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

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