Modeling the Dynamics of Sectoral TFP Growth in Ethiopia: Explaining Persistent Economic Debacles

Abstract: This paper provides a rigorous analysis for modeling the dynamics of sectoral total factor productivity growth in Ethiopia over the period 1970 - 2010. It also attempts to estimate total factor productivity growth rate for agriculture, industry and service sector using sectoral growth accounting approach, and then examines determinants that affect sectoral productivity by employing a vector autoregressive model that incorporates exogenous variables. The study then finds that sectoral economic growth largely depends on factor accumulation instead of factor productivity. As a result of this, labour becomes the dominant source of agricultural growth while capital deepening explains the immense source of growth in industry and services over the reference period, regardless of the various political economy regimes. Total factor productivity growth, however, is negative on average across economic sectors and heavily reflects the lack of efficiency and technological change that bottlenecked economic growth. The study also finds that economy openness, imported capital goods, and service liberalization are statistically significant variable and positively influence the sectoral total factor productivity growth in agriculture, industry and service sector respectively. The study therefore recommends that the government focuses on widening economy openness in order to driving up agricultural total factor productivity, and pays more attention to importation of strategic technologies and reduces trade and service barriers associated with in order to foster industrial and service total factor productivity respectively.