The Impact of Vagaries of Nature and Institutions on Fastening Agricultural Economic Growth in Ethiopia

The main objective of this study is to estimate the production function of Ethiopian’s Agriculture sector and identify key factors that plays role in the economy using 1965 – 2014 data. Are there impacts of institutional transformation from public to private ownership of resources in improving agricultural growth? What are the sources of Agricultural productivity growth? Are there productivity changes in the performance of the agriculture sector during the period of 1965 – 2014. Aggregate production functions are specified by different economists for estimation. The major are CES and Cobb-Douglas. Cobb-Douglas production function is used to estimate the aggregate production of Ethiopian agricultural sector. In estimating aggregate production function for a country, it is better to consider the co-integration of variables in a time series analysis. In this empirical work, after determining the order of the vector autoregressive, co-integration test is conducted. Thereafter the structural long-run relationships of the variables are identified using vector error correction model. To this end a neoclassical and structuralist model of production function is developed. The result confirms that the variables are co-integrated at polynomial rank of order (2). The variables of production function are non-stationary at their level but stationary after differencing. The Engle Granger causality modeling shows that agricultural labor and Price of agricultural goods to non-agricultural goods Granger Cause agricultural productivity, Capital inputs in agriculture and Price of agricultural goods to non-agricultural goods Granger Cause agricultural labor, Rainfall Granger Cause ratio of Price of agricultural goods to non-agricultural goods and finally ratio of Price of agricultural goods to non-agricultural goods Granger Cause institutional capability. From the vector error correction model result, the coefficient of the co-integrating equation tells that about 45 percent of disequilibrium corrected each year by change in aggregate agricultural production. The overall performance of the model is well fitted, because the 64% of total variation of the dependent variable is explained by the independent variables included in the model. Moreover, the model selection criteria indicated the model is adequate to represent the real world and manageable to predict agricultural production behavior in Ethiopia. Vector error correction modeling of the sector shows that the Ethiopian agricultural sector is mainly dependent up on institutional capability, price ratio and rainfall in the long run. In the short run, it is determined by agricultural labor, previous agricultural production and rainfall. Finally, forecasting of the agricultural production and its associated sources of growth has been made to provide solution in future values. To circumvent the poverty trap in the country, therefore, the government needs to invest on human capital and irrigation development to reduce its dependence on vagaries of nature. Moreover, competent private-public partnership in increasing the capability of institutions on coordination and cooperation of resource use is also vital. There should be a tradeoff between private-public ownership and likewise between efficiency -equity in improving public welfare in Ethiopia. Keywords: Error correction model, Cointegration, Aggregate production function, Short and Long run, Ethiopia. DOI: 10.7176/JESD/10-23-01 Publication date: December 31st 201