Abstract

Total factor productivity (TFP) as a source of economic growth, has been recognized in economic theory for a long period of time. In this research we tried to examine the effect of some macroeconomic factors, which include trade openness, inflation, government expenditure, credit extended and foreign direct investment, and natural disaster drought on total factor productivity and its trend in Ethiopia by using Time series data spanning from 1991 to 2018. The TFP was computed by using the growth accounting method from Cobb–Douglas production function. ARDL was used for estimation of the short and long run econometric model. Accordingly, the trend analysis shows the growth in TFP has been fluctuating over the study period. The result from ARDL indicated that; in long run foreign direct investment, government expenditure and drought negatively and significantly affect TFP. Credit extended is found to affect TFP positively and significantly, while inflation and trade openness are insignificant. Therefore, policies such as; subsidizing domestic firms, effective government spending and making the agriculture sector drought resistant need to be stimulated.

Highlights

  • Ethiopia has been achieved high economic growth for the last two decades

  • The results show the opportunities for increasing productivity through improving efficiency alone is significant.in addition, Farmers that cultivate diverse crops are technically more efficient and while farmer specific factors played some roles, most of the inefficiencies are traced to externally imposed policy and institutional constraints

  • Total factor productivity as a source of economic growth has been recognized in economic theory for a long period of time

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Summary

Introduction

Ethiopia has been achieved high economic growth for the last two decades. The country, is among the ten fastest growing economy in the world by having 7.7 percent real gross domestic product growth rate (IMF, 2018). According to Bart, (2014), productivity is the only sustainable source of long-term economic growth since it is not affected by diminishing return as of homogenous inputs. There are two most commonly used productivity measures which are single factor productivity and Total factor productivity (Aymen et al, 2015) The former reflect units of output produced per unit of a given input, while the later relates to a measure of output to multiple inputs (Schreyer and Pilat, 2001). Among these two measures of productivity, the widely looked one is total factor productivity. This is because it is invariant to the intensity of use of observable factor inputs and less likely to be affected by difference in factor prices (Tsegay et al, 2017)

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