The Impact of Macroeconomic Factors on Manufacturing Sector Value Added in Ethiopia: An Application of Bounds Testing Approach to Cointegration

Dagim Tadesse Bekele

doi:10.14414/jebav.v23i1.2164

Authors

Dagim Tadesse Bekele Salale University

DOI:

https://doi.org/10.14414/jebav.v23i1.2164

Keywords:

Impact, Macroeconomic Factors, Manufacturing sector Value Added, ARDL, and Ethiopia.

Abstract

The role of the manufacturing sector for the economic growth and structural change is very low in Ethiopia and performing less compering with that of the other sectors in the economy. So, this research tried to look at how different macroeconomic variables affect the manufacturing sector value added by using annual time series data from 1982 to 2018 estimated by Autoregressive-Distributed Lag (ARDL). The result from the Bound test shows manufacturing sector value added has a long-run relationship with macroeconomic variables in the model. In the long-run, general inflation rate, exchange rate, and trade openness have a significant negative effect on the manufacturing sector value-added. In contrast, general government expenditure has a significant positive effect. Also, the Error Correction model shows an adjustment towards the long-run equilibrium of the manufacturing sector value-added. So, the government has to control the general inflation level, promote demand for domestic manufacturing products and competitiveness of domestic firms, and strengthen the backward link of the sector to decrease its import-input dependency to reduce the effect of exchange rate depressions. Lastly, effective and efficient government expenditure will have to be used to increase the manufacturing sector value-added.

Author Biography

Dagim Tadesse Bekele, Salale University

Lecturer in department of Economics

References

Abebaw, A. (2019). The Effect of Macroeconomic Variables on the Industry Sector Output Growth of Ethiopia. International Journal of Business and Economics Research. 8(6), 325-338.

Amadi, A. N., Nwidobie, B. M., & Adesina, J. B. (2018). Macroeconomic Implications of Exchange Rate Fluctuations on the Manufacturing Sector Performance in Nigeria. Business & Entrepreneurship Journal, 7(2), 1-14

Amiri, H., Samadian, F., Yahoo, M., & Jamali, S. J. (2019). Natural resource abundance, institutional quality, and manufacturing development: Evidence from resource-rich countries. Resources Policy, 62, 550-560.

Anyanwu, C. M. (2002). Productivity in Nigerian Manufacturing Industry. Research department; Central Bank of Nigeria, 124-129.

Anyanwu, J.C. (2017). Manufacturing Value Added Development in North Africa: Analysis of Key Drivers. Asian Development Policy Review, 5(4), 281-298.

Appiah, M., Li, F., & Korankye, B. (2019). Foreign investment & growth in emerging economies: panel ARDL analysis. Journal of Economics, Business, & Accountancy Ventura, 22(2), 274-282.

Chaudhry, I.S., Ayyoub, M., & Imran, F. (2013). Does Inflation Matter for Sectorial Growth In Pakistan? An Empirical Analysis. Pakistan Economic and Social Review, 51(1), 71-92.

Chikelu, J. C. & Okoro V. C. (2016). Impact of capital expenditure on the Manufacturing Sector of the Nigerian Economy. MPRA PAPER NO. 74694. online at https://mpra.ub.uni-muenchen.de/74694/

Christopher, E. & Tomilade, I. O. (2012). Exchange Rate Management and Manufacturing sector performance in Nigerian economy. IOSR Journal of Humanities and Social Science (JHSS), 5(5), 1-12

ECA (Economic Commission for Africa) (2016) Transformative Industrial Policy for Africa, Addis Ababa, ECA, eISBN: 978-99944-62-87-2.

Granger, C. (1988) Causality, Cointegration and Control. Journal of Economic Dynamics and Control, 12(2-3), 551-559.

Harris, H. & Sollies, R. (2003). Applied time series modelling and Forecasting. Wiley, West Sussex.

Imran S.C., Muhammad A. & Fatima I. (2013). Does Inflation Matter for Sectoral Growth in Pakistan? An Empirical Analysis. Pakistan Economic and Social Review, 5(1), 71-92.

Judith, M. N., & Chijindu, E. H. (2016) Dynamics of Inflation and Manufacturing Sector Performance in Nigeria: Analysis of Effect and Causality. International Journal of Economics and Financial Issues, 6(4), 1400-1406

Kaldor, N. (1967). Strategic Factors in Economic Development,' Ithaca: New York State School of Industrial and Labor Relations, Cornell University.

