The Future of Ethiopia’s Agriculture: Drivers and Scenarios

1. The Future of Ethiopia’s Agriculture:
Drivers and Scenarios
Paul Dorosh, James Thurlow, Frehiwot Worku Kebede,
Tadele Ferede and Alemayehu Seyoum Taffesse
The Future of Ethiopia’s Agriculture: Towards a Resilient System
to End Hunger and Undernutrition
Addis Ababa Hilton
December 15, 2017
Presentation based on an ongoing study by the Ethiopian Strategy Support Program
(ESSP), with financial support from USAID, the European Union and DFID.

2. 2
• Introduction
• Agricultural Growth and Structural Transformation
• Macroeconomic Environment and Constraints
• Future of Ethiopian Agriculture: Model Simulations
• Summary and Conclusions
Plan of Presentation

3. 3
• Agricultural sector performance
• Substantial public investments, technical change and output growth
• Spatial and structural transformation
• Urban population doubled over 20 years (7.3mil. in 1994 to 16.7mil. in 2014)
• Agriculture’s share of national employment and GDP have fallen
• Dramatic improvement in household welfare
• Rural poverty fell (45% in 1999/00 to 30% in 2010/11)
• Child malnutrition (stunting) fell (58% in 2000 to 40% in 2014)
• Looking forward, how can this progress be sustained or even
accelerated?
Introduction

4. 4
• Increasingly binding land and water constraints (esp. in highlands)
• Technology-driven yield increases
– Improved seeds, quantity and quality of fertilizer
• Modernized value-chains
– Larger share marketed, reduced transport costs, cold-chains, value-addition
• Decelerating demand for cereals
– Accelerating demand for meat, dairy and process goods
• Faster urbanization: 16% in 2010/11 to 27% in 2034/35 (off. est.)
• Public investments
– Road and port infrastructure, urban versus rural allocations
• International economic climate and foreign investment
Drivers of Growth & Transformation

5. 5
• Increases in area cultivated, labor use, use of fertilizer and improved seeds, and
total factor productivity (TFP) accounted for much of the 8.3 percent annual
average growth in cereals from 2004/05 to 2015/16.
• Growth in cereal output slowed to 6.7 percent per year in the second part of
this period, however, as growth rates of all major inputs declined, except the
growth rate of fertilizer use.
Cereal Area Cultivated & Yield
• Annual increases in cereal area
cultivated have declined from over
3% in the early 2000’s to less than
1% in recent years.
• Yield increases averaged over 5%
per year from 2010/11 to
2015/16.
-1
1
3
5
7
9
11
2005/06
2006/07
2007/08
2008/09
2009/10
2010/11
2011/12
2012/13
2013/14
2014/15
2015/16
Percent
Area Yield
Source: Calculated from CSA Agricultural Sample Survey
data. (Adapted from Bachewe et al., 2017).

6. 6
• Earlier CAADP analysis
– Would 6 percent / year agricultural growth raise rural incomes and reduce
poverty? (given rapid non-agricultural income growth)
– Model results suggested … with rapid non-agricultural growth, real prices of
food would not fall significantly, farmer incomes would increase; poverty
would decline.
• What actually happened?
– Major production increase
– Nonagricultural economy grew
– Real cereal prices rose
– Poverty fell
– Many other factors also
influenced outcomes.
CAADP Analysis & Actual Outcomes (c.2008)
0
100
200
300
400
500
600
700
800
900
1000
(2010Birr/quintal)
Maize Sorghum (red)
Teff (mixed) Wheat (white)

7. 7
Key factors
• Growth of agricultural supply relative to demand (price effects on
agricultural incomes)
• Structural change in economy: Number of farmers (and agricultural
workers) declines as a share of total population.
• Changing structure of demand: share of agricultural/food products
in total demand falls as incomes rise.
• Small investments targeted to poor farmers could still reduce
poverty even if aggregate agricultural growth has limited effects.
Will Further Agricultural Growth Promote
Poverty Reduction Given Structural Change?

