An Empirical Investigation of Inter Sectoral Linkage in Ethiopia: A Co-Integrated VECM Approach

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Addis Ababa University


The main objective of this paper was to examine the long run nature and direction of inter sectoral linkages between agriculture, industry and service sectors with a view to identifying the main growth stimulating sector in the economy in the case of Ethiopia. The study used time series data for the period between 1974 and 2016. The researcher estimated an econometric model that incorporates the linkages among the sectors using a Vector Error Correction Model. Johansen’s co-integration test confirms the existence of one long-run relationship among the variables. Vector Error Correction Model (VECM) results indicated a strong long-run relationship between industry and service sector and also between agriculture and service sector. On the other hand, there is only a statistically significant association between industry and service sectors in the short run. Short run Granger causality test result also supports this outcome showing a strong unidirectional causality from industry to service sector. On the other hand, results of variance decomposition analysis and impulse response function suggest that service sector plays an important role in determining the growth of both the agriculture and industry through its positive innovative impact in medium to long-term perspective. The result of this paper suggests that government should be considered this directions and magnitudes of the inter-sectoral linkages before they set a policy and should focus on economic policies that promote multidimensional inter sectoral linkage.



Co-integration Analysis, Economic Growth, Intersectoral Linkage