An important fact or that would influ ence the success or f a ilulrnof an industrial concern is the degree of efficiency in thernutilizati on of resourc es und er its command. In Ethiopiarnefficiency is a major problem. Th e r e a r e some evidences tornsupport the contention that resources are being utilizedrninefficiently.rnBy emp loying the Oeomestic Reso urce Cost (ORe) methodology inrngeneral equilibrium settin g . this st udy attempts to empi~iea~lyrnestab lish the incidenc e of prot ect ion and the magnitude ofrnefficiency in th e state own ed textile industry at a point inrntime. The major findings are as follows: (a) The system ofrnprot ection provides a uniform nominal protection to all firmsrn(b) The eff ective protection is high and differs substan tiallyrnamong firms (c) The domestic r esource cost is high and differsrnsubst antially among firms. indicating inefficiency (d) Firmsrnwith high domestic resource cost are acco rd ed high protectionrnwhile firms with low domestic r eso urce cost are offered lowrnprotection . This indica t es th a t the Ethiopian system ofrnprotecti on encouraged and supported in eff ici e nt firmsrn(e ) Wide differences exist between economic and privaternprofitability among firms . indicating the presence of pricernpistortions both in the product and fact or markets . Thernquantitative estimates further indicat e that in a number ofrncas es the effect of gove rnment policy was not consistent withrnobjective of economic eff ici ency.rnTo enha nce e conomic e ffi ciency i n the State own ed texti l erns ect or. substantial restructuring and polic y r eform is required.rnIn respect t o this. the study identified spec ific areas thatrndeserve the a ttention of policy makers and recommends thernmeasure s to be taken.