Political instability, corruption and inclusive growth in Ethiopia: Transmission channels and moderating roles

This paper examines the direct and moderating roles of political instability and corruption on inclusive growth in Ethiopia from 1992–2020. We also test whether corruption sands or greases the wheels of inclusive growth and whether the impacts of political instability and corruption vary across the low and high regimes of political instability. Different econometric approaches are applied to address these objectives, including simultaneous equation modelling, moderation analysis, and two-regime threshold regression. The findings robustly confirm negative impacts of political instability and corruption on inclusive growth. The effects of political instability and corruption are also channelled through investment and tourism and appear to be more severe in a higher political instability regime. Further, the study supports the ‘sanding the wheels’ hypothesis, which argues that corruption is harmful to economic activities. The results generally suggest that, unless proper efforts are taken to relieve the current political upheaval and ethnic conflicts in the country, the detrimental impacts of political instability and corruption will aggravate the country’s dire situation.