Economic Growth, Urbanization and Poverty Reduction in Ethiopia Paul Dorosh International Food Policy Research Institute (IFPRI) Presentation at the Brussels.

Economic Growth, Urbanization and Poverty Reduction in Ethiopia

Paul DoroshInternational Food Policy Research Institute (IFPRI)

Presentation at the Brussels Development Briefings n. 24: “Major drivers for rural transformation in Africa: Job creation for rural growth”, Brussels, 14th September 2011.

Presentation outline

1. Ethiopia’s Changing Economic Landscape– Structural shift of the economy (declining share of agriculture)– Spatial (urbanization)– Infrastructure (expanding road networks)– Electricity generation and use (even exports?!)– Telecommunications (mobile phones and internet)– Education and health

2. Key policies– Implications of agricultural investments– Land policies– Industrial structure and constraints

3. Allocation of Public Investments: Model Simulations

4. Concluding Observations

3

Ethiopia: Economic Structure1999/00 – 2008/09

Source: Calculated from World Bank, World Development Indicators data.

38

40

42

44

46

48

50

52

0

20

40

60

80

100

120

140

1999

/00

2000

/01

2001

/02

2002

/03

2003

/04

2004

/05

2005

/06

2006

/07

2007

/08

(200

8/09

)

Agr

ic S

hare

of G

DP

(%)

billi

on (

1999

/200

0) B

irr

Agriculture Industry Electricity and Water

Construction Other Private Services Public Administration

Agric Share of GDP

4

Ethiopia: Industrial Output and Growth1999/00 to 2008/09

Source: Calculated from Ministry of Finance national account statistics.

2008/09 Growth Rate2008/09 Share of GDP 1999/00-08/09

(bn Birr) (percent) (percent)Agriculture 160.6 50.3% 7.0%Industry 34.0 10.7% 9.2% Mining 1.3 0.4% 4.2% Large, Medium Scale Manuf 8.6 2.7% 8.1% Small Scale, Cottage Industries 4.0 1.3% 5.8% Electricity and Water 4.0 1.3% 7.6% Construction 16.1 5.0% 12.3%Other Private Services 114.2 35.8% 11.2%Public Administration 10.3 3.2% 4.2%Total 319.2 100.0% 8.6%

5

Ethiopia: UrbanizationOfficial Agglomeration

Estimate Index(percent) (percent)

1984 11.4% 3.7%1994 13.7% 7.1%2007 15.9% 14.2%

(mns people) (mns people)1984 4.55 1.481994 7.33 3.802007 11.72 10.50

(growth rate) (growth rate)1984-1994 4.9% 9.9%1994-2007 3.7% 8.1%1984-2007 4.2% 8.9%

Ethiopia is urbanizing faster than people think!!!

6

Ethiopia: Alternative Urbanization Estimates

0

2

4

6

8

10

12

14

1984 1994 2007

(mill

ions

)

Agglomeration Index Official CSA

7

Road Infrastructure and UrbanizationTravel Time 1984

INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE – ETHIOPIA STRATEGY SUPPORT PROGRAM

8

Road Infrastructure and Urbanization Travel Time 1994

INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE – ETHIOPIA STRATEGY SUPPORT PROGRAM

9

Road Infrastructure and Urbanization Travel Time 2007

INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE – ETHIOPIA STRATEGY SUPPORT PROGRAM

10

Percent Population by Travel Time to 50K+ Urban Agglomeration

Source: Schmidt and Kedir (2009); Mozambique and Nigeria country papers.

0

10

20

30

40

50

60

70

80

90

Ethiopia 1984

Ethiopia 1994

Ethiopia 2007

Mozamb. 1997

Mozamb. 2007

Nigeria 1991

Nigeria 2006

> 10 hours 5-10 hours

11

Ethiopia: Percent Population connected to Urban Agglomeration

1984 1997 2007 -

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

35,000,000

40,000,000

45,000,000

0%

10%

20%

30%

40%

50%

60%

Under 1 hour 1- 3 hoursShare of Total Population

Source: Schmidt and Kedir (2009)

12

Ethiopia: Electricity Generation Capacity1958 to 2011*

Source: Calculated using CSA Survey of Manufacturing (various years) and Ethiopian Electric Power Corporation data. Notes: Figures for 2008-10 based on additional capacity from Tekeze I (300 Mw) in 2009; and Tana Beles (460 Mw) in 2010. 2011 figures is 2010 figure plus Gile Gibe II (420 Mw) for which the tunnel collapsed in December, 2009.

