An important factor that would influence the success or failure of an industrial concern is the degree of efficiency in the utilization of resources under its command. In Ethiopia efficiency is a major problem. There are some evidences to support the contention that resources are being utilized inefficiently. By employing the Oeomestic Resource Cost (ORC) methodology in general equilibrium setting. this study attempts to empi~ieal1y establish the incidence of protection and the magnitude of efficiency in the state owned textile industry at a point in time. The major findings are as follows: (a) The system of protection provides a uniform nominal protection to all firms (b) The effective protection is high and differs substantially among firms (c) The domestic resource cost is high and differs substantially among firms, indicating inefficiency (d) Firms with high domestic resource cost are accorded high protection while firms with low domestic resource cost are offered low protection. This indicates that the Ethiopian system of protection encouraged and supported inefficient firms (e) Wide differences exist between economic and private profitability among firms, indicating the presence of price pietortions both in the product and factor markets. The quantitative estimates further indicate that in a number of cases the effect of government policy was not consistent with objective of economic efficiency. To enhance economic efficiency in the state owned textile sector, substantial restructuring and policy reform is required. In respect to this, the study identified specific areas that deserve the attention of policy makers and recommends the measures to be taken.