 .1788201 .0507595 -.0513725 -.0545627 .076999

D.lnCHPO(L1) 7.146636 1.414395 - 2.048639 2.465088
.8431756
D.lnCHPO(L2) .2396612 .3744826 -.005788 3.999061 -.07962.

D.lnCHPO(L3) 1.490711 -.1068294 -.0747722 4.808539 -.7579526

D.lnWAPO(L1) 7.01648 1.524242 -.8899853 1.770576 2.295035

D.lnWAPO(L2) -2.553761 .7437147 -.3064688 -4.135784 -1.713261

D.lnWAPO(L3) 1.250946 -.5921146 .3343792 5.235476 -1.886348

D,lnAGPO (L1) 1.97748 .0822732 -.07962 .3216251 -.028216

D,lnAGPO (L2) 2.484299 -.1316911 .1191628 .7370706** -.1998352

D,lnAGPO (L3) 2.516933 -.119497 .1229144 1.07616 ** .1900388

D,lnLEXPO(L1) 2.397345 -.0062477 .0358771 1.1344* -.502477

D,lnLEXPO(L2) 1.360777 .0780345 -.034013 .79999** -.3851932

D,lnLEXPO(L3) .3810797 .1084066 -079325 .36833*** -.3598725

C .0092861 -.0327671 .041633 -01466 .0065351

Note: * significant at 1% **significant at 5% and ***rarely significant at 10%

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Table 4. Granger causality Wald tests between RGDPPC and other demographic variables

60
Figure 1. Impulse Responses of lnPOGR, lnCHPO, lnWAPO, lnAGPO and lnLEXP to RGDPPC

Response to Cholesky One S.D. (d.f. adjusted) Innovations

Response of LNAGPO to Innovations Response of LNCHPO to Innovations
.012 .012

.008 .008

.004 .004

.000 .000

-.004 -.004

-.008 -.008
1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10

LNRGDPPC LNAGPO LNCHPO LNRGDPPC LNAGPO LNCHPO

LNLEXP LNPOGR LNWAPO LNLEXP LNPOGR LNWAPO

Response of LNLEXP to Innovations Response of LNPOGR to Innovations

.016 .0015

.012 .0010

.008 .0005

.004 .0000

.000 -.0005

-.004 -.0010
1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10

LNRGDPPC LNAGPO LNCHPO LNRGDPPC LNAGPO LNCHPO

LNLEXP LNPOGR LNWAPO LNLEXP LNPOGR LNWAPO

Response of LNRGDPPC to Innovations Response of LNWAPO to Innovations

.04 .008
.03
.004
.02
.01 .000

.00 -.004
-.01
-.008
-.02
-.03 -.012
1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10

LNRGDPPC LNAGPO LNCHPO LNRGDPPC LNAGPO LNCHPO

LNLEXP LNPOGR LNWAPO LNLEXP LNPOGR LNWAPO

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