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Constraints on the Rural Non-farm Economy: An Analysis of the Hand Loom Sector
1. ETHIOPIAN DEVELOPMENT
RESEARCH INSTITUTE
Constraints on the Rural Non-farm Economy:
An Analysis of the Hand Loom Sector
Gezahegn Ayele
Ethiopian Development Research Institute (EDRI)
Lisa Moorman
International Food Policy Research Institute (IFPRI)
Co-authors:
Jordan Chamberlin
Kassu Wamisho
Xiaobo Zhang
October 23, 2009
Ethiopia Strategy Support Program-II (ESSP-II)
Policy Conference 2009
2. Background: Motivation of the study
• Rural non-farm development is a strategic priority for DCs during
their economic transformation from an agricultural to industrial
society
• Rural non-farm development plays a role in generating local
employment and linking with other sectors in developing countries
(Haggblade et al. 2007).
• Rural non-farm development is particularly relevant to the
Ethiopian context, emphasized in the Agricultural-Development Led
Industrialization (ADLI) Strategy.
• The second PRSP- Economic Development’s Plan for Accelerated
and Sustained Development to End Poverty (PASDEP) (2005/06-
2009/10) further emphasizes the importance of this sector.
INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE – ETHIOPIA STRATEGY SUPPORT PROGRAM
3. Objectives
There is a knowledge gap in how nonfarm activities are
organized in rural areas, particularly with respect to the
impact of infrastructure development.
To address this gap, this study examines the differences
between urban and rural, electrified and non-electrified
handloom weaving clusters.
The few studies of clustering within Ethiopia to date have
maintained a geographical focus on the capital city of Addis
Ababa and nearby areas (Abdella and Ayele 2007; Sonobe
et al. 2006).
INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE – ETHIOPIA STRATEGY SUPPORT PROGRAM
4. Research Questions
This paper investigates issues
related to rural industrial clusters
through an in-depth case study of
handloom clusters in Ethiopia
(non-farm economy).
In particular, our study addresses the following questions:
• Does infrastructure impact rural/urban linkages?
• Does infrastructure impact firm network structure?
• Does infrastructure impact firm productivity?
INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE – ETHIOPIA STRATEGY SUPPORT PROGRAM
5. Why Handloom?
The selection of the handloom sector was guided by three main
characteristics:
• First, it is the most important non-agricultural source of income in
the country (Central Statistics Agency 2003a), and the most
important employer of rural families for livelihood after agriculture.
• Second, it is a traditional cotton value chain-based activity with
strong patterns of geographically clustered handloom activities.
• Third, it is one of the few non-agricultural sectors with a discernable
presence in both urban and rural areas.
This sector also produces semi-finished and finished goods for
domestic consumption and processing as well as for international
markets.
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6. Survey Methodology
• In this study, we surveyed three urban clusters in Addis Ababa
and six rural clusters in the southern part of Ethiopia
• The list of handloom weavers used for the study was given by
the Medium and Small Scale Manufacturing desks of the
urban kebeles and rural woreda
• Our sample comprised 488 producers and 154 traders
• Using this data, we mapped out the production structures and
linkages among producers and traders.
• Detailed production data enable us to compare cluster
performance both through labor productivity and working
hours across different types of clusters
• The survey was conducted in May and June 2008
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7. Study Sites (2008)
• Addis Ababa: Shiro-Meda, Adisu-Gebeya, Kechene-Medhaniyalem
• Chencha woreda, Gamo Gofa Zone, SNNPR: 6 sites
Of the 50 kebeles in Chencha woreda, only 10% were classified as “electrified”
by the woreda administration.
% from
Sample Sample sample
population size population
size
Chencha woreda 12045 293 2.4
Electrified towns 7948 142 1.8
Chencha town 1774 52 2.9
Ezo town 2305 38 1.6
Dorze town 3869 52 1.3
Non-electrified towns 4097 151 3.7
Deco-mecho 1584 66 4.1
Mesho 493 20 4.1
Kale 480 20 4.1
Shaye 264 11 4.1
Losha 347 14 4.1
Zozo 922 44 4.8
Setena borche 430 20 4.8
Boyena tupa 239 11 4.8
Gendo gembela 253 12 4.8
Shama 1591 41 2.5
Shama town 829 21 2.5
Webera 762 19 2.5
Source: Ethiopian Atlas on the Rural Economy (2004) Total 12045 293 2.4
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9. Addis Ababa Network Structure (2008)
Inputs Producers Initial Sales Final Sales
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10. Electrified vs. Non-Electrified Network Structure (2008)
Electrified Clusters Non-Electrified Clusters
Inputs Producers Initial Sales Final Sales
Inputs Producers Initial Sales Final Sales
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11. Starting Capital (2008)
Addis Ababa Electrified Not Electrified
Producer Trader Producer Trader Producer Trader
Average value of starting
194 6560 95 1332 115 1,660*
capital (ET Birr)
Average value of starting
22 732 11 149 13 185
capital (USD)
Sources of starting capital (average % of starting capital coming from each source)
Own savings 48.4 67.4 45.3 80.2 41.3 80.0
Borrowing from friends or
27.4 22.0 34.5 10.2 43.2 20.0
family
Gift from family 19.1 5.7 18.6 5.8 14.8 0.0
Loan from microfinance 2.0 2.9 0.0 3.9 0.0 0.0
Loan from bank 0.0 0.0 0.0 0.0 0.0 0.0
*Only 5 traders were found in the non-electrified sites, so this average reflects only 5 observations, compared to 52
for rural electrified and 97 for Addis Ababa.
