Sectoral output Volatility and Economic growth in Ethiopia

Abstract

In this study we examined the determinants of economic growth, and the effect of sectoral output volatility on economic growth of Ethiopia using national bank of Ethiopia (NBE) and the World Bank (WB) time series data ranging from 1981 to 2018. We included capital stock, working age population, trade balance and, sectoral output volatility as an explanatory variable. The sectoral output volatility was computed using Exponential General Autoregressive Conditional Heteroscedasticity (EGARCH) technique. Estimating three different ARDL models, we found long run relationship between economic growth and explanatory variables. From the long run ARDL model economic growth was positively and statistically significantly affected by capital stock—both in the long run and in the short run. In the long run trade balance (which has been negative throughout the study period) was found to have negative and statistically significant effect on economic growth. In the long-run volatility of industrial and service sector output growth was found to have negative and statistically significant effect on economic growth of Ethiopia. However, the study proved that the working age of population had no statistically significant effect on economic growth of Ethiopia. As the economy exhibits structural transformation from the agricultural to modern sectors the relative significance of sectors also change. In recent years the role of agriculture to Ethiopian economy, particularly in terms contribution to the national GDP has been declining—indicating the growing importance of service and industrial sectors. Therefore, smoothening and maintaining the positive sectoral output growth is advisable for the betterment of the economy. In addition, balancing the foreign trade, specially augmenting and diversifying of the export structure, and curbing of unrestricted importation of goods, is recommended as long as economic growth is concerned.