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.