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12. Most Common Product Types
100%
80%
60% Other products
Kuta
Other traditional clothes
Linen
40%
Shawl
Netella
Gabi
20% Kemis
0%
Addis Ababa Electrified Not Electrified
-20%
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13. Production and Profit (2008)
Addis Ababa Electrified Not Electrified
Producer Trader Producer Trader Producer Trader
Average sales price of 1 unit
of most important product 116.1 130.3 56.3 46.0 47.9 28.2
(ET Birr)
Cost of raw materials for 1
unit of most important 69.4 -- 39.4 -- 33.5 --
product (ET Birr)
Average monthly
25.3 -- 15.6 -- 14.8 --
production (in units*)
*Unit = one finished product (e.g. gabi, netella, shawl, etc.)
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14. Productivity Measures (2008)
12.0
10.3 10.7
10.0
8.0 7.2
6.0
Addis Ababa
4.0 Electrified
1.8 Not Electrified
2.0 1.3 1.7
0.0
Hours Worked Per Average number of
Day (Average) workers per
enterprise
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15. Labor Productivity (ET Birr/Worker) (2008)
16,000 14,859
14,000
12,000
10,000 8,461
8,000
6,021 Addis Ababa
6,000 4,427 Electrified
4,000 2,544 Not Electrified
1,796
2,000
0
Average annual Average annual
value added per revenue per worker
worker
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16. Capital/Labor Ratios (2008)
10.0
8.9
9.0 8.4 8.0
8.0
7.0
6.0 5.3
5.0 4.2 4.3
Addis Ababa
4.0
3.0 Electrified
2.0 Not Electrified
1.0
0.0
Fixed Assets Plus Cost of Fixed Assets/Labor
Raw Materials and
Operational Costs
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17. Productivity Measures
Addis Not
Chencha* P-Value Electrified P-Value
Ababa Electrified
Hours worked per day (average) 10.3 9.0 0.001 10.7 7.2 0
Average number of workers per
1.8 1.5 0.003 1.3 1.7 0
enterprise
Average annual revenue per worker 14,859 7,237 0.000 8,461 6,021 0.021
(In ET Birr/worker)
Capital/Labor Ratio 8.9 8.2 0.000 8.4 8.0 0.000
(Fixed Assets Plus Cost of Raw
Materials and Operational Costs)
Average annual value added per
4,427 2,169 0.000 2,544 1,796 0.086
worker
(In ET Birr/worker)
Capital/Labor Ratio 5.3 4.3 0 4.2 4.3 0.084
(Fixed Assets/Labor)
*All rural clusters, as a whole.
Note: Value added = revenue - fixed and variable capital costs + wage + taxes. 1 USD = 8.96 ET Birr. “Electrified” vs. “Not Electrified”
indicates small towns or villages located in SNNPR.
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18. Specifications
(1)
Y = annual sales revenue for top three products
L = number of workers contributing to production
K = sum of fixed assets, operating costs, and annual cost of raw
materials
X = vector of enterprise type and community and infrastructure controls
ε is an error term
(2)
= annual value added for top three products
= total amount of fixed assets per enterprise
Value added is defined as the annual sales revenue of the three most
important products less the annual cost of raw materials and operational costs.
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20. Segmented Regression Analysis
Attempt to capture differences between groups of producers, for the Chencha subsample.
Value Added/Labor
Bottom Third Middle Third Top Third
Fixed Assets/Labor 0.535* 1.291*** 0.450
(0.283) (0.387) (0.303)
Electrified 0.552** 0.546** -0.286
(0.234) (0.267) (0.271)
Year Established -0.002 -0.002 0.001
(0.009) (0.009) (0.010)
Rented Workspace 0.780** -0.325 0.076
(0.316) (0.284) (0.278)
Healthcenter -0.379 0.143 0.483*
(0.249) (0.250) (0.261)
Constant 9.432 4.779 3.600
(18.293) (17.101) (18.875)
Adjusted R-Squared 0.184 0.058 0.028
AIC 278.667 296.584 302.721
Observations 94 98 95
Note: The sample for Chencha was divided into thirds based on the size of the capital to labor ratio. The symbols
"*", "**", and "***" stand for significance levels of 10%, 5%, and 1%, respectively. “Electrified” vs. “Not Electrified”
indicates small towns or villages located in SNNPR.
Robust standard errors are in parentheses.
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21. Nonparametric Analysis – Chencha Subsample
Illustrating productivity differences between groups of producers
Chencha Revenue/Labor on Capital/Labor
10
Ln(Revenue/Labor)
9
8
7
6 7 8 9 10 11
Ln(Capital/Labor)
No electricity Electricity
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22. Nonparametric Analysis – Chencha Subsample
Illustrating productivity differences between groups of producers
Chencha Value Added/Labor on Fixed Assets/Labor
8
7.5
Ln(Value Added/Labor)
7
6.5
6
2 3 4 5 6
Ln(Capital/Labor)
No electricity Electricity
Note: Value added is defined as annual sales revenue of the three most important
products less annual cost of raw materials and operational costs.
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23. Concluding Thoughts
• Infrastructure expands the options available to producers and traders.
– Networks are more complex.
– Linkages between rural clusters and urban markets are stronger.
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24. Concluding Thoughts, cont.
• Electricity plays an important role in handloom weaver productivity,
particularly for the rural portion of the population.
– Rural producers with access to electricity work, on average, 49%
longer hours than do those without access to electricity.
– Rural producers with access to electricity also earn 41% more
revenue per worker per year, and 42% more value added per
worker per year.
– After controlling for enterprise age, capital to labor ratio, type of
enterprise, and infrastructure, small-scale electrified rural
producers are 55% more productive than their non-electrified
counterparts.
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