Long and Short-Run Relationship Between Agricultural and Industrial Sectors’ Growth in Ethiopian Economy: Application of the Co-Integration and Error Correction Model (ECM)

Fisseha Seyoum

doi:10.7176/jesd/12-1-02

Abstract

The objective of this paper was to examine an equilibrium long run relationship and short impact of agricultural sector on the industrial sector and to determine the direction of causality in Ethiopia's economy using annual time series data ranging from 1991-2015 obtained from the World Development Indicators (WDI) database. The time was related to the implementation of the Ethiopian agricultural led industrialization (ADLI) strategy policy to food security and poverty reduction objectives of the country. The Johansen Co-integration test result showed that the data were co-integrated of the ordered one. The Johansen’s co-integration tests, both trace and max-trace statistical tests was significant at 1% critical values indicated that there was a strong long-run equilibrium relationship between agricultural and industrial sectors. The Johansen restricted normalized equations error correction model (ECM) indicated that agricultural has long run positive significant impact on industrial sector but not vice versa. Marginal analysis result indicated that increases agricultural by one percent, being other factors held constant, the industrial sector output increase by 3.39% due to economic multiplier effect. Granger pairwise causality test revealed that there exists unidirectional causality from industry to agriculture sector. In the long-run growth come from agriculture to industry and in the short run agricultural growth is caused by industry. Therefore, ADLI economic growth strategy should strengthened the sectors forward and backward linkages to bring balance and rapid sectorial growth that support the entire economic growth of the country. Keywords :ADLI, Co-Integration, Ethiopia, Industry, Integration, VECM. DOI: 10.7176/JESD/12-1-02 Publication date: January 31 st 2021

Highlights

In Ethiopia, agriculture is the most important and considered a leading sector for its economic growth
Johansen normalized restricted equation error correction model indicated that a 1% increase in agricultural output leads to 3.39% increase in industrial sector output being other factors held constant
This means that agricultural sector output has a long run, strong and positive impact on the industrial sector but no vice versa

Summary

Introduction

In Ethiopia, agriculture is the most important and considered a leading sector for its economic growth. The sector’s inherited immediate smallholder, subsistent that depend on traditional, fragile institutional support contribute to low productivity, food insecurity, poverty, and low capital formation to support the industrial sector development in the country and could not able to realize the long-standing national economic growth and development objectives. According to the Ethiopian ADLI growth document 2007, the Ethiopia economic growth and development genesis is agriculture and agricultural lead indoctrination (ADLI) strategy assumes that economic growth starts from agriculture and motivates the growth of other sectors the industrial sector. This ADLI growth theory was formulated under the experience of the East Asian developing countries agricultural-industrial growth model. To solve productivity constraints and the paradox, the Ethiopian government has been taking different activities including promotion of the supply of input and productivity-enhancing technological packages through specialized extension agents

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