Sectoral economic growth and

structural transformation in Ethiopia

Tadele Ferede (PhD)

Department of Economics

Addis Ababa University

October 3, 2015

1

Outline

1 Introduction

2 Structural transformation and stylized facts

3 Measures of structural transformation

4 Structural change and productivity decomposition

5 Conclusion

2

1. Introduction

Ethiopia has registered strong economic and social progress in the last decade

The country achieved an average annual growth rate of 9.5% in real terms between 2000/01 and 2013/14.

The recent growth record is also more impressive: averaged about 10.3% between 2005/06 and 2013/14.

Policies have the potential to alter not just the rate of economic growth, but also the structural character of that growth.

3

Figure 1: Real GDP growth rate (%)

4-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008 /9 2009 /10 2010 /11 2011 /12 2012/13 2013/14

Plan for Accelerated and

Sustainable Development to

End Poverty (PASDEP)

Real GDP growth rate: 11.0

Growth and

transformation Plan

(GTP)

Real GDP growth rate: 9.4

Sustainable Development

and Poverty Reduction

Programme (SDPRP)

Real GDP growth rate: 7.1

Sectoral contributions to

overall growth varied

The services sector a

driver of overall growth

Agriculture’s growth

contribution declined

Limited growth

contribution of the

manufacturing sector

Figure 2: Sectoral contributions to growth

5

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

2000/01 2005/06 2010/11 2013/14

24.5

40.4

47.4

54.9

Agriculture Manufacturing

Other industry Services

Key questions

Does Ethiopia need more of the same type of growth

or a change in the sources of growth?

What are the sectoral growth drivers of the Ethiopian

economy?

How have the sectoral composition of output evolved

over time?

To what extent labour mobility and productivity have

been affected by the growth performance?

What have been the relative contributions of within-

sector productivity and structural change?6

2. Structural transformation and stylized

facts Structural transformation is a critical prerequisite for

economic and social development.

But what is structural transformation?

Structural transformation refers to (Syrquin 1988:

206):

– reallocation of economic activity across the broad sectors

agriculture, manufacturing and services.

The most common relates to the relative importance

of sectors in the economy, in terms of production

and factor utilization.7

Structural transformation involves four interrelated

processes (Timmer and Akkus, 2008).

(i) a declining share of agriculture in total output and

employment;

(ii) the rise of a modern industrial and service economy;

(iii) rapid urbanization as people migrate from rural to

urban areas; and

(iv) a demographic transition from high birth rate-high

death rate to low birth-low death rates

Thus structural transformation entails economic and

social transformation. 8

The following stylized facts emerge

First, the output share of agriculture declines over

time, while that of manufacturing and services sectors

increase

Second, the employment share of agriculture diminish

over time, while the employment share of non-agricultural

sectors increases.

Third, labour productivity tends to be higher in non-

agricultural sectors compared with the agricultural sector.9

Finally, a change in the structure of final demand

towards services.

Consumers wish to spend a greater fraction of their

budget on services and a smaller fraction on food

(agricultural goods) as their incomes grow.

So, demand and supply side factors as key drivers

Focus of this presentation: economic aspects of

structural transformation

employment aspects of structural change (e.g. labour

productivity and employment shares)10

3. Measures of structural transformation

Indicators of economic performance at aggregate

level:

– GDP per capita and

– Some measure of productivity (e.g. labour productivity)

Three most common measures of structural

transformation at the sectoral level include:

employment shares,

value added shares, and

Final consumption expenditure shares.

11

Accounting for structural change

There are two main sources of aggregate labour

productivity growth:

(i) Innovations within sectors; and

(ii) Movement of workers across sectors.

The growth rate of aggregate labour productivity

between time 0 and t can be decomposed into three

elements:

it i0 i0 it i0 i0 it i0 it i00 0 i 1 i 1 i 1 i 1

p 1s s p p p s s s p p

P P

12

(i) Reallocation effect due to transfer of labour

between sectors

This is the contribution to productivity levels of the

transfer of resources among sectors.

it i0 i0

i 1

s s p

13

(ii) Within-sector productivity effect

It is the contribution of productivity growth within

each sector to overall labour productivity growth.

(iii) the dynamic structural reallocation effect

It represents the contribution of the resource transfer

to labour productivity growth.

it i0 i0

i 1

p p s

it i0 it i0

i 1 i 1

s s p p

14

The share of

agriculture in GDP

has declined

The share of services

has increased, and

bypassed agriculture

in recent years.

The share of the

industry sector has

remained very low.

Figure 3: Trends in sectoral VA shares in GDP

15

0.0

10.0

20.0

30.0

40.0

50.0

60.0

2000/

01

2001/

02

2002/

03

2003/

04

2004/

05

2005/

06

2006/

07

2007/

08

2008/

09

2009/

10

2010/

11

2011 /

12

2012/

13

2013/

14

Agriculture Industry

Services

Ethiopian manufacturing is

lagging in comparison to

peer economies and relative

to its aspirations

• MVA share in GDP in

Ethiopia are well below the

East Africa regional average

and selected Asian countries

Figure 4: Share of manufacturing in

GDP in Ethiopia and selected countries

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

Ethiopia

East Africa average

China

South Africa

Korea, Rep.

