United Nations University World Institute for Development Economics Research wider.unu.edu
WIDER Working Paper 2015/154
Ethiopia – an agrarian economy in transition
Yared Seid,
1
Alemayehu Seyoum Taffesse,
2
and Seid Nuru Ali
3
December 2015
In partnership with
1
International Growth Centre, London School of Economics and Political Science (LSE);
2
International Food Policy Research
Institute (IFPRI), Washington, DC, corresponding author: A.SeyoumTaffesse@cgiar.org;
3
Ethiopian Economics
Association, Addis Ababa, Ethiopia.
This study has been prepared within the UNU-WIDER project on ‘Macro-Economic Management (M-EM)’ as part of
the Institute’s collaboration with the Brookings Institution and the Development Policy Research Unit (DPRU) at the University
of Cape Town on ‘Understanding the African Lions: Growth Traps and Opportunities in Six Dominant African Economies’.
Copyright © University of Cape Town 2015
ISSN 1798-7237 ISBN 978-92-9256-043-0 https://doi.org/10.35188/UNU-WIDER/2015/043-0
Typescript prepared by Ayesha Chari for UNU-WIDER.
UNU-WIDER gratefully acknowledges the financial contributions to the research programme from the governments of
Denmark, Finland, Sweden, and the United Kingdom.
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Abstract: Ethiopia has experienced rapid economic growth since 2005. Real gross domestic
product (GDP) grew at an average rate of 10.5 per cent per annum for the period between 2004–
05 and 2013–14. Public investment in key infrastructure and interventions in the agriculture
sector have made important contributions to GDP growth. This growth has been accompanied
by a process of capital deepening and signs of structural shift away from traditional and primary
sectors towards secondary and tertiary sectors. Both processes of high growth and structural
shift have important implications for poverty reduction and income distribution. One potential
channel through which these influences work is the labour market. The indications of structural
transformation that Ethiopia has shown in the last decade, including a continuous decline in the
role of agriculture and rise in that of services, have led to reallocation of jobs and labour from
low-productivity agriculture to more productive industrial—in particular the construction sub-
sector—and service sectors. The rise in total factor productivity, overall increase in labour force
participation rate, and fall in the labour share of the agriculture sector are indicative of the nature
and extent of structural shift in the Ethiopian economy. A more durable shift of economic
activities towards the manufacturing sector is expected to follow the rising trend in investment in
the sector. This study explores the impact of the high economic growth and slow but
unmistakable structural change on a number of economic outcomes working through the labour
market. The growth opportunities and challenges of the Ethiopian economy are also discussed.
Keywords: economic growth, structural transformation, labour market, Ethiopia
JEL classification: I25, O10, O12
Acknowledgements: We thank Haroon Bhorat for his valuable comments and suggestions on a
previous version of this paper. The paper has also benefited from the comments of participants
of the authors’ workshops on ‘Understanding the African Lions’. Any errors are the
responsibility of the authors.
1
1 Introduction
Ethiopia has experienced rapid economic growth since 2005, with gross domestic product
(GDP) growing at an average rate of 10.5 per cent per annum in real terms for the period
between 2004–05 and 2012–13 (Ministry of Finance and Economic Development, MoFED
2013). This makes Ethiopia one of the fastest growing countries in the world. The rapid
economic growth has a multifaceted effect on a number of social, economic, and political
domains. Considering 2015 is the year the first Growth and Transformation Plan (GTP)—the
country’s comprehensive five-year development plan with targets aligned to the aim of achieving
middle-income status by the mid-2020s—ends, it is a good time to explore the pattern of
economic growth in Ethiopia and the relevant growth opportunities and challenges.
Available evidence suggests that economic growth in Ethiopia has been accompanied by signs of
a structural shift away from traditional and primary sectors and towards secondary and tertiary
ones. For instance, the pace of output growth has been decreasing in agriculture whereas growth
rates of industrial and service sectors have been increasing. As a result, the share of agriculture in
GDP is now comparable to that of the service sector—a significant change from a couple of
decades ago.
Both economic growth and structural shifts have important implications for poverty reduction
and income distribution. Labour market outcomes are a major potential avenue through which
these influences take place. The high rate of public investment in infrastructure has generated
growth in construction and related industries and triggered growth in other sectors through
linkage effects. There are three major channels through which the process is believed to have
influenced income distribution in the country. First, investment on infrastructure and buildings
led to higher employment of urban youth and rural migrants in construction and allied sub-
sectors. Second, partly caused by this expansion of employment, the demand for goods and
services increased. This is particularly significant to the agricultural sector, thereby leading to
terms of trade improvements in favour of the sector. Policy responses to these pressures aimed
to raise productivity in agriculture and include the expansion of the agricultural extension system.
