Transformation and Vulnerability in Ethiopia Symposium 2016

1. ETHIOPIAN
DEVELOPMENT
RESEARCH INSTITUTE
Growth and Structural Transformation
in Ethiopia
Paul Dorosh, Sherman Robinson, Emily Schmidt and James Thurlow
IFPRI
Transformation and vulnerability in Ethiopia:
New evidence to inform policy and investments
ESSP Symposium
Addis Ababa
May 27, 2016

2. Growth and Transformation Goals
• The Growth and Transformation Plan (GTP2)
emphasizes…
– Rapid economic growth (Middle Income Country status by
2025)
– Poverty reduction and job creation
– Structural transformation of the economy
• Major GTP2 goals include…
– Targeting at least 10% annual GDP growth
• Already achieving this target
– Reducing the share of the workforce in agriculture to 50%
• Here the evidence is mixed…
2

3. Gradual Exit from Agriculture
79.7
80.2
76.6
70
72
74
76
78
80
82
84
1998 2000 2002 2004 2006 2008 2010 2012 2014
Agriculture'sshareoftotalemployment
(%)
LFS estimates
Other estimates
HICES
HCES
LFS*
ESS
LFS = Labor Force Survey; HICES = Household Income, Consumption and Expenditure Survey;
HCES = Household Consumption and Expenditure Survey; ESS = Ethiopia Socioeconomic Survey.
3

4. Evidence of Positive Structural Change
Workers are moving into more productive sectors
– Structural change accounts for 27% of the increase in worker
productivity
AGR MIN
MAN
UTL
CON
TRD
HOT
TRN
FBS
GOV
OSV
PRV
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
-4.5 -3.0 -1.5 0.0 1.5
Value-addedperworker(logdeviation
fromaverage)
Change in employment share (%-point)
Source: Calculations using 2005 and 2013 Labor Force Surveys and national accounts data.
AGR: Agriculture
MIN: Mining
MAN: Manufacturing
UTL: Energy, gas, water
CON: Construction
TRD: Trade services
HOT: Hotels, catering
TRN: Transport, communication
FBS: Finance, business
GOV: Gov., education, health
OSV: Other services
PRV: Private households
4

5. Lagging Job Creation in Rural Areas
• Rural areas accounted for 89% of jobs in 2005,
but only 56% of new jobs created after 2005
National Rural Urban
Initial employment (1000s) 31,429 27,984 3,444
Share of total (%) 100.0 89.0 11.0
Increase in employment (1000s) 6,112 3,443 2,669
Average annual growth (%) 2.2 1.5 7.4
Contribution to total increase (%) 100.0 56.3 43.7
Agriculture 58.3 51.8 6.5
Industry 13.2 0.5 12.6
Services 28.6 4.0 24.6
Change in employment, 2005-2013
Source: 2005 and 2013 Labor Force Surveys.
5

6. Implications of Definitions of Urban
Using the administrative definition of urban, Ethiopia’s
smallest urban center in 2007 Census has only 151 people
– Higher thresholds imply a more diverse rural economy
Alternative
thresholds
Number of
centers
Population
(1000s)
Urbanization
rate (%)
Current 966 11,817 16.0
2,000+ 802 11,598 15.7
5,000+ 444 10,382 14.1
10,000+ 201 8,719 11.8
20,000+ 86 7,159 9.7
50,000+ 25 5,318 7.2
100,000+ 11 4,305 5.8
250,000+ 1 2,740 3.7
Ghana
Tanzania
Nigeria
Source: 2007 Population Census 6

7. Maybe Overlooking Secondary Jobs?
• About 13% of workers nationally have both farm
and nonfarm jobs (20.4% in towns < 10K pop.)
12.7 13.5
20.4
4.6
National Rural Urban
<10,000
Urban
>10,000
23.6 19.9
37.3
50.2
All rural
households
Only
farming
Not farming Farm and
nonfarm
On-farm work
Off-farm work
Source: 2013/14 ESS Source: 2011/12 ERSS
Average weeks worked per year
by rural workers
People with both
farm/nonfarm jobs
7

8. Strategic Questions
1. Can the major cities and towns continue to lead
the national growth process?
2. What are implications of deemphasizing
agriculture-led development?
3. What are the economic linkages between rural
areas and small towns?
4. Should more investments be directed towards
the rural non-farm economy, broadly defined?
8

