Public Investment on Rural Road Transport and Its Effect on Total Factor Productivity: Evidence from the Ethiopian Living Standard Measurement Survey

Abstract

Given that 83 percent of the Ethiopian population live in rural areas being engaged in agriculture, the role of rural road transport in Ethiopia in improving rural livelihoods and agricultural growth is expected to be tremendous. However, empirical studies on the effect of rural road transport (access and mobility) on total factor productivity are scant. This study intends to fill this gap by using the Malmquist index to measure total factor productivity indices of each farmer by decomposing its two components: technical efficiency change index and technological change. In order to estimate the effect of heterogeneity in rural transport on total factor productivity change in a panel data setting, fixed and random effect models were estimated. Hausman test was applied to choose one of them. Data emerged from two consecutive panel surveys of the Ethiopian Rural Socioeconomic Survey (ESS) –Living Standard Measurement Survey (LSMS). Finally, a balanced panel of 2176 households consisting of 4352 observations over two rounds was created. Results show that the change in total factor productivity is attributed largely to technological change when compared to technical change. On the other hand, the result shows that mean efficiency change of households with access to all weather roads is higher than that of households with no access to all weather roads. Findings suggest that investing in roads is vital to help move agriculture forward.