Growth Accounting: Sources of Economic Growth in Ethiopia

In spite of Ethiopia’s over a decade long double-digit economic growth that started in 2004, there seemed to be no significant change in the economic development of the country. This study sets out to investigate the factors that drive economic growth in Ethiopia and explain why the highly praised and rapid economic growth has led to little or no change in the welfare of the society. The study uses time-series data extending from 1950 to 2017 and employs descriptive statistics and a production function and growth accounting models to examine the factors that directly or indirectly impact major macroeconomic variables. Our findings show that real capital stock accounted for most part of the real GDP growth especially during the post-2004 period, while the contribution of labor or employment to economic growth was consistently low in the same period. Overall, while a disproportionately large share of the gains from economic growth accrued to a few capital owners, the bulk of workers, averaging about 41 percent of the country’s population, ended up taking only a small share of the economic pie. This shows that the country’s double-digit economic growth was not inclusive, and it has manifested itself by stagnant change in the welfare of the average citizen.