Abstract
Industrialization plays a key role in the process of a nation’s economic development. The experience of the developed world revealed that industrialization significantly increased their productivity and changed the economic structure. Mainly with the context of reoccurring unstable macroeconomic performance in Ethiopia, analyzing the effect of macroeconomic variables on industry sector output growth is a proper way to design suitable industrial policies. Therefore, this study aimed to examine the effect of some macro-economic variables on the industry output growth in Ethiopia. To do so the study used a time series data ranging from 1991 up to 2018 from Ministry of Finance and Economic Cooperation of Ethiopia. The study also used Augmented Dickey-Fuller (ADF) and the Phillip-Perron (PP) unit root tests of stationary, Auto Regressive Distributed Lag (ARDL) bound test to co-integration and error correction model. Accordingly the study confirmed the existence of a long-run relationship between industrial output growth and macroeconomic variables. Macroeconomic variables such as, lending rate, inflation rate and trade balance found to be affecting the industrial sector output growth negatively, positively and negatively, respectively in the long run. Therefore, the government has to keep lending rate to the level that could be amenable for firms and maintaining the trade balance; via manipulating the export and import.
Highlights
Using error correction mechanism model, the study assured the presence of a longterm equilibrium relationship, show that credit to the manufacturing sector in the form of loans and advances and foreign direct investment have the capacity to sharply increase the level of manufacturing productivity in Nigeria, while broad money supply has less impact. [32] estimated the response of manufacturing capacity utilization in Nigeria to changes in key macroeconomic indicators using annual data over the period 1975 – 2012
The effect of capital formation, money supply and real effective exchange rate on industrial output growth is insignificant, meaning in the long run these variables have no significant effect on industrial sector output growth
Any increase in inflationary rate would increase the output of the industrial sector in Ethiopia
Summary
Industrialization is a process by which industries are introduced and expanded in a particular place or country [43]. Industrial sector output growth can be affected by different monetary policy transmission mechanism [20]. This mechanism operates through such as lending rate (interest rate), inflation rate, real effective exchange rate, exchange rates, equity and real estate prices and firm balance sheets. [2] Studied the intersectoral linkages in Ethiopian economy using a time series data ranging from 1975 to 2017 He found that, Industrial output growth is largely depends on agricultural and service sectors. This paper examined the effect of macroeconomic variables on Ethiopian industrial output growth using a time series data ranging from 19912018
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