The Causal Linkage Between Agriculture, Industry and Service Sectors in Ethiopian Economy

Investigation of structural relationships among the sectors becomes important from the policy angle. A clear perspective on the intersectoral linkage could be useful in formulating a favorable and appropriate development strategy. This study analyzed the intersectoral linkages in Ethiopian economy using a time series data ranging from 1975 to 2017. The study employed Johanson co-integration test, vector error correction model, granger causality test, impulse response and variance decomposition functions. The study found a stable long run relationship among agricultural, industrial and service sectors of the economy. Only industrial sector is found as endogenous to the system implying long-run causality runs form agricultural and service sectors to industrial sector. According to short run granger causality results, there is bi-directional causality between industrial and agricultural sectors, and between industrial and service sectors. The results of Impulse response and Variance decomposition functions suggest that the agricultural sector development plays a role in determining the growth of the economy via its linkages to the rest sectors of the economy. Therefore, development strategies such as, Agricultural Development Led Industrialization (ADLI) of Ethiopia, if properly implemented can play an encouraging role by reassuring the agricultural sector, so that the industrial sector would be promoted. In addition the percentage share of agricultural sector to GDP has been declining over the study period. However, this doesn’t indicate that the role of agricultural sector is falling. The analysis of intersectoral linkages identified agricultural sector as the principal economic activity that controls most economic activities in Ethiopian economy.