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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”
24
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!
28
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