Ethiopia has experienced rapid economic growth over the past decade, with growth occurring across sectors. While agriculture's share of GDP has fallen, it remains a major driver of growth, primarily through improvements in crop yields. Measuring employment based on time spent working rather than primary occupation suggests agriculture's share of rural employment is lower than surveys indicate, at around three-quarters rather than over four-fifths. Positive structural change, with workers moving to higher productivity sectors, accounted for around a quarter of the increase in average labor productivity between 2004-05 and 2012-13. However, at current rates of structural change, agriculture is projected to employ a majority of workers until near the end of the century.

1. ETHIOPIAN
DEVELOPMENT
RESEARCH INSTITUTE
Implications of
Agricultural Productivity Growth for
Structural Change and Employment in Ethiopia
Paul Dorosh, Sherman Robinson and James Thurlow
IFPRI
EDRI-ESSP Seminar
Addis Ababa
April 9, 2015

2. Overview
1. Recent growth trends
2. Measuring structural change
3. Moving to a time-based view of employment
4. Modeling future growth and structural change
5. Summary and conclusions
2

3. 1. Recent Growth Trends
3

4. Rapid Economic Growth Since 2002
• Total GDP growth averaged 10% per year
(2001/02-13/14)
– About 7.5% annual growth in per capita terms
Real GDP per capita, 2002/03-13/14
(constant 2012/13 prices)
239
541584
1,322
0
200
400
600
800
1,000
1,200
1,400
2001/02
02/03
03/04
04/05
05/06
06/07
07/08
08/09
09/10
10/11
11/12
12/13
13/14
GDPpercapita(US$)
US$
US$ PPP
4

5. Sectoral Patterns of Growth
• Growth occurred throughout the economy
– Particularly strong growth in industry and services
Initial GDP
share (%)
Final GDP
share (%)
GDP growth
rate (%)
Contribution
to increase in
GDP (%)
Total 100.0 100.0 10.0% 100.0
Agriculture 45.6 36.2 7.2% 28.6
Industry 13.9 17.5 12.7% 20.1
Services 40.6 46.3 11.8% 51.3
Real GDP, 2002/03-13/14
5

6. Key Growth Sectors
Initial GDP
share (%)
Final GDP
share (%)
GDP growth
rate (%)
Contribution
to increase in
GDP (%)
Total 100.0 100.0 10.0 100.0
Agriculture 45.6 36.2 7.2 28.6
Mining 0.5 0.6 11.3 0.7
Manufacturing 5.4 5.2 9.8 5.3
Utilities 2.4 2.0 8.8 1.8
Construction 5.6 9.7 16.4 12.4
Trade 12.4 13.7 11.2 15.0
Hotels, catering 2.4 5.3 18.3 7.4
Transport, communication 5.8 6.4 11.8 6.6
Finance 0.8 1.9 17.0 2.5
Business, real estate 8.6 9.0 11.3 9.9
Public administration 4.7 4.1 8.8 4.0
Education 2.8 3.0 11.7 3.2
Health 0.9 1.1 11.8 1.3
Other services 1.9 1.5 7.2 1.3
*
*
*
*
= 72.2%
*
Real GDP, 2002/03-13/14
6

7. Agricultural Growth
• Agriculture is still a major driver of economic
growth
– Grew at about 7% per year during 2001/02-13/14
• Four-fifths of agricultural GDP growth was from
increased crop production
Initial
agricultural
GDP share
(%)
Final
agricultural
GDP share
(%)
Contribution
to increase in
agricultural
GDP (%)
Agriculture 100.0 100.0 100.0
Crops 59.3 68.4 81.9
Livestock 29.8 24.8 17.3
Forestry, Fishing 10.8 6.8 0.9
Real Agricultural GDP, 2002/03-13/14
Source: Diao, Thurlow and Verduzco Gallo (2015)
7

