Macroeconomic determinants of industrial sector growth in Ethiopia

Abstract

Ethiopia’s industrial sector remains underdeveloped despite sustained policy efforts, making it imperative to identify the macroeconomic drivers that shape its growth trajectory. This study examines the long-term and short-term determinants of industrial sector growth in Ethiopia, measured through industrial value added (IVA), via annual time series data from 1990 to 2024 sourced from the World Bank, IMF, and Federal Reserve Economic Data. The autoregressive distributed lag (ARDL) bounds-testing approach coupled with an error correction model (ECM) is employed to capture both short- and long-run dynamics. Diagnostic tests confirm model adequacy in terms of heteroscedasticity, serial correlation, functional form, and structural stability. The results reveal that GDP is the dominant long-run driver of industrial growth (coefficient: 1.690), whereas inflation exerts a negative long-run effect but a positive short-run influence, suggesting a nuanced inflation‒industry nexus. Past industrial value added positively determines current growth, confirming persistence effects. Policymakers should prioritize sustained GDP growth, price stability, and strategic FDI attraction to foster durable industrial expansion in Ethiopia. The model demonstrates robust predictive power, with an R-squared value of 0.9365, indicating that 93.65% of the variation in industrial growth is explained by the included macroeconomic variables. Policymakers prioritize sustained economic growth as a central strategy for industrial development that requires promoting productive investments with strong industrial linkages. It is advised to maintain price stability by reducing production cost pressures and creating a stable environment for long-term industrial investment, as inflation is shown to harm industrial growth in the long run. Overall, this study emphasizes the intricate interplay of macroeconomic factors in shaping industrial growth, stressing the need for strategies to support sustainable economic growth in Ethiopia.