Vietnam

16

The share of agricultural

employment in total employment

remained very high.

Total employment increased by

11.6 million between 2005 and

2013.

With agriculture absorbing 72

percent, followed by services

(20) percent), manufacturing (4.5

percent) and Other industry (3

percent).

On aggregate, employment grew

on average by about 3.8% per

year between 2005 and 2013.

Figure 5: Sectoral employment shares (%)

17

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0 80.3

1.74.9

13.1

72.7

2.9 4.5

19.9

2005 2013

Among the services

sectors, wholesale and

retail accounted for

about 27% of total

employment in the

services sector

It seems that labour is

moving from agriculture

to services

Figure 6: Sectoral employment shares (% of total employment)

18

0.010.020.030.040.050.060.070.080.090.0

2005 2013

Aggregate labour productivity

increased from 8.9 thousand birr

per worker in 2005 to 13.2

thousand birr in 2013 at 2010/11

constant prices

Increased by 5.1% per year

But labour productivity levels

have remained low in agriculture

and manufacturing.

Figure 7: Labour productivity

19

-

50.00

100.00

150.00

200.00

250.00

2005 2013

While employment grew in

the majority of sectors, real

income declined

In 2012, the top four low

paying sectors were hotels &

restaurants, agriculture, whol

esale and retail trade, and

manufacturing

Labour mobility occurred

from a low paying sector to

another low paying sector.

Table 1: Average monthly real income (ETB)

2010 2012

Agriculture, Hunting, Forestry &

Fishing 355.2 275.7

Mining & Quarrying 494.6 600.0

Manufacturing 385.0 341.6

Electricity, Gas and Water Supply 641.3 471.0

Construction 550.2 452.9

Wholesale and Retail trade 387.8 293.5

Hotels and Restaurants 213.0 249.0

Transport, Storage and

Communications 603.6 508.3

Financial Intermediation 809.9 681.6

Real Estate, Renting and Business

Activities 656.5 605.0

Average monthly payment 483.9 421.720

4. Structural change and labour productivity

The reallocation effect is

small, indicating limited role of

inter-sectoral labour mobility

Agriculture and services sectors

made strong contributions to the

aggregate labour productivity

growth.

The contribution of

manufacturing activity to

economy-wide labour

productivity growth remained

very low.

Fig. 8: Structural change and sectoral contribution to labour productivity growth

-0.020

0.000

0.020

0.040

0.060

0.080

0.100

Static reallocation effect

Dynamic reallocation effect

Within-sector productivity growth21

The within-sector

productivity represents

the largest contribution

to aggregate labour

productivity growth

Structural change effect

contributed to close to a

third of the total labour

productivity growth

The contribution of

manufacturing activity to

economy-wide

productivity growth has

remained very low

Table 2: Components of aggregate labourproductivity growth

Structural change

effect

Within-sector

productivity

growth

Employment

effect

Interacti

on effect

Agriculture, Huntin

g, Forestry &

Fishing 0.180 -0.048 -0.017

Mining & Quarrying 0.004 0.006 0.003

Electricity, Gas and

Water Supply 0.014 -0.005 -0.005

Manufacturing 0.028 -0.003 -0.002

Construction 0.020 0.015 0.008

Wholesale and retail

trade 0.077 0.006 0.003

Transport and

Communications -0.009 0.046 -0.010

Other services -0.006 0.174 -0.005

Total 0.308 0.191 -0.02622

The employment effect is negative for agriculture and

manufacturing, while it is positive for services and

construction sectors

Labour shifts from agriculture and manufacturing sectors

to services.

Hence, Ethiopia’s overall labour productivity growth

in recent years has been driven by productivity growth

in individual sectors

The expansion of services reflects the transfer of

resources (e.g. labour) from agriculture to services. 23

Labour moves to sectors with lower productivity

levels, supporting the “structural burden” hypothesis

This indicates that sectors with fast growing labour

productivity cannot maintain their shares in total

employment.

Successful transformation entails labour shifts from

low productivity to high productivity- “growth

bonus”

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5. Conclusion

Structural transformation is a key driver for sustained

growth, productive employment creation and poverty

reduction.

Ethiopia’s overall labour productivity growth in recent

years has clearly been driven by productivity growth in

individual sectors, with little contribution coming

from structural change.

25

Low labour productivity levels in agriculture and manufacturing

No country has been able to sustain a rapid transition out of poverty without raising productivity in agricultural and industrial sectors (if it had one to start—Singapore and Hong Kong are exceptions) (Timmer, 2008).

Structural change requires not only one of “getting agriculture moving,” but also of “getting manufacturing moving.”

– “The only way out for agriculture is industry.” 26

Research agenda

Structural transformation involves both economic and social

transformation

Economic transformation: sectoral shares, productivity, etc.

Social transformation: urbanization, demographic transition,

etc.

This calls for a broader measure of structural transformation

Multi-dimensional structural transformation index (MSTI)

The multidimensional structural transformation index (MSTI)

needs to capture both economic and social transformation

27

Thank you!

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