Unintended structural transformation and growth in Ethiopia: An autoregressive distributed lag (ARDL) model approach

Abstract Industrialization represents a key policy option for sustainable economic growth, and governments must pursue structural transformation. The Ethiopian government has been designing and implementing different industrialization policies to achieve the desired structural transformation of the country. However, an unintended jump or massive twisting was observed in the economic structure, mainly due to the shift in the dominance of output from agriculture to the service sector in the country. Hence, this study investigates the determinants of unintended service sector output growth in Ethiopia from 1990 to 2022 using the autoregressive distributed lag (ARDL) model. The findings suggest that differences in labor productivity among agriculture, manufacturing, and the service sector positively influence service sector output growth in the country. This implies that labor productivity disparities play a significant role in shaping the growth trajectory of the service sector, with higher productivity levels in services and low productivity in other sectors contributing to the faster expansion of the service sector. In addition, variables such as per capita GDP, gross fixed capital formation, and credit to the private sector are found to have a favorable impact on service sector growth, while openness has a negative effect. This study adds to the understanding of unintended structural transformations in developing countries by highlighting how labor productivity disparities can drive shifts in economic dominance, particularly the rapid growth of the service sector at the expense of traditional sectors like agriculture. Furthermore, it emphasizes that such transformations may not align with national development objectives if not managed strategically. Therefore, enhancing labor productivity in agriculture and manufacturing through technology, training, and education is crucial to achieve the desired structural change. In addition, increasing gross fixed capital and improving access to credit for the private sector could further stimulate service sector expansion. Finally, encouraging domestic industries and implementing protective measures against unfair competition may mitigate the adverse effects of trade openness on service sector growth in Ethiopia. These insights are crucial for policymakers aiming to navigate structural transformations effectively while promoting sustainable economic development.