8. Rising Crop Yields
• Cereals generated more than half of crop GDP growth
during 2001/02-13/14
– Driven by land expansion and rising yields
– Cereals alone were responsible for almost 13% of total GDP
growth in Ethiopia
• Overall, rising crop yields (land productivity) accounted
for more than half of total crop GDP growth
– i.e., equal to 13% of total GDP growth in Ethiopia
All crops Cereals Non-Cereals
Crop GDP share in 2001/02 100% 57.1% 42.9%
Contribution to total crop GDP growth 100% 54.1% 45.9%
From cultivated land expansion 36.9% 21.1% 15.8%
From rising crop yields 55.4% 36.1% 19.3%
From reallocating land to higher value crops 7.7% -3.1% 10.8%
Source: Diao, Thurlow and Verduzco Gallo (2015)
Decomposition of real crop GDP growth, 2001/02-13/14
8

9. Summary
• Ethiopia is one of the fastest growing economies in the
world
• Economic growth has occurred throughout the economy
• There has been tremendous growth in industry and
services
– As a result agriculture’s share of GDP has fallen over the last
decade
• Nevertheless, agriculture remains a major driver of growth
– Most of which is due to improvements in land productivity
9

10. 2. Measuring Structural Change
10

11. Evidence of Structural Change
• Positive structural change is defined as a movement of
workers from low to high productivity sectors (e.g., from
agriculture to non-agriculture)
• Ethiopia’s two recent Labor Force Surveys reported a
large decline in agriculture’s share of total employment
between 2004/05 and 2012/13
– From 80% to 73% over 8 years
– Is this evidence of rapid, positive structural change in Ethiopia?
Employment
in 2004/05
(1000s)
Employment
in 2012/13
(1000s)
Employment
share in
2004/05 (%)
Employment
share in
2012/13 (%)
Total employment 31,435 42,404 100.0 100.0
Agriculture 25,208 30,817 80.2 72.7
Industry 2,090 3,134 6.7 7.4
Services 4,127 8,453 13.1 19.9
Employment, 2004/05 and 2012/13
Source: Ethiopia’s Labor Force Surveys
11

12. Private Household Jobs (1)
• Sharp rise in the employment
share for the sector called
“Private Households”
– +2.8mil. workers over 8
years (= 26% of all new
jobs)
• Sector includes work within
the household, e.g.,
wood/water collection;
cleaning; child care.
• Increase probably due to a
change in the definition of
employment between
surveys:
– Had to work 4+ hours per
week in 2004/05
– Only had to work 1+ hours
per week in 2012/13
2004/05 2012/13
Total 100.0 100.0
Agriculture 80.2 72.7
Mining 0.3 0.4
Manufacturing 4.9 4.5
Utilities 0.1 0.5
Construction 1.4 2.0
Trade 5.2 5.4
Hotels, catering 2.5 1.1
Transport, communication 0.5 1.0
Finance 0.1 0.3
Business, real estate 0.2 0.7
Public administration 1.2 0.7
Education 0.9 1.6
Health 0.3 0.6
Other services 1.6 1.2
Private households 0.8 7.3
Employment share (%)
12

13. Private Household Jobs (2)
• Rural women accounted for most (80%) of the increase
in Private Household employment between 2004/05 and
2012/13
• 2012/13 survey probably captured more “household
chores” than the 2004/05 survey (possibly done by
young women in rural households)
Total Male Female
National total 2,843 411 2,432
(+1,143%) (+1,780%) (+1,078%)
Urban areas 244 59 185
(+121%) (+290%) (+101%)
Rural areas 2,598 351 2,247
(+5,649%) (+1,3617%) (+5,176%)
Increase in Private Household jobs, 1000s
(% changes in parentheses)
13