Legese L., Kwame C. & Melesse A. (2014). The Role of Ethiopian Medium and Large Scale Manufacturing Industries in Strengthening Rural-Urban Linkages. Developing Country Studies, 4(9), 142 - 151

Liew, V.K.S. (2004). Which Lag Length Selection Criteria Should We Employ? Economics Bulletin, 3(33), 1-9

Mishra, M.K. (2018). Determinants of manufacturing sector growth in Ethiopia. Amity Journal of Management, 6(2), 1-12.

Mawufemor B., Isaac Y. & Faisal M. (2016). What is the effect of Inflation on Manufacturing Sector Productivity in Ghana? MPRA Paper No. 75145, Online at https://mpra.ub.uni-muenchen.de/75145/

Mohammad R. L., Maliheh A. & Maryam Z. (2013). Exchange Rate Impacts on Investment of Manufacturing Sectors in Iran. Business and Economics Research, 3(2), 12-22.

National Planning Commission (2015). Annual report on manufacturing industries investment and performance. Addis Ababa, Ethiopia.

NBE (National bank of Ethiopia) (2019). Annual report 2017-2018. Addis Ababa, Ethiopia

Nwanne, T.F.I. (2015). Implication of Government Capital Expenditure on the Manufacturing Sector in Nigeria. European Journal of Accounting, Auditing and Finance Research, 3(10), 19-33.

Onakoya, A.B. (2018). Macroeconomic Dynamics and the Manufacturing Output in Nigeria. Mediterranean Journal of Social Sciences, 9(2), 43-43.

Oqubay A. (2018). The Structure and Performance of the Ethiopian Manufacturing Sector. Working Paper Series NÂ° 299, African Development Bank, Abidjan, CÃ´te dâ€™Ivoire.

Osinowo O.H. (2015). Effect of Fiscal Policy on Sectorial Output Growth in Nigeria. Advances in Economics and Business, 3(6), 195-203.

Patjoshi, P. K. (2013). The Effect of Inflation on Measures of Financial Performance on Indian Manufacturing Industry. Asian Journal of Management, 4(1), 28-35.

Pesaran, M.H., Shin, Y., & Smith, R.J. (2001).Bounds Testing Approaches to the Analysis of Level Relationships. Journal of Applied Econometrics, 16, 289-326.

Pesaran, M.H. & Shin, Y., (1995). An Autoregressive Distributed Lag Modelling Approach to Cointegration Analysis. Cambridge Working Papers in Economics 9514, Faculty of Economics, University of Cambridge.

Rao, K. R. M., & Tesfahunegn, S. Z. (2015). Revitalizing the performance of garment industry in Ethiopia through multi dimensional performance measurement practices. Journal of Business Management & Social Sciences Research, 4(2), 94-110.

Siyakiya, P. (2014). An Analysis of the Effects of Hyperinflation on Manufacturing Sector Output. A Case of Zimbabweâ€™s Manufacturing Firms 2000 â€“ 2013. MA thesis, International Institute of Social Studies, the Hague, Netherlands.

Sokunle, R. O., Chase, J. M., & Harper, A. (2017). The Determinants of Manufacturing Growth Sector Growth in sub-Saharan Africa. Research in Business and Economics, 12(2), 29 -40.

Takam F.G., Kamdem C.B. & Litchepah T.C. (2017). Does trade openness affect manufacturing growth in EMCCA countries? A panel cointegration analysis. MPRA Paper No. 83747. https://mpra.ub.uni-muenchen.de/83747/

Tigabu D.G, Gebrehiwot A. K., Balineau, G., & Fikru D. S. (2018). Manufacturing Competitiveness in Ethiopia: Developments, Challenges, and Prospects. Addis Ababa, Ethiopian Development Research Institute.

Tsegay G., kidanemariam B., Tigabu D. Girum A., & Gebrehiwot A. (2018). Productivity Determinants in the manufacturing sector in Ethiopia: evidence from the textile industries,' Addis Ababa, Ethiopia.

UNDP (2018). Ethiopiaâ€™s Progress towards Eradicating Povertyâ€™ Paper presented to the Inter-Agency Group Meeting On the â€œImplementation of the Third United Nations Decade for the Eradication of Poverty (2018 â€“ 2027)â€ April 18 -20, 2018, Addis Ababa Ethiopia

UNDP (2017). Manufacturing sector Performance in Ethiopia. Working Paper No. 6

Yayeh, Y. (2018). Determinants of Manufacturing Industries Productivity: The Case of Firms Financed by Development Bank of Ethiopia. MSc Thesis, St. Mary's University, Addis Ababa.

Zuhroh, I., Kusuma, H., & Kurniawati, S. (2018). An Approach of Vector Autoregression Model for Inflation Analysis in Indonesia. Journal of Economics, Business, & Accountancy Ventura, 20(3), 261-268.