Ethiopia has experienced rapid economic growth and poverty reduction over the last decade, with an average annual GDP growth of 10.9%. This growth has been driven primarily by the agricultural sector and public investment in infrastructure. The economy is transitioning from primarily agrarian to greater roles for secondary and tertiary sectors. Population growth presents both opportunities and challenges for continued economic expansion. Education and skills development will need to keep pace with structural changes in the economy and labor market. Social protection programs have helped support livelihoods but further expansion will be important. Sustaining growth will require developing domestic industry and managing macroeconomic and demographic factors.

1. Ethiopia - an Agrarian Economy in
Transition
Alemayehu Seyoum Taffesse (Senior Research Fellow, IFPRI) and
Yared Seid (Country Economist, IGC Ethiopia)
African Lions Authors Draft Workshop, June 5, 2015, Arusha, Tanzania

2. Background
• Fast economic growth – relative, absolute
• Rapid poverty reduction, improvements in welfare indicators (albeit from a low base);
• Non-resource based growth process;
• Pro-active government;
• Data availability - regular surveys, quality;
Documenting and understanding the process in terms of the 10 questions can be
informative more broadly

3. Outline
1. The Recent Economic Growth in Ethiopia
• Trends in Economic Growth
• Between- and Within-sector Employment Shift
• Sources of Economic Growth
– Aggregate Growth Accounting
– Sectoral Growth Accounting – Agriculture
2. Population Growth: Blessing or Curse?
3. Economic Growth and Employment
• Differential Effects of Economic Growth on Skilled and Unskilled Workers
• Returns to Education
• Expansion of the Education System and Returns to Education
• The Role of Public Sector in Employment
• The Role of Social Protection in Growth and Employment
4. Structural Change?
• The Structure of the Ethiopian Economy – A SAM-Based Characterization
• Pace of Structural Change
• Challenges and Prospects
5. Conclusions and Key Policy Implications

4. Trends in Economic Growth
• Ethiopia has experienced fast and robust economic
growth in recent years (averaged 10.9 % GDP growth
per annum for the last decade).
• GDP and employment growth rates have been
relatively higher in secondary and tertiary sectors.
• There is some evidence of a shift away from primary
sector towards secondary and tertiary sectors.

5. GDP Growth in Ethiopia, 1990-2013
1990 1995 2000 2005 2010 2015year
GDP growth (annual %) Fitted values
Source: Authors’ computation using data from World Development Indicators (WDI), the World Bank

6. Growth Accounting - Trend

7. Growth Accounting - Decomposition
Period
GDP
Growth
(%)
Contribution
of Employment
Growth in GDP
Growth
(percent)
Contribution
of Labour
Composition
Growth in GDP
Growth
(percent)
Contribution
of non-ICT
Capital
Services
Growth in GDP
Growth
(percent)
Total Factor
Productivity
Growth (ln
difference,
percent)
1990-1994 -0.49 1.01 0.03 1.07 -2.60
1995-1999 4.54 1.50 0.02 2.54 0.48
2000-2004 5.18 1.29 0.01 2.01 1.87
2005-2009 10.20 1.71 0.00 3.45 5.04
2010-2012 10.18 1.68 0.05 3.64 4.81
1990-2012 5.55 1.42 0.02 2.45 1.67

8. Growth Accounting – Determinants
Determinants
• Education
• Health (life expectancy)
• Infrastructure
• Extension
• Good weather
Elements of Policy
• Agriculture focus
• Infrastructure investment
• Fiscal decentralization
• Social protection

9. Employment Trends
• Sectoral Share of Employment
Primary Sector Secondary and Tertiary Sectors
1960 1970 1980 1990 2000 2010
Year
1960 1970 1980 1990 2000 2010
Year
Seconday Sector Tertiary Sector
Source: Authors’ computation based on data from GDDC 10−Sector Database

10. Between- and Within-sector Employment
Shift
• All 10 sectors in Ethiopia experienced positive output
growth – see the figure below.
• Government services and other services experienced
contraction in employment.
• The construction sector experienced
disproportionately high level of employment
expansion.