14. Adjusted Employment Shares
• Impose Private Household
shares from 2004/05 onto
2012/13
– At the detailed male/female,
rural/urban level
• Private Household jobs in
2012/13 fall from 3.1 to 0.4 mil.
– Up from 0.25mil in 2004/05
• Total employment falls from
42.4 to 39.7 mil.
– Job growth is 3% p.a. (not 4%)
• Agriculture’s employment share
is now 77.6% rather than 72.7%
– Implies a slower rate of decline
in agricultural employment
Original Adjusted
Total 100.0 100.0
Agriculture 72.7 77.6
Mining 0.4 0.5
Manufacturing 4.5 4.8
Utilities 0.5 0.6
Construction 2.0 2.1
Trade 5.4 5.8
Hotels, catering 1.1 1.2
Transport, communication 1.0 1.0
Finance 0.3 0.3
Business, real estate 0.7 0.7
Public administration 0.7 0.7
Education 1.6 1.7
Health 0.6 0.6
Other services 1.2 1.3
Private households 7.3 1.0
Employment share (%)
14

15. Worker Productivity by Sector,
2012/13
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
0 10 20 30 40 50 60 70 80 90 100
AverageGDPperworker(US$)
Share of employment (%)
PRH
MAN
OSV
TRD
AGR
AGR: Agriculture
MIN: Mining
MAN: Manufacturing
CON: Construction
TRD: Trade services
HOT: Hotels, catering
TRC: Transport, communication
FIN: Finance
PAD: Public administration
EDU: Education
HSW: Health, social work
OSV: Other services
PRH: Private households
CON
HOT
EDU/HSW
FIN/PAD/TRC
15

16. Measuring Structural Change
• GDP growth can be expressed as changes in GDP per
worker, which is a measure of labor productivity
• We can decompose growth in GDP per worker into two
components:
– Within-sector: Increases in average GDP per worker assuming
workers do not move between sectors
– Between-sector: Productivity increases caused by workers
moving from lower to higher productivity sectors (e.g., agric. to
manufacturing)
• A positive “between-sector” component implies a positive
contribution of structural change to GDP growth
16

17. Decomposing Productivity Growth
• Positive structural change accounted for 25% of
the increase in worker productivity between
2004/05 and 2012/13
– Mainly people exiting agriculture for non-farm jobs
– Agriculture still generated 26% of worker productivity
gains (from higher yields)
Within-sector
productivity
growth
Structural
change (labor
reallocation)
Total
Share of total
change
All sectors 353 116 469 100.0%
Agriculture 136 -14 123 26.2%
Industry 41 47 88 18.8%
Services 175 83 258 55.1%
Share of total change 75.3% 24.7% 100.0%
Increase in average value-added per worker (US$)
between 2004/05 and 2012/13 caused by…
17

18. Positive Structural Change (04/05-
12/13)
agr
min
man
egw
con
trd
hot
trc
fin
rbs
pad
edu
hsw
osv
prh
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
-3.5 -3.0 -2.5 -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0
Value-addedperworker(logdeviationfromaverage)
Change in employment share (%-point)
Slope: 0.346
t-stat: 2.21 AGR: Agriculture
MIN: Mining
MAN: Manufacturing
EGW: Energy, gas, water
CON: Construction
TRD: Trade services
HOT: Hotels, catering
TRC: Transport, communication
FIN: Finance
RBS: Real estate, business
PAD: Public administration
EDU: Education
HSW: Health, social work
OSV: Other services
PRH: Private households
18

19. Summary
• The decline in agriculture’s employment share over the last decade is
not as rapid as recent surveys suggest
– Need to maintain consistent employment definitions in order to track
progress
• Nevertheless, rapid economic growth in Ethiopia was associated with
positive structural change
– Mainly from a declining importance of agricultural jobs
– But also from a relative shift out of manufacturing into construction and
higher value-added services
– Agriculture’s employment share is falling by 0.33 percentage points per year
• This is lower than China’s rate of structural change (0.9 percentage points per year) when
it transitioned from $500 to $1000 per capita
• At current trends, agriculture will continue to employ a majority of workers until 2097
(i.e., 77.6% - 84 years x 0.33 = 50%)
19

