Long and Short Run Relationship Between Agricultural and Industrial Sectors’ Growth in Ethiopia Economy: Application of Co-Integration and Error Correction Model

doi:10.7176/jpid/59-02

Abstract

The objective of this paper was to examine the long run and short run impact of agricultural sector on the industrial sector and to determine the direction of causality in Ethiopia economy using annual time series data ranging from 1991-2015 obtained from the World Development Indicators (WDI) database. The time of analysis related was to the adoption of agricultural led industrialization (ADLI) strategy to bring food security, poverty reduction, and rapid economic growth objectives in country. The result of the Johansen Co-integration test showed that data were integrated of ordered one in both trace, and max-trace statistical tests showed that there was strong long run equilibrium relationship between agricultural and industrial sectors outputs. The Johansen error correction model (ECM) indicated that agricultural series output has long run significant and positive impact on industrial sector series output but not vice versa. In the long run, increase in agricultural sector’s by one percent, being other factors held constant, the marginal industrial sector output increase by 3.39% due to multiplier effect. Granger pair wise causality test revealed that there is unidirectional causality from industry to agriculture sector. In the long run, growth comes from agriculture to industry and in the short run; agricultural growth is caused by industrial growth. Therefore, the adoption of ADLI strategy should be strengthened the sectors forward and backward linkages to bring balance, and rapid sectorial growth to support the entire economic growth in the country. Keywords: Ethiopia, Industry, Integration, Co-Integration, VECM, ADLI. DOI: 10.7176/JPID/59-02 Publication date: February 28 th 2021

Highlights

In Ethiopia, agriculture is the most important and leading sector for its economic growth
The result of the Augmented Dickey-Fuller (ADF) stationarity unit root test indicate that both stationary of difference one and the Johnson co integration tests of maximum likelihood ratio trace and max eigenvalue statistics indicate that the variables are cointegrated of order one implies the two sectors output series in Ethiopian have long run equilibrium relationship
Johansen normalized restricted equation error correction model indicates a 1% increase in agricultural output leads to 3.39% increase in industrial sector output being other factors held constant

Summary

Introduction

In Ethiopia, agriculture is the most important and leading sector for its economic growth. The sector’s is operated by smallholder subsistent farmers that depend on traditional technologies and has low institutional support to lead the industrial sector development and could not able to realize the long standing national economic growth and development objectives of the country. According to Ethiopian ADLI growth document 2007, the Ethiopian economic growth genesis from agriculture and motivates the growth of other sectors the industrial sector. This growth theory was formulated from the experience of the East Asian developing countries agricultural-industrial growth model. In Ethiopian economy, to improve smallholder, subsistence, low and declining in per capita agriculture productivity government has been taking different action including promotion of input and productivity enhancing technological packages through specialized extension agents

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