9. Insights from Earlier Work
• Economy-wide modeling for Ethiopia has identified trade-
offs between urban and agriculture-oriented strategies:
– Continued urbanization without supporting investments in
urban infrastructure and services simply leads to an
“urbanization of poverty”
– Investing in major cities is very effective at generating national
economic growth
– However, it is not possible to “bypass” agriculture, since it
remains, by far, the most effective sector at reducing poverty
and stimulating broad-based income growth.
9

10. Modeling Rural-Urban Linkages
Farm employment
Non-farm Underemployment
Rural Sectors
Non-farm employment
Urban Sectors
Migration
National markets
Local rural markets
+ own goods
Poor
Non-poor
Rural Households Urban Households
Poor
Non-poor
Supply Supply
DemandDemand
Foreign Markets Government
+ Investment
10

11. Ethiopia Economywide Model
• 2010/11 social accounting matrix
– 69 sectors disaggregated across rural and urban areas
– Rural and urban labor split by education levels and
farm/nonfarm sectors in rural areas
– Households separated into rural/urban expenditure quintiles
– National product markets, but with rural own consumption
• Recursive dynamic simulations, 2011-2025
– Internal migration flows based on real wage differentials
– Agglomeration and congestion effects in rural and urban
nonfarm economies (larger gains in major cities)
– Rural agricultural workers are seasonally underemployed (they
can work in the rural nonfarm economy)
11

12. Three Investment Scenarios
• Run the model over 25 years (2010-2025)
• Reallocation of public investments raises productivity
growth in different sectors and regions:
1. Urban non-farm scenario
2. Rural agriculture scenario
3. Rural non-farm scenario (with & without underemployment)
• Comparable (cost-neutral) scenarios:
– Fixed resource envelope
– Same direct investment impacts in rural and urban areas
– Outcomes vary solely based on structural linkages
12

13. Headline Findings (1)
• Urban investment is better than agriculture and the RNFE at
promoting national economic growth (more higher-value job
opportunities for urban migrants)
• But if RNFE investments reduces rural underemployment, then it is
even more important for growth and structural transformation
13
Urban
scenario
Agriculture
scenario
RNFE Scenarios
Full employ. Under-
employ.
National 1.23 0.94 0.68 2.70
Agriculture -0.05 1.77 -0.15 1.46
Industry 1.56 0.24 0.88 3.94
Services 2.16 0.28 1.32 3.41
Rural areas -0.66 0.64 0.50 3.38
Urban areas 4.63 1.65 1.10 0.71
Change from baseline GDP growth rate (%-point)

14. Headline Findings (2)
• Agricultural growth twice as effective as urban growth at reducing
poverty
• If rural workers are underemployed, then the RNFE can be as
effective as agriculture at reducing poverty
14
Urban
scenario
Agriculture
scenario
RNFE Scenarios
Full employ. Under-
employ.
National 0.95 2.22 0.67 1.97
Rural 1.23 2.87 1.27 2.90
Urban 0.28 -0.62 -0.76 0.11
Poor 1.45 3.13 1.49 2.97
Nonpoor 0.81 1.98 0.43 1.68
Change from baseline household welfare growth rate (%-point)

15. Summary and Conclusions (1)
• Ethiopia is one of the world’s fastest growing economies
– But only a quarter of growth after 2005 was due to “positive
structural change”
– This is a much lower share than in other countries, like China,
during their rapid growth and transformation periods
– While Ethiopia is on track to achieving its growth target, more
work is needed to turn growth into structural transformation.
• Faster urbanization would help drive structural change
– But it requires supporting investments in urban infrastructure
and services, as well as in agriculture
– Raising agricultural productivity is crucial for avoiding an
“urbanization of poverty” (e.g., preventing food prices from
eroding real wage gains for urban migrants).
15

16. Summary and Conclusions (2)
• The rural non-farm economy (and small towns) are other
potential sources of growth and structural change
– Rural centers may be more effective at absorbing low-skilled
migrants, or providing a stepping stone for farmers to engage in
(seasonal) nonfarm work
– If investments in the RNFE create jobs for Ethiopia’s large
underemployed rural workforce, then they can be as effective
as agricultural investments at reducing poverty
• Structural transformation is needed to sustain rapid
economic growth over the coming decades
– Nonetheless, investments in agriculture and the rural economy
remain crucial for both regional growth and poverty reduction.
16