Long and Short Run Relationship Between Agricultural and Industrial Sectors’ Growth in Ethiopia Economy: Application of Co-Integration and Error Correction Model

Abstract

The objective of this paper was to examine the long run and short run impact of agricultural sector on the industrial sector and to determine the direction of causality in Ethiopia economy using annual time series data ranging from 1991-2015 obtained from the World Development Indicators (WDI) database. The time of analysis related was to the adoption of agricultural led industrialization (ADLI) strategy to bring food security, poverty reduction, and rapid economic growth objectives in country. The result of the Johansen Co-integration test showed that data were integrated of ordered one in both trace, and max-trace statistical tests showed that there was strong long run equilibrium relationship between agricultural and industrial sectors outputs. The Johansen error correction model (ECM) indicated that agricultural series output has long run significant and positive impact on industrial sector series output but not vice versa. In the long run, increase in agricultural sector’s by one percent, being other factors held constant, the marginal industrial sector output increase by 3.39% due to multiplier effect. Granger pair wise causality test revealed that there is unidirectional causality from industry to agriculture sector. In the long run, growth comes from agriculture to industry and in the short run; agricultural growth is caused by industrial growth. Therefore, the adoption of ADLI strategy should be strengthened the sectors forward and backward linkages to bring balance, and rapid sectorial growth to support the entire economic growth in the country.

Keywords: Ethiopia, Industry, Integration, Co-Integration, VECM, ADLI.

DOI: 10.7176/JPID/59-02

Publication date: February 28^th 2021