Ethiopia - an Agrarian Economy in TransitionAlemayehu Seyoum Taffesse (Senior Research Fellow, IFPRI) andYared Seid (Country Economist, IGC Ethiopia)African Lions Authors Draft Workshop, June 5, 2015, Arusha, Tanzania

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

Outline1. 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

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.

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

Growth Accounting - Trend

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

Growth Accounting – Determinants Determinants

• Education

• Health (life expectancy)

• Infrastructure

• Extension

• Good weather

Elements of Policy

• Agriculture focus

• Infrastructure investment

• Fiscal decentralization

• Social protection

Employment Trends• Sectoral Share of Employment

Primary Sector Secondary and Tertiary Sectors

1960 1970 1980 1990 2000 2010Year

1960 1970 1980 1990 2000 2010Year

Seconday Sector Tertiary Sector

Source: Authors’ computation based on data from GDDC 10−Sector Database

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.

Between-sector employment shift

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 ho u seh o ld s. H igh -sk illed w ork ers in clu d e m an agers an d p ro fession als; m ed iu m - skilled workers include clerks, service and sales workers, operators, and assemblers; an d u n sk illed w orkers in clu d e elem entary w ork ers.

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.

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.

Workers' Education Level by year

The figure below, on the other hand, shows that Ethiopian workers have become more educated over time.

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

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

N o tes: *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 fi x ed eff ects.

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.

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’ calculation based on data from Ethiopian Urban Em p loy m ent U n em p lo y m en t Surv ey .

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).

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

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