ETHIOPIAN DEVELOPMENT
                                            RESEARCH INSTITUTE




Constraints on the Rural Non-farm...
Background: Motivation of the study

 • Rural non-farm development is a strategic priority for DCs during
   their economi...
Objectives

There is a knowledge gap in how nonfarm activities are
organized in rural areas, particularly with respect to ...
Research Questions


                                               This paper investigates issues
                       ...
Why Handloom?
 The selection of the handloom sector was guided by three main
   characteristics:

 •    First, it is the m...
Survey Methodology

• In this study, we surveyed three urban clusters in Addis Ababa
  and six rural clusters in the south...
Study Sites (2008)
• Addis Ababa: Shiro-Meda, Adisu-Gebeya, Kechene-Medhaniyalem
• Chencha woreda, Gamo Gofa Zone, SNNPR: ...
Sample Composition (2008)

                                                                                Rural
         ...
Addis Ababa Network Structure (2008)
    Inputs                 Producers                     Initial Sales              F...
Electrified vs. Non-Electrified Network Structure (2008)
          Electrified Clusters                                   ...
Starting Capital (2008)
                                            Addis Ababa                  Electrified              ...
Most Common Product Types
   100%




    80%




    60%                                                                 ...
Production and Profit (2008)

                                               Addis Ababa              Electrified         ...
Productivity Measures (2008)

      12.0
                  10.3 10.7
      10.0

       8.0                       7.2

   ...
Labor Productivity (ET Birr/Worker) (2008)

     16,000                                   14,859
     14,000
     12,000
 ...
Capital/Labor Ratios (2008)
    10.0
                8.9
     9.0                8.4     8.0
     8.0
     7.0
     6.0   ...
Productivity Measures
                                               Addis                                                ...
Specifications

                                                                                  (1)
    Y = annual sales...
Regression Analysis: Producer Productivity
                                      Revenue/Labor                            ...
Segmented Regression Analysis
Attempt to capture differences between groups of producers, for the Chencha subsample.
     ...
Nonparametric Analysis – Chencha Subsample
Illustrating productivity differences between groups of producers


           ...
Nonparametric Analysis – Chencha Subsample
       Illustrating productivity differences between groups of producers

     ...
Concluding Thoughts

  • Infrastructure expands the options available to producers and traders.
      – Networks are more ...
Concluding Thoughts, cont.
 • Electricity plays an important role in handloom weaver productivity,
   particularly for the...
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Constraints on the Rural Non-farm Economy: An Analysis of the Hand Loom Sector

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Constraints on the Rural Non-farm Economy: An Analysis of the Hand Loom Sector

  1. 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. 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. 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. 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. 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. INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE – ETHIOPIA STRATEGY SUPPORT PROGRAM
  6. 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 INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE – ETHIOPIA STRATEGY SUPPORT PROGRAM
  7. 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 INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE – ETHIOPIA STRATEGY SUPPORT PROGRAM
  8. 8. Sample Composition (2008) Rural Addis Rural % % Not % Ababa Electrified Electrified Producers 195 145 146 Household 109 56% 72 50% 114 78% Rented workspace 74 38% 72 50% 32 22% Workshop 12 6% 0 0% 0 0% Traders 97 52 5 Shop 77 79% 1 2% 0 0% Market 20 21% 43 83% 5 100% Roadside market 0 0% 8 15% 0 0% Total 292 46% 197 31% 151 24% INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE – ETHIOPIA STRATEGY SUPPORT PROGRAM
  9. 9. Addis Ababa Network Structure (2008) Inputs Producers Initial Sales Final Sales INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE – ETHIOPIA STRATEGY SUPPORT PROGRAM
  10. 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 INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE – ETHIOPIA STRATEGY SUPPORT PROGRAM
  11. 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. INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE – ETHIOPIA STRATEGY SUPPORT PROGRAM
  12. 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% INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE – ETHIOPIA STRATEGY SUPPORT PROGRAM
  13. 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.) INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE – ETHIOPIA STRATEGY SUPPORT PROGRAM
  14. 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 INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE – ETHIOPIA STRATEGY SUPPORT PROGRAM
  15. 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 INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE – ETHIOPIA STRATEGY SUPPORT PROGRAM
  16. 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 INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE – ETHIOPIA STRATEGY SUPPORT PROGRAM
  17. 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. INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE – ETHIOPIA STRATEGY SUPPORT PROGRAM
  18. 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. INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE – ETHIOPIA STRATEGY SUPPORT PROGRAM
  19. 19. Regression Analysis: Producer Productivity Revenue/Labor Value Added/Labor Addis Addis Chencha Chencha All Chencha (1) Chencha (2) All Ababa Ababa (1) (2) LN[(K + CORM)/L] 1.004*** 0.970*** 1.030*** 1.030*** 0.292*** 0.305*** 0.336*** 0.338*** (0.020) (0.032) (0.027) (0.027) (0.057) (0.082) (0.096) (0.097) Electrified -0.042 -0.040 -0.043 0.175 0.213 0.209 (0.028) (0.027) (0.029) (0.139) (0.143) (0.145) Addis Ababa 0.065** 0.461*** (0.032) (0.147) Year Established 0.003*** 0.005*** 0.001 0.001 0.007* 0.018*** -0.002 -0.002 (0.001) (0.002) (0.001) (0.001) (0.004) (0.006) (0.005) (0.005) Rented Workspace -0.029 -0.004 -0.044 -0.052* 0.206 0.091 0.236 0.224 (0.026) (0.050) (0.027) (0.030) (0.130) (0.247) (0.153) (0.167) Workshop -0.085 -0.039 0.370 0.335 (0.071) (0.077) (0.348) (0.376) Healthcenter 0.026 0.035 (0.035) (0.150) Constant -5.545*** -8.479*** -2.740 -2.833 -8.538 -28.716** 8.933 8.784 (1.861) (3.066) (2.193) (2.205) (8.305) (12.711) (10.080) (10.185) Adjusted R-Squared 0.919 0.892 0.920 0.920 0.215 0.201 0.066 0.063 AIC 94.688 80.974 3.515 4.751 1417.979 538.485 877.034 878.971 Observations 480 190 290 290 472 185 287 287 INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE – ETHIOPIA STRATEGY SUPPORT PROGRAM
  20. 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. INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE – ETHIOPIA STRATEGY SUPPORT PROGRAM
  21. 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 INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE – ETHIOPIA STRATEGY SUPPORT PROGRAM
  22. 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. INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE – ETHIOPIA STRATEGY SUPPORT PROGRAM
  23. 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. INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE – ETHIOPIA STRATEGY SUPPORT PROGRAM
  24. 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. INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE – ETHIOPIA STRATEGY SUPPORT PROGRAM

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