Structural change formed the third channel.
As a consequence of the changes noted above, the role of agriculture has decreased continuously
in the face of an increasing role of the service and construction sectors, and this has led to
reallocation of jobs and labour from the low-productive agriculture sector to the high-productive
service sector. Historical evidence shows that this type of labour reallocation is vital for more
secure employment and higher living standards. The nation’s effort following these changes is to
diversify the shift of economic activities towards the manufacturing sector to ensure more
durable jobs and sustainable growth. This is the focus of the second phase of the GTP that
began in late 2015.
Another aspect of sectoral reallocations is their potential to engender more unequal outcomes.
The possibility of this out-turn is not small since the jobs created in the service sector are, on
average, relatively more knowledge-intensive and higher paying. The earnings gap between
skilled and unskilled workers in Ethiopia can thus widen. This is obviously an empirical question.
In this study, we, accordingly, attempt to collate and analyse the relevant evidence, such as
within- and between-sector employment shifts, to ascertain whether economic growth and
structural change in Ethiopia are pro-poor. Moreover, the study explores related social and
economic changes that have affected employment of both skilled and unskilled workers in
Ethiopia, including population growth and its demographic structure, the expansion of
2
education, returns to education, and the role of the public sector and social protection
programmes in employment.
The remainder of this paper is organized as follows. Section 2 discusses the pace and sources of
economic growth in Ethiopia, which has been observed since the mid-1990s. Section 3 considers
the status of structural transformation in Ethiopia. Demographic conditions and human capital
development in the country are considered in Section 4, whereas Section 5 explores the effect of
the economic growth on the labour market. The final section concludes.
2 Background
2.1 Trends in economic growth in Ethiopia
After being stagnant for many decades, Ethiopia’s economy has experienced robust and
continuous growth over the last decade since 2005. Figure 1 shows trends in GDP growth in
Ethiopia since 1990.
1
As can be seen in the figure, in the 1990s, GDP growth in Ethiopia was
not only low on average, it was also highly volatile, with both high positive and negative growth
rates throughout the decade. The outcome reflected a combination of factors including recovery
from a lengthy civil war, war with Eritrea (towards the end of the decade), and volatile weather
combined with heavy reliance of Ethiopian agriculture on rainfall and its very large contribution
to total GDP.
Figure 1: Gross domestic product (GDP) growth in Ethiopia (1990–2014)
Source: Authors’ computation using data from the World Development Indicators (WDI) database (World Bank
2015b).
Since the mid-2000s, on the contrary, Ethiopia has enjoyed accelerated and sustained economic
growth for more than a decade now, where growth rates exceeded global averages. Indeed, it has
1
Analogous patterns emerge from the data of the Ministry of Finance and Economic Development. The
corresponding chart is available from the authors upon request.
-15
-10
-5
0
5
10
15
20
1990 1995 2000 2005 2010 2015
Growth rates (%)
Year
GDP growth (annual %) Linear (GDP growth (annual %))
3
become one of the fastest growing countries in the world along with some Asian countries. Even
during the global economic recession that began around 2008, Ethiopia continued to grow
steadily.
In addition to favourable weather conditions for agriculture, a set of factors has contributed to
the economic growth in Ethiopia. Conducive government policies, including large market
reforms in the 1990s, are a vital and defining element of this set. Improvements in access to
basic services (such as health and education) and heavy investment in infrastructure (such as
roads and telecommunications) have also significantly helped by addressing critical bottlenecks.
Overall growth has also been symbiotically accompanied by greater commercialization of
agriculture and private sector development, more broadly.
An important attribute of this high growth episode is that it has been resilient to various shocks
such as drought and international economic crisis. This is contrary to the historical susceptibility
of the economy to such shocks: war in the 1990s and very early 2000s and drought in 1975,
1985, 1997, and 2003 have had adverse effects on the Ethiopian economy (see Figure 2).
Figure 2: Sustained growth in per capita GDP (Hodrick–Prescott decomposition)
Source: Authors’ calculations using data from the Ministry of Finance and Economic Development (MoFED
2013).
2.2 Sources of growth
This section explores the sources of aggregate and sectoral growth using Solow decomposition
analysis. Such growth decomposition has a long history stretching back to Solow (1957).
2
2
For further details, see Barro (1998) among others. Also see World Bank (2015c) for a more detailed examination
of the growth performance of the Ethiopian economy during 2004–14, and Bachewe et al. (2015) specifically for the
agricultural sector.
-0.15
-0.10
-0.05
0.00
0.05
0.10
7.4
7.6
7.8
8.0
8.2
8.4
8.6
8.8
9.0
Per capita GDP (in logs)
Per capita GDP Trend Cycle
