In search of structural change surplus and perpetual growth in Ethiopia

Abstract

Purpose – The Ethiopian economy is characterized by erratic and poor performance with negative growth rates, seven times over the period 1981-2010. This trapped per capita income at 358 USD in 2010 staying far away from middle-income country status. A lot of unsolved debates regarding perpetual growth, structural change and sectoral allocation of resource emerged overtime. The purpose of this paper is to examine the alternative effects of induced sectoral total factor productivity and makes comparisons of various sectoral growth options. Design/methodology/approach – This study uses a recursive dynamic computable general equilibrium model based on neoclassical-structuralist thought. It also calibrates coefficients that capture the impacts of openness, imported capital and liberalization on sectoral total factor productivity growth using a model of vector auto-regressive with exogenous variables. Findings – Future economic growth rate is expected to grow at a declining trend and to be dominated by the service sector. If it keeps growing on the current path it will expose the economy to a severe structural change burden problem. Openness induced agricultural total factor productivity highly improves the welfare of households while imported capital goods induced industrial total factor productivity is also better in fostering structural change of the economy. The broad-based growth option that combines the induced total factor productivity of all sectors also enables the economy to achieve more sustainable growth, rapid structural change and welfare gain at the same time. Originality/value – There are intensive and charged debates regarding alternative sectoral growth options. However, the debate does not derive from a rigorous analysis and holistic economy-wide approach. It is rather affiliated with politics. Therefore, the paper is original and investigates these issues meticulously.