20. 3. Moving to a Time-Based View
of Employment
20

21. Workers vs. Time Spent Working
• Most surveys only capture people’s primary occupation
or job
– This includes 2012/13 Labor Force Survey
– But many farmers split their year between family farms and
non-farm enterprises (and sometimes they work as wage labor
in the nonagricultural sector)
• 2011/12 Ethiopia Rural Socioeconomic Survey (ERSS)
provides information on farmers’ secondary non-farm
jobs
%
Total 100.0
Family farming only 73.3
Farming + wage/non-farm work 13.5
Non-farm work only 13.2
Share of rural employed workforce holding
farm and non-farm jobs, 2011/12
Source: 2011/12 Ethiopia Rural Socioeconomic Survey
= 86.8% in agriculture
(≈ 89.6% in 2012/13 LFS)
21

22. Estimating Labor Full-Time Equivalents
• Rough estimate of workers’ time allocations using simple
assumptions:
– Farming activities = 8 months of work
– Farmers’ non-farm jobs = 4 months of work (i.e., off-season)
– Solely non-agricultural jobs = 12 months of work (i.e., year round)
• Agriculture’s share of rural employment falls from 87%
(measured in people’s primary jobs) to 77% (measured in time
spent on the job)
People
share (%)
People
(1000s)
Time
(years)
Time
share (%)
Total employment 100.0 33,428 25,261 100.0
Family farming only 73.3 24,502 ×⅔ 16,335 64.7
Farming and wage/non-farm work 13.5 4,510 ⇒ 4,510 17.9
Farming component 13.5 4,510 ×⅔ 3,007 11.9
Non-farm work component 0 0 ×⅓ 1,503 6.0
Non-farm work only 13.2 4,416 ⇒ 4,416 17.5
Agriculture employment share 86.8% 76.6%
Measuring rural employment in full-time equivalents
22

23. Summary
• Secondary nonfarm jobs are often overlooked (esp. in rural economy)
– These could easily account for a significant share of the time spent working
– More detailed surveys and analysis are needed
• Three implications:
– Agriculture’s employment share may be lower than primary job statistics
suggest
– Average agricultural value-added per “worker year” is higher than average
valued-added per worker
• This partially narrows gap in worker productivity across sectors (and reduces the
benefits from structural change)
– Rural non-farm jobs could be a potential source of structural change
• One that does not require migration to small towns and major cities
• And one that is difficult to capture in existing labor force surveys
23

24. 4. Modeling Future Growth and
Structural Change
24

25. Conceptual Framework
Non-farm employment
Urban Sectors
Farm employment
Non-farm Underemployment
Rural Sectors
Migration
Poor
Non-poor
Rural households
Poor
Non-poor
Urban households
National markets
Rural
“home”
goods
Foreign
markets
Land,laborand
capitalincomes
Laborandcapital
incomes
Government +
Investment
25

26. Producers and Factor Markets
• Multi-sector, multi-region production structure
– 2010/11 Social Accounting Matrix (i.e., adapted EPAU/EDRI SAM)
– 20 sectors (6 in agriculture) in 3 regions (rural areas, small towns, major
cities)
• Detailed labor markets (time-based)
– Rural: Farm work (fully-employed during season); Non-farm work (surplus)
– Urban: Non-farm professional, skilled and unskilled (full-employed year-
round)
• Rural-to-urban migration:
– Based on relative real wages (i.e., rural farm to urban unskilled)
Non-farm employment
Urban Sectors
Farm employment
Non-farm Underemployment
Rural Sectors
Migration
26

27. Households and Product Markets
• Rural/urban, poor/non-poor households (i.e., bottom two
quintiles)
– Earn land, labor and capital incomes according to their factor
endowments
• Purchased goods in national markets (potentially supplied
from abroad)
– Rural households first source goods from local rural markets
Poor
Non-poor
Rural households
Poor
Non-poor
Urban households
National markets
Rural
“home”
goods
Incomes Incomes
27

28. Recursive Dynamics
• Model run over the period 2010/11 to 2024/25
• Endogenous capital accumulation and allocation
– Past investment influences current availability of
capital (after depreciation)
• Exogenous updating:
– National population growth (regional population
depends on migration flows)
– Labor, land and capital productivity growth (factor-
specific, not TFP)
Baseline scenario
Alternative scenario
Outcome
variable
(e.g., GDP)
2010/11 2014/15 2024/25
28

