Manufacturing Value-Added (MVA) Share Development in Ethiopia: Causes and Determinants

Industrialization is not only a prerequisite for increasing an economy’s competitiveness and living standards, but it is also required for developing economies to catch up to more developed. However, Ethiopia’s average performance over the last five decades has been rather unsatisfactory, with MVA accounting for 5.6% of Gross Domestic Product (GDP). The overarching goal of this article is to investigate the fundamental reasons why manufacturing has historically played such a minor role in Ethiopia’s economy. It has also looked into the determinants factors that influence MVA. The study reviewed both theoretical and empirical literature. It used tables and figures to conduct descriptive, and the residual of the approximate Cobb-Douglas production function for Total Factor Productivity (TFP) analyses. To estimate determinant factors, the Autoregressive Distributive Lag (ARDL) model was used for time series data. The study identified key reasons and determinants that limit MVA share: volatile political environments, the tendency of major fabrication subsectors to decline, TFP remaining small and stagnant, and others. According to the empirical study, in the long run, GDP per capita and Foreign Direct Investment (FDI) variables have shown a significant positive association, whereas the real exchange rate index has a negative correlation with MVA. While, in the short run, the later variables, and manufacturing imports have a positive significant impact. The findings have policy implications such as proper policy design and stable implementation, avoiding premature deindustrialization, improving low TFP, attracting large-scale FDI, and increasing GDP per capita income, among other things.