Trade and domestic savings as growth drivers in Ethiopia: Toda–Yamamoto causality approach

Alemu, Seboka and Kotosz, Balázs (2025) Trade and domestic savings as growth drivers in Ethiopia: Toda–Yamamoto causality approach. HUNGARIAN STATISTICAL REVIEW, 8 (2). pp. 3-31. ISSN 2630-9130

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Abstract

This study examined the causality between trade, domestic savings, and economic growth in Ethiopia. While various research is extensively examined individual impacts of trade and savings on economic growth, the relationships among these three variables remained insufficiently explored, particularly in the Ethiopian context. The study hypothesised that trade drives economic growth, with domestic savings reinvesting its gains creating a reinforcing cycle where higher trade and savings drive expansion. We employed a robust multivariate vector autoregressive (VAR) model and the Toda–Yamamoto causality approach to analyze quarterly data spanning from 1992 to 2023. Our results revealed a significant bidirectional relationship between trade and economic growth, demonstrating that enhanced trade activities not only drove GDP growth but also that economic expansion fostered greater trade volumes. Conversely, domestic savings were found to have no direct causal effect on either trade or GDP, illustrating critical structural issues such as low savings rates and limited access to financial markets. This paper significantly contributed to the existing literature by contextualizing the trade-savings-growth nexus within Ethiopia’s unique socio-economic framework. The findings underscored the urgent need for targeted policy interventions that could bolster domestic savings and improve trade competitiveness, ultimately facilitating sustainable economic development in Ethiopia and offering insights applicable to other developing economies facing similar challenges.

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