Impact of Industrial Policy on the Regional Economy in Ethiopia: A Computable General Equilibrium Analysis

Abstract

Industrial policy becomes one of the most debated issues in developing countries. Developing countries still need to advance their industries and accelerate the economic transformation through implementing proper industrial policies supporting this endeavor. This study examines the impacts of industrial policy on the regional economy in Ethiopia. The data required to construct Oromia regional Social Account matrix (SAM) come from Central Statistical Agency of Ethiopia (CSA), Ministry of Finance and Economic Development (MoFED), Oromia Finance and Economic Development Bureau (OFEDB) and other organizations. The use of Oromia regional SAM provides databases for calibration of the Computable General Equilibrium (CGE) models used in this study to yield significant ex-ante expectations of industrial policy impacts and provide a rich set of findings. The results indicate that the industrial policy has a positive impact on the components of the regional economy. In particular, the outcomes under full capacity scenario had significant impacts on agro-processing industries demand for agricultural, agro-processed, manufactured and industrial commodities. Capital stock injections into the regional economy significantly enhance the output of other manufacturing and industries by about 63% when they work under capacity. If they worked at their full capacity, industrial policy would significantly raise the output of other manufacturing and industries by about 122%. The study found that simulation 1 and 2 would have higher impact on urban than rural households' consumption of the commodities. Of all the export commodities, the industrial policy would have the highest impact on manufactured export commodities. The study implies that industrial policy is a key for industrialization and fast economic growth in emerging economies if the industries operate at their full capacity. Industrial policy is quite important as African continent is striving for catching up and achieving job-creation through structural transformation. The study suggests a combination of incentives with a disciplined approach to develop industries and enable industries to operate at their full capacity.