11. Between-sector employment shift

12. Within sector employment share
• Let us now consider the changes
in skills and occupations within
each sector – see Table 1.
• The share of high- and medium-
skilled workers have increased in
primary sector.
• The share of high- and low-skilled
workers have increased in
secondary and tertiary sectors.
Table 1: Changes in the Skill Share by Sectors in Ethiopia
Proportions, % Changes in:
2005 2013 percentage points
Primary Sector:
High Skilled 0.1 0.5 0.4
Medium Skilled 47 64 17
Low Skilled 53 35 -18
Total 100 100
Secondary Sector:
High Skilled 3 8 5
Medium Skilled 87 69 -18
Low Skilled 11 23 12
Total 100 100
Tertiary Sector:
High Skilled 14 21 7
Medium Skilled 59 47 -12
Low Skilled 26 32 6
Total 100 100
Note: The primary sector includes agriculture and mining; the secondary sec-
tor includes manufacturing, utilities, and construction; and the tertiary sector
includes trade, transport, financial services, community services, and private
households. High-skilled workers include managers and professionals; medium-
skilled workers include clerks, service and sales workers, operators, and
assemblers; and unskilled workers include elementary workers.

13. Population Growth: Blessing or Curse?
• Ethiopia is the 2nd most
populous country in Africa.
• Population is expected to be
somewhere between 127 and
143 million by 2037 – see the
figure below for projected
population.
• The percentage of children will
decrease by 27-34 percent by
2037, while that of the working
age group will increase.

14. The Effect of Economic Growth on
Employment
• Blinder-Oaxaca wage
decomposition between
skilled and unskilled
workers suggests that
– The changes in demographic
and labour market
characteristics explain a
large portion of the
observed increase in wage
among skilled workers.

15. Workers' Education Level by year
The figure below, on the other hand, shows that Ethiopian workers have become
more educated over time.

16. Returns to Education
• Girma and Kedir (2005) and our OLS estimates
below show positive effect of education on
earnings.
• Also, Girma and Kedir (2005) found out that
returns to education is higher for people at the
lower end of the income distribution.
• Updates

17. Table 3: Ordinary Least Squares (OLS) Regression of the Returns to Education in Ethiopia
Dependent Variable: Log(Wage)
(1)
Age 0.070∗∗∗
(0.004)
Age Squared -0.001∗∗∗
(0.000)
Female dummy -0.426∗∗∗
(0.014)
Primary school graduate dummy 0.141∗∗∗
(0.030)
Some secondary education dummy 0.281∗∗∗
(0.025)
Secondary school graduate dummy 0.566∗∗∗
(0.025)
Some college education dummy 0.842∗∗∗
(0.025)
College graduate dummy 1.204∗∗∗
(0.031)
Above college education dummy 1.454∗∗∗
(0.038)
Dad’s years of schooling -0.029∗∗∗
(0.003)
Mom’s years of schooling 0.013∗∗∗
(0.002)
Married dummy 0.274∗∗∗
(0.023)
Divorced/widowed/separated dummy -0.151∗∗
(0.070)
Constant 4.606∗∗∗
(0.164)
Observations 19104
R-sq 0.528
Notes: *p < 0.10, ** p < 0.05, *** p < 0.01.
Robust standard errors are clustered by enumeration area, a primary sampling unit,
and are reported in parentheses. The regression also controls for district and year
fixed effects.

18. Education Expansion and Returns to
Education
• There was a huge education expansion project in Ethiopia since mid
1990s.
• As a result, enrolment in primary, secondary, and tertiary schools
has increased significantly in recent years.
• However, similar improvement in quality of education has not
observed.
• Need for rigorous research on the effect of the school expansion
program on the returns to education in Ethiopia.

19. Public Sector and Employment
• Relative share of the public sector in total employment
has been continuously decreasing in the 2000s.
Table 4: Employment Share of the Public Sector in Urban Ethiopia by Gender by Year (%)
2003 2006 2009
Male 24 22 14
Female 16 14 13
Both 20 19 13
Source: Authors’calculationbasedondatafromEthiopianUrban
Employment Unemployment Survey.

20. Social Protection and Growth/Employment
• Productive Safety Net Program (PSNP) is the largest social
protection program in the country, with primarily focusing on rural
households.
• Empirical evidences suggest that PSNP has improved the livelihood
of households.
• Gilligan et al. (2009) found no short-term disincentive effects of
PSNP on labour supply – need for further research.
• No similar social protection program for vulnerable urban
households (in the works, though).

21. Observations
• Pro-active government approach seems to have worked so far
• Sustainability is the challenge
– Industrial development – competitiveness
– Domestic private sector
– Macro-economic management – public finances, exchange rate
– Demographic transition/pressure
– Quality of education

22. www.wider.unu.edu
Helsinki, Finland