8. • Ethiopia has invested
heavily in the rural
economy
– Agriculture and roads
accounted for 13.9 and 15.8
percent of public expenditures
in 2014/15.
– Agricultural expenditures grew
by an average of 10.1 percent
per year from 2009/10 to
2014/15. Road expenditures
grew even faster – 13.0
percent/year.
Ethiopia: Public Spending
2007/08 – 2015/16
8
2009/10 2014/15 Annual Growth
Agriculture 33.3 53.7 10.1%
Recurrent 6.4 10.0 9.3%
Capital 26.8 43.7 10.2%
Roads 33.2 61.2 13.0%
Other 172.6 271.9 9.5%
Total 239.1 386.8 10.1%
Agriculture share 13.9% 13.9% 0.0%
Roads share 13.9% 15.8% 0.4%
0
50
100
150
200
250
300
350
400
450
2007/8 2008/9 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16
(bn2015/16Birr)
Rec. Agric. Cap. Agric. Rec. Roads Cap. Roads Rec. Other Cap. Other

9. 9
Zone Classification Parameters
Elevation:
 Highlands: >1500 meters above
sea level
Moisture Reliability:
 Annual rainfall (mean/std) >= 7.5
Cropping System:
 Cereal or enset based (moisture
reliable highlands only)
Drought Prone Lowland /
Pastoralist:
 Mean annual rainfall < 500mm
Ethiopia: Agroecological Zones
Highland moisture reliable zones accounted for 92% of
cereal area cultivated and production in 2013/14

10. 10
• Detailed economic structure
– 75 sectors split across 6 zones (2010/11 social accounting matrix)
• Urban centers >50k | five rural areas and towns <50k
– In each zone, rural/urban labor separated by education levels and
households separated by expenditure quintiles
• Model assumptions and behavior
– National product markets
– Population and labor (by zone) grow at different rates
– Total crop land (by zone) grows at fixed rates (individual crops’ areas are
endogenously allocated)
– Foreign savings is exogenous; real exchange rate is endogenous
Ethiopia Economywide Model

11. 11
• Land (varies by region / agroecology):
– 0.6% annual growth in most scenarios (1.8% in moisture-sufficient lowlands;
0.7% in moisture-sufficient highlands)
• Labor (and rates of urbanization)
– Historical population growth rates 2007-15: urban 4.6%, rural 2.1%, overall
2.5%
• Capital (and rates of investment by sector)
– Determined by domestic and foreign savings
– Private and public investment choices
• Technical change (changes in TFP)
Drivers of Agricultural & Economic Growth

12. 12
• Model run over the period 2010/11 - 2039/40
– 2010/11-2015/16 replicates observed trends
– 2016/17 onwards based on projections
• Five scenarios:
1. Baseline: Business-as-usual
2. Cities: Faster urbanization in cities >50k
3. Agriculture: Greater investment in agriculture
4. Rural Nonfarm/Towns: Faster growth in rural nonfarm and towns <50k
5. Livestock: Shift in geographic area of concentration
Rainfall sufficient highlands: Decline in crop area and increase in livestock productivity;
Rainfall sufficient lowlands: Increase in crop area and decrease in livestock productivity
• Targeted investments displace other investments (no free lunch)
– e.g., investing in cities reduces investments in agriculture
Model Simulations

13. 13
Baseline Assumptions
2011-2016 2016-2026 2026-2040
Population 2.6 2.3 1.8
Labor force 2.6 2.3 1.8
Crop land 1.5 0.9 0.7
Livestock herd 1.4 0.8 0.4
Foreign capital inflows 30.0 -15.0 -5.0
Foreign aid inflows 1.5 -4.0 -4.0
Remittance inflows 15.0 -15.0 -5.0
Agricultural TFP 3.0 1.0 1.0
Non-agricultural TFP 3.0 0.5 0.5
National average annual growth rate (%)

14. 14
Model Results: Growth Drivers
Average annual growth rate, 2016/17-2039/40 (%)
Simulations have similar urban/rural population growth rates, labor supply growth rates,
and land expansion rates. TFP growth is fastest in the Cities and Nonfarm scenarios.
Source: Ethiopia CGE model results
Baseline S1: Cities S2: Agric. S3: Nonfarm S4: Livestock
National population 2.0 2.0 2.0 2.0 2.0
Rural 1.7 1.7 1.7 1.7 1.7
Urban 3.4 3.4 3.3 3.3 3.3
Total GDP 6.8 7.0 6.4 6.8 6.4
Labor supply 2.0 2.0 2.0 2.0 2.0
Land supply 0.8 0.8 0.8 0.8 0.7
Capital stock 7.4 7.5 7.1 7.6 7.1
Productivity (TFP) 2.1 2.2 1.9 2.1 1.8
Foreign inflows/GDP (2040) 22.0 20.9 23.0 22.1 22.7
Investment/GDP (2040) 27.3 27.1 26.7 27.6 26.3

