Abstract:

The purpose of this study is to investigate the role of manufacturing and service exports in Ethiopia’s economic growth performance from 1995 until 2018. To accomplish the objective, the study developed two versions of an augmented Solow’s (1956) model. Both versions include manufacturing and service exports as potential determinants of total factor productivity (TFF). However, the first version proxies physical capital accumulation with the investment rate, and the second version uses capital per worker. The autoregressive distributed lag (ARDL) bounds testing results of the first version suggest that there is no long-run relationship among the variables. Moreover, the investment ratio and labour force growth rate variables are statistically insignificant, which contradicts the theoretical predictions of the Solow model. On the other hand, the second version of the Solow model with capital per worker shows evidence of a long-run cointegrating relationship among the variables which support the manufacturing export-led growth hypothesis in Ethiopia, in which manufacturing exports are statistically significant, while service exports are statistically insignificant in the long run. Conversely, the results of the first version show that capital per worker has a positive and significant effect on Ethiopia’s economic growth performance. Overall, the main findings suggest that the Ethiopian government should strengthen current policies that emphasize manufacturing exports and maintain high investment rates in physical capital.