Impact of Production Expansion in Labor-Intensive Industrial Activities on the Ethiopian Economy: A Stage CGE Modelling Approach

Abstract

Ethiopia’s industrial activity has been characterized by meager growth for the last few epochs. This study examines the likely effects of productivity expansion in labor-intensive industrial activities on the macroeconomy, government priority industries, factors, household income, and the welfare of households. These labor-intensive sectors include dairy, grain milling, milling services, sugar refining, other food processing, beverage manufacturing, textiles, leather products, and wood products. In order to investigate the impact of a 10% increase in the technical coefficients of these labor-intensive industrial activities, the study used the static stage computable general equilibrium (CGE) model. The production expansion, via an increase in the technical coefficient of the sectors, derived a significant change in macro variables such as real GDP, government consumption demand, investment demand, household consumption, and the export and import of goods and services. The GDP of the economy has increased by 3.41%. The findings also suggest that production and exports of government-prioritized industrial products have increased largely. For instance, the production of the textile and leather sectors increased by 26.08% and 41.03%, respectively. Increasing the production of labor-intensive industrial activities showed a significant decline in the import of priority industrial goods. It also resulted in welfare gains for all rural and urban households. The study further extends its recommendation for Ethiopia to develop a strong industrial policy aimed toward promoting labor-intensive industrial activities.