Sources of economic growth, structural dynamics, and uncertainty : the case of Ethiopia

Abstract

The performance of the Ethiopian economy has been poor for a long time before the recent high growth since 2004. This therefore triggers a question what the reasons could be behind the poor economic performance, and what have been the changes that have taken place. This study covered three periods, covering 1960-2010, over which time there have been different economic systems namely: a mixed economy from 1960-1972; a socialist economy from 1973 to 1991; and a transition economy from 1992This study develops a model to explain the effect of factor inputs determining economic growth, evaluate the overall technological progress, and assess the contribution of structural dynamics and rainfall. A translog production function was applied to develop the mode. The results indicated that physical capital contributed positively (P=0.012) to economic growth whereas labor was not statistically significant (P>0.1). It was also found out that the change in production structure of the economy has been contributing positively to growth (P= 0.041). The results of two rainfall variables have the expected signs, and the effect of the “main rain” season was negative. The findings of this study also revealed that the growth of total factor productivity (TFP), in its broad sense, and the rate of technical change were not boosting growth. The implication is that an emphasis should be given to physical capital accumulation, promoting structural transformation of the economy, while reengineering technical and technological factors so that performance of the economy is driven by productivity growth, and the need to address the negative effect of the “main rain” season. Key words: Economic growth, Factor accumulation, TFP, Structural change, Rainfall