Impact of Industrialization on Per Capita GDP Growth in Ethiopia: An ARDL Modeling Approach to Poverty Reduction

Abstract

Despite Ethiopia’s significant GDP growth averaging 7.2% between 2010 and 2024, increased income inequalities have been lingering, reflecting a pattern of uneven development. This study investigates the effect of industrialization on real per capita GDP in Ethiopia using annual data from 1980 to 2023. The Autoregressive Distributed Lag (ARDL) approach to co-integration and error correction model are applied in order to investigate
the long-run and short-run relationship between the dependent variable real per capita GDP and its determinants. The findings of the Bounds test show that there is a stable long-run relationship between real per capita GDP, industrialization, population growth, bank lending, government expenditure, and inflation. Additionally, our findings demonstrate that while population increase and inflation have a strong and negative long-term association with real per capita GDP, industrialization has a considerable positive long-
term effect on it. In contrast, government has a negative short-term relationship with real GDP per capita, whereas bank lending and population have a positive short-term effect. Based on our empirical findings, we recommend that the government should try to control fertility by providing education, creating employment opportunities, and giving family planning services at low cost for women. We also recommend that digitalization, allowed through Homegrown Reform 2.0 and mobile finance channels such as Telebirr or M-Pesa, provide a modern transmission mechanism to protect household possessions from inflationary pressure. Furthermore, the government should set a legal national minimum wage to protect low-income earners from the high cost of living.