29. Four Simulations
Baseline
+ Faster urban
growth
+ Faster
Migration
+ Agricultural
productivity
Population growth 2% 2% 2% 2%
Exogenous labor supply growth
Rural 2% 2% 2% 2%
Towns 3% 3% 3% 3%
Cities 4% 4% 4% 4%
TFP growth
Rural 2% 2% 2% 2%
Towns 2.5% 2.5% 2.5% 2.5%
Cities 3% 3% 3% 3%
Base rural-urban migration rate 0.5% 0.5% +1%-point +1%-point
Capital productivity growth
Towns +5%-points +5%-points +5%-points
Cities +6%-points +6%-points +6%-points
Agricultural labor productivity +4%-points
Annual growth rates, 2014/15 to 2024/25
29

30. Results: Economic Growth
Baseline
+ Faster urban
growth
+ Faster
Migration
+ Agricultural
productivity
Total GDP per capita (%) 4.71 8.30 8.32 8.96
Rural 3.56 3.47 3.46 4.96
Urban 5.93 12.56 12.16 12.16
Agric. GDP per capita (%) 1.89 1.84 1.71 3.99
Population (%) 2.00 2.00 2.00 2.00
Rural 1.95 1.95 1.88 1.85
Urban 2.29 2.28 2.71 2.83
Real food price index 0.38 0.87 0.89 0.74
Average annual growth rate (%) or deviation in price index (%-point)
30

31. Results: Wages and Migration
Baseline
+ Faster
urban growth
+ Faster
Migration
+ Agricultural
productivity
Person-based labor supply (%) 2.34 2.34 2.35 2.36
Rural 1.88 1.88 1.69 1.64
Urban 3.84 3.82 4.42 4.57
Time-based labor supply (%) 3.19 3.60 3.59 3.80
Rural 3.03 3.55 3.39 3.61
Urban 3.84 3.82 4.42 4.57
Rural-urban wage ratio, 2024/25
Person-based 1.56 1.72 2.18 1.46
Time-based 1.80 2.16 2.75 1.74
Average annual growth rate (%) or deviation in price index (%-point)
31

32. Results: Employment Shares
Baseline
+ Faster urban
growth
+ Faster
Migration
+ Agricultural
productivity
Person-based (%)
2013/14 78.1 78.1 78.1 78.1
2024/25 74.3 74.3 72.7 72.3
Annual change (%-point) -0.35 -0.34 -0.49 -0.53
Time-based (%)
2013/14 67.4 67.4 68.1 68.1
2024/25 58.5 56.1 55.0 53.4
Annual change (%-point) -0.80 -1.03 -1.19 -1.33
Agriculture’s share of total employment (%)
• Exceeds China’s 0.9%-points per year
• Large increase over person-based rate of structural change
32

33. Results: Household Welfare
Baseline
+ Faster urban
growth
+ Faster
Migration
+ Agricultural
productivity
National 3.7 6.3 6.2 7.1
Poor 4.5 7.2 7.2 6.8
Non-poor 3.4 5.9 5.8 7.3
Rural 3.8 5.8 5.9 6.8
Poor 4.5 7.1 7.3 6.7
Non-poor 3.4 5.1 5.1 6.9
Urban 3.1 6.9 6.5 7.3
Poor 3.7 8.3 7.0 7.9
Non-poor 3.2 6.9 6.7 7.6
Real household per capita consumption growth rate (%)
33

34. 5. Summary and Conclusions
34

35. Summary and Conclusions
1. Ethiopia is one of the fastest growing countries in the world
– A quarter of growth since 2004/05 was due to positive structural
change
– This pace of change is slower than other countries during their rapid
growth
2. Faster urban growth and rural-urban migration has limited
effect on the pace of structural change, without investments in
agricultural productivity
3. Labor-saving agricultural investments accelerate structural
change by…
– Releasing labor to urban areas
– Preventing food prices from eroding real wage gains for new urban
migrants
– Generating demand for rural non-farm products and creating jobs for
surplus rural labor during the off-season
35