15. 4.0
-2.3
10.8
-7.0
5.6
-8.1
1.4
-18.5
9.6
-10.7
0.7
16.0
-15.8
-0.4
0.9
-9.3
0.1
-19.3
8.2
-11.8
-30 -20 -10 0 10 20
National
Rural
Urban
Agriculture
Non-agriculture
Deviation from baseline, 2040 (%)
S1: Cities S2: Agriculture
S3: Nonfarm S4: Livestock
15
• City investments raise real GDP
by 4% relative to baseline (8.1%
lower with agric. investments)
• Largest rural GDP gains from
investments in nonfarm
activities, but draws resources
away from rural agriculture
• Nonagricultural GDP is 10.7%
and 11.8% less in the agriculture
and livestock simulations
Growth Outcomes
Source: Ethiopia CGE model results

16. 16
• Model captures agriculture’s contribution to the agri-food system
(AFS) and broader national economy
Ethiopia’s Agriculture-Food System
Share of total, 2010/11 (%)
Source: 2010/11 Social Accounting Matrix (SAM)
GDP Employment
National economy 100.0 100.0
Agriculture-food system 52.9 84.4
Agriculture (crops, livestock, etc.) 42.1 79.0
Agricultural processing (milling, etc.) 2.1 0.7
Farm/processing input production 1.3 0.4
Agricultural trade & transport 7.5 4.2

17. 17
Baseline Agri-Food System Dynamics
52.9
13.1
42.1
8.8
20.5
33.0
0
10
20
30
40
50
60
2010 2015 2020 2025 2030 2035 2040
Shareofnationaltotal(%)
Agriculture-food system GDP share
Agriculture GDP share
Downstream share of total AFS GDP
Source: Ethiopia CGE model results

18. 18
• All scenarios, except Cities, accelerate AFS GDP growth
• Investing in cities accelerates national GDP growth, but draws
resources out of the AFS
Agri-Food System Outcomes
Average annual growth rate, 2016/17-2039/40 (%)
Source: Ethiopia CGE model results
Baseline
S1:
Cities
S2:
Agric.
S3:
Nonfarm
S4:
Livestock
National economy 6.8 7.0 6.4 6.8 6.4
Agriculture-food system 2.9 2.7 3.2 2.9 3.2
Agriculture 2.4 2.1 2.8 2.4 2.7
Agro-processing 5.0 4.8 5.1 4.9 5.0
Input production 4.2 3.9 4.4 4.2 4.3
Trade & transport 4.3 4.2 4.4 4.2 4.3

19. 19
• All scenarios improve
national household welfare
• Rural welfare increases faster
than urban welfare
– Initial levels of rural per capita
incomes are lower than urban
per capita incomes.
– Overall the urban economy
grows faster than the rural
economy, but migration
increases urban population.
Household Welfare Outcomes (1)
Per capita consumption, 2016/17-2039/40
Source: Ethiopia CGE model results
2.3
2.7
1.2
2.3
2.5
1.3
2.4
2.8
1.0
2.4
2.8
0.9
2.3
2.7
1.0
0.0 0.5 1.0 1.5 2.0 2.5 3.0
National
Rural
Urban
Average annual growth (%)
Baseline S1: Cities S2: Agriculture
S3: Nonfarm S4: Livestock

20. 20
• Investments in agriculture lead
to 1.1% higher national
household consumption in
2040 than investments in cities
• Urban investments benefit
urban households, but reduce
national average welfare
– Generates demand for
agricultural products, but some
of these are imported
– Urban nonfarm producers
compete with rural nonfarm
producers
Household Welfare Outcomes (2)
Source: Ethiopia CGE model results
-2.0
-3.4
2.4
1.1
3.1
-4.7
0.7
3.2
-7.4
-0.2
1.7
-5.9
-8 -6 -4 -2 0 2 4
All
Rural
Urban
Deviation from baseline, 2040 (%)
S1: Cities S2: Agriculture
S3: Nonfarm S4: Livestock

21. 21
• Given the concentration of poverty in rural areas, agriculture and
small town investment scenarios are more pro-poor, despite
smaller national GDP gains
Poor* Household Outcomes (1)
2.3
2.3
2.4 2.4
2.3
2.8
2.7
2.9 2.9
2.8
2.0
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
2.9
Baseline S1: Cities S2: Agriculture S3: Nonfarm S4: Livestock
Averageconsumptiongrowth(%)
All households Poor households
Source: Ethiopia CGE model results
* Defining poor households as the lowest 40% in the income distribution..

