Do institutional frictions and digital modernization associate with tax revenue in Ethiopia from 1990 to 2023?

Ethiopia’s tax-to-GDP ratio has remained persistently low, averaging only 6.5% over the past three decades. This paper investigates short-run and long-run associations (not structural causal effects) of tax revenue from 1990 to 2023, incorporating a comprehensive set of economic, structural, and institutional variables. Using the ARDL bounds testing approach with a parsimoniously specified model to avoid overfitting, given the sample size (N = 34 observations), a stable long-run cointegrating relationship is found. In the core model, GDP growth, trade openness, VAT, and digital tax administration (ITAS) show significant positive associations, while inflation, agriculture share, the shadow economy, and conflict intensity show significant negative associations. Robustness specifications that add manufacturing share, FDI, and corruption perception yield results consistent with these core associations. The error correction term (−0.431) indicates a relatively rapid adjustment speed. A novel conflict intensity index is constructed that captures the full spectrum of Ethiopia’s conflicts, including the Eritrean-Ethiopian war (1998–2000), the Ogaden insurgency (1992–2018), the Tigray conflict (2020–2022), and ongoing instability, providing robust evidence that conflict is negatively associated with tax revenue. Causal claims are avoided; results are conditional correlations. The findings underscore the need for structural transformation, formalization of the informal economy, prudent FDI incentive design, and peace-building to strengthen domestic revenue mobilization. This study examines how institutional frictions shadow economy, corruption, and armed conflict and digital modernization relate to tax revenue in Ethiopia from 1990 to 2023. Using ARDL bounds testing, it finds that conflict and informality are negatively associated with tax revenue, while digital tax administration (ITAS) and VAT are positively associated. The research contributes a continuous Conflict Intensity Index covering Ethiopia’s major conflicts and is among the first to assess digital tax administration in this context. Its significance lies in showing that peace-building, formalization of the informal economy, and investment in digital tax systems are central not peripheral to strengthening domestic revenue mobilization and reducing aid dependence. Results are framed as conditional correlations, offering evidence-based guidance for fiscal policy.