The Causal Linkage Between Agriculture, Industry and Service Sectors in Ethiopian Economy

Adisu Abebaw Degu

doi:10.11648/j.ajtab.20190503.13

Abstract

Investigation of structural relationships among the sectors becomes important from the policy angle. A clear perspective on the intersectoral linkage could be useful in formulating a favorable and appropriate development strategy. This study analyzed the intersectoral linkages in Ethiopian economy using a time series data ranging from 1975 to 2017. The study employed Johanson co-integration test, vector error correction model, granger causality test, impulse response and variance decomposition functions. The study found a stable long run relationship among agricultural, industrial and service sectors of the economy. Only industrial sector is found as endogenous to the system implying long-run causality runs form agricultural and service sectors to industrial sector. According to short run granger causality results, there is bi-directional causality between industrial and agricultural sectors, and between industrial and service sectors. The results of Impulse response and Variance decomposition functions suggest that the agricultural sector development plays a role in determining the growth of the economy via its linkages to the rest sectors of the economy. Therefore, development strategies such as, Agricultural Development Led Industrialization (ADLI) of Ethiopia, if properly implemented can play an encouraging role by reassuring the agricultural sector, so that the industrial sector would be promoted. In addition the percentage share of agricultural sector to GDP has been declining over the study period. However, this doesn’t indicate that the role of agricultural sector is falling. The analysis of intersectoral linkages identified agricultural sector as the principal economic activity that controls most economic activities in Ethiopian economy.

Highlights

IntroductionThe structural changes of an economy entail that in the long run, the dynamics of sectoral shares are interrelated to each other and with economic growth [33]
(ii) Long run Causality From the vector error correction models, all error correction terms are negative and less than one, only the industry sector equation is significant, implying the long-run causality is running from Agricultural and Service sector to the industry sector
Our long-run causality showed that, there is uni-directional causality between agricultural and industrial sectors running from agricultural sector to industrial sector, and between industrial and service sectors running from service sector to industrial sector

Summary

Introduction

The structural changes of an economy entail that in the long run, the dynamics of sectoral shares are interrelated to each other and with economic growth [33]. Whether agriculture or industry should be considered as the main stimuli of growth and how the service sector should be linked up with the two sectors have been debatable issues [3], especially at early stage of economic development. This role can be in the form of providing employment opportunities to the agricultural sector, supplying agricultural inputs such as; pesticides, fertilizer and different machineries which augment productivity in the agricultural [31] and it brings increasing returns and economies of scale while agriculture does not give such gains [17] It is argued that Industrialization has a number of roles to play in the process of economic development. this role can be in the form of providing employment opportunities to the agricultural sector, supplying agricultural inputs such as; pesticides, fertilizer and different machineries which augment productivity in the agricultural [31] and it brings increasing returns and economies of scale while agriculture does not give such gains [17]

Objectives

Methods

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Discussion

Conclusion