22. 22
• Rural nonfarm investments
result in large gains to poor
households (1.2%) as well as
nonpoor households (2.1%)
• Investments in agriculture
and rural nonfarm are more
pro-poor than investments
in urban sectors
• Urban investments draw
resources away from AFS,
which hurts both poor and
nonpoor consumers
Poor* Household Outcomes (2)
Source: Ethiopia CGE model results
-2.0
-2.7
-3.2
1.1
1.1
1.8
0.7
1.2
2.1
-0.2
-0.1
0.6
-4 -3 -2 -1 0 1 2 3
All
Poor
Nonpoor
Deviation from baseline, 2040 (%)
S1: Cities S2: Agriculture
S3: Nonfarm S4: Livestock
* Defining poor households as the lowest 40% in the income distribution.

23. 23
• Agricultural growth is likely to decelerate
– Growing land constraints are only partly offset by cultivating more of the
moisture-sufficient lowlands
– Urbanization slows rural labor force growth (but rural pop. still grows)
• Broader agri-food system becomes more important over time as
agriculture’s direct importance declines (in relative terms)
– Investing in rural nonfarm activities greatly benefits poor (rural) households
• Agriculture remains highly effective at reducing poverty (at least
until 2040)
• Urban investments generate faster economic growth and
structural transformation
– But does not reduce poverty as fast as agricultural or rural investments
Summary

24. Thank you
አመሰግናለሁ!
24

25. Drivers of Agricultural Growth:
Land Constraints
The base simulation assumes slow area expansion (less than
1% per year) in the highlands.
25
Land Supply Growth 2017-35 (percent)
Base Urban Agric RNFE
National 0.64 0.64 0.85 0.64
Rural 0.64 0.64 0.85 0.64
R1: Dry Highlands 0.19 0.19 0.19 0.19
R2: Dry Lowlands 0.89 0.89 1.15 0.89
R3: Moist Lowlands 1.76 1.76 3.50 1.76
R4: Moist High Cereals 0.73 0.73 0.73 0.73
R5: Moist High-Enset 0.25 0.25 0.25 0.25

26. 26
• Total goods imports in
2016/17 (US$18bil.) were
2.2x 2004/05 levels
• Foreign capital inflows,
private transfers and FDI
together were US$14bil. in
2016/17 (75.6% of
merchandise imports).
• Merchandise exports
accounted for only 19.4%
of total foreign exchange
net inflows.
Drivers of Growth: Foreign Capital Inflows
Foreign capital inflows have been large.
Projected debt/GDP for 2016/17 was 54.1%; projected
external debt/GDP was 30.5%.
0
2
4
6
8
10
12
14
16
18
20
2004/05 2006/07 2008/09 2010/11 2012/13 2014/15 2016/17
billionUS$
Foreign Capital Inflows Foreign Direct Investment Public Transfers
Net Servs + Priv Transfers Exports
Imports
Balance of Payments: 2004/05 to 2016/17
Source: IMF (various years). (2016/17 figures are projections.)

27. 27
External & Domestic Debt
• Both external and
domestic debt quadrupled
between 2010/11 and
2016/17
• External debt reached
$27bil. in 2016/17
– Equal to 35% of GDP.
• Debt-to-GDP ratio rose by
60%-points
– 37% in 2010/11
– 60% in 2016/17
37.4
32.7
37.4
45.7
55.3 54.2
60.3
0
10
20
30
40
50
60
70
0
10
20
30
40
50
2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17
Debt/GDP(percent)
billionUS$
Domestic Debt External Debt Debt/GDP
Further substantial increases in foreign debt as a share of
GDP could become unstainable
Model simulations will assume slower debt growth
Source: IMF (various years). (2016/17 figures are projections.)

28. 28
• Agricultural GDP share fell from 46% in 2010/11 to 36% in 2015/16
• Most (62%) of real GDP change from agric., construction and trade
GDP Growth Dominated by Agric. & Services
0
100
200
300
400
500
600
700
800
GDP 2010/11 GDP 2015/16 Change in GDP 2010/11-15/16
(billion2010/11birr)
Agriculture Manufacturing Construction Other Industry
Trade Hotels, Restaurants Transport, Comm. Real Estate
Other Private Services Public Services
Source: CSA (2017)