Explaining output growth and total factor productivity changes using production frontier: The case of Ethiopian smallholders farming

Abstract

This paper provides a parametric decomposition of output growth and total factor productivity changes, extending production approach to the case of non-neutral stochastic frontier. The results were based on unbalanced panel data from Ethiopian smallholder farmers observed over the period 1999–2015. The study decomposes output growth into input growth and total factor productivity changes while both were further decomposed into components. Output growth was decomposed into individual inputs contribution, whilst total factor productivity change decomposed into technical change, scale effect and technical efficiency changes. The empirical findings indicate output growth was mainly driven by total factor productivity changes (71%) while 22% attributed to input growth. Technical change found to be the main source of total factor productivity while scale effect also contributed significantly. Technical efficiency change was found to be the main source for the reduction of total factor productivity and so in output growth. The result indicates both changes due to inputs use and farm-characteristics were found the most important, in explaining technical efficiency changes, cancelling the negative impact due to autonomous changes and environmental factors. The finding implies there are total factor productivity changes and the output growth in cereal farming is mainly driven by technical change, suggesting policies aim at enhancing technology adoption and investment in modernizing agriculture are significantly effective. Thus policies directed toward enhancing agricultural technologies that improve technical change, enable farmers to benefit from scale of operations and their best practice form essential part of the overall agricultural policies. Key words: Output growth, total factor productivity, decomposition, stochastic frontier, farming, Ethiopia.