| Keywords: | Ethiopia, manufacturing output, economic growth, GDP, VECM, long-run relationship, short-run dynamics, policy recommendations. |
| Abstract: | Ethiopia's manufacturing sector, comprising only 4.6% of GDP in 2021, faces significant
developmental hurdles that hinder its potential as an engine of economic growth. Comparative
analyses with neighboring and regional economies underscore Ethiopia's lag in industrial
development. For example, Kenya and Tanzania demonstrate higher manufacturing contributions
to GDP, highlighting Ethiopia's unrealized potential in the sector. This disparity necessitates
strategic interventions to enhance manufacturing competitiveness and economic impact.
While existing literature underscores the transformative role of manufacturing value added (MVA)
on economic growth, specific studies focusing on Ethiopia remain scarce. This study addresses
these gaps by investigating the dynamics of manufacturing output on Ethiopian economic growth
from 1983 to 2021. Utilizing the Vector Error Correction Model (VECM), our analysis reveals a
significant and negative long-run equilibrium relationship between MVA and economic growth.
Specifically, a one percent increase in MVA correlates with a 0.37 percent decrease in economic
growth, highlighting challenges in translating manufacturing growth into broader economic
expansion.
Short-run dynamics demonstrate a unidirectional causality from manufacturing value added to
GDP, indicating potential immediate economic benefits from targeted sectoral interventions.
Moreover, bidirectional short-run causality between manufacturing and service value added
underscores complex economic interdependencies within Ethiopia.
These findings challenge conventional beliefs about manufacturing as the primary driver of
economic growth in Ethiopia and underscore the need for nuanced policy approaches.
Recommendations include short-term interventions to enhance manufacturing productivity and
competitiveness, alongside long-term structural adjustments in industrial policies to promote
sustainable economic growth and resilience |