0

5

10

15

20

25

0

200

400

600

800

1000

1200

1400

1600

1800

2000

1958

1961

1964

1967

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

watt

s/pe

rson

meg

awatt

s (m

n w

atts)

Total Installed Capacity Non-Hydro Capacity Capacity/capita

13

Ethiopia: Fixed Line and Cellular Telephones2003 to 2010

Sources: ITU (2009). Information Society Statistical Profiles 2009 - Africa, International Telecommunication Union (ITU). Ethiopian Telecommunications Corporation (ETC). ETC Strategic Plan. http://www.ethionet.et/aboutus/visionmission.html

0

1

2

3

4

5

6

7

8

9

10

2003 2008 2009 (plan) 2010 (plan)

(mill

ions

)

Cellular Phones Fixed Lines

14

Ethiopia: Fixed Line and Cellular Telephones2003 to 2010

Sources: ITU (2009). Information Society Statistical Profiles 2009 - Africa, International Telecommunication Union (ITU). Ethiopian Telecommunications Corporation (ETC). ETC Strategic Plan. http://www.ethionet.et/aboutus/visionmission.html

2003 20082009

(plan)2010

(plan)Main (fixed) telephone lines Ethiopia 405 909 3,000 4,400 Africa 9,553 10,617 --- ---

Mobile cellular subscriptions ('000s) Ethiopia 51 3,168 7,500 9,900 Africa 35,251 245,608 --- ---

Mobile cellular subscriptions (per 100 people) Ethiopia (share of total population) 0.1 3.9 9.0 11.5 Ethiopia (share in connected area) 0.1 5.3 --- --- Africa (share in connected area) 3.7 32.5 --- ---

15

Net Primary School Enrollment

All Children Girls

1991 2000 2007 1991 2000 2007

Ethiopia 21.9 38.4 71.4 18.8 32.5 68.5

Burundi 53 42.6 81.2 48.8 38.8 80.3

Kenya --- 66.2 86.3 --- 67.1 86.3

Rwanda 66.9 --- 93.6 65 --- 94.9

Sudan --- 41.2 --- --- 37.2 ---

Uganda 51.1 0 94.6 46.2 0 96.1

Source: World Bank World Development Indicators.

16

Rural – Urban Expenditure and WelfarePoverty Incidence

3032343638404244464850

1995/96 1999/00 2004/05

(per

cent

)

Rural Urban Total

17

ERHS: Self-Reported Perceptions of Poverty

2009

2004

1994

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

2

1

8

11

20

33

13

13

8

DestitutePoorNever quite enoughCan get byComfortableRich, very rich

18

Agricultural Growth and Poverty CAADP CGE Baseline Scenario

• Agriculture– Land cultivated for each crop follows medium-term trends: total land

cultivated increases 2.6% per year, 2009-2015– Land growth varies across region (1.2% per year in rainfall sufficient

areas, 3.2% per year in drought-prone areas, 3.7% per year in pastoralist areas)

– Crop yield increases account for one-third of the crop production growth

– Overall agricultural GDP growth: 4.0%/year– Note: population growth rate is 3.0 percent/year

• Non-agricultural output growth based on historical medium-term trends: – Manufacturing: 6.5% per year– Services: 6.7% per year

Source: Dorosh and Thurlow (2009), ESSP2 Discussion Paper No. 2.

19

Ethiopia: Impacts of Growth on Poverty

22.7

17.6

40.0

13.3

10

15

20

25

30

35

40

2005 06 07 08 09 10 11 12 13 14 15

Nati

onal

pov

erty

hea

dcou

nt (%

)

Baseline scenario

All agriculture scenario

With non-agriculture scenario

Source: Dorosh and Thurlow (2009), ESSP2 Discussion Paper No. 2.

20

Rural – Urban Migration

Source: de Brauw et al., (2010).

21

Land Policies and Migration

• Regional governments' proclamations restrict access to rural land by prescribing the need to be a rural resident in that particular region as a condition for acquiring rural land free of charge.

• No right to transfer land right on sale or in exchange with another property

• No easy transferability of land rights: transfer of use right in the form of inheritance and donation is allowed only to the right holder's family members who are residing in the rural kebele and are engaged or wish to engage in agriculture.

• These policies inhibit migration from rural areas.

22

Ethiopia’s Industrial Sector• Many small firms: 70 percent of firms employ less than 50

workers. • A high degree of survival for firms at the top of the productivity

distribution, while the majority of the least efficient firms in the bottom two quintiles (nearly 60 percent) exit the market.

• Given the substantial numbers of first that exit, there is also a high degree of both job creation and destruction.

• The sub-sectors with the most employment growth are not those related to the ADLI strategy (agro-processing).

• Many firms engage in virtually no investment. • Small firms rarely scale up, with entrepreneurs preferring to start

additional small firms rather than re-invest in existing small firms.

Source: Shiferaw (2007, 2010).

23

Ethiopia’s Industrial Sector: Constraints• Credit constraints

– In 2007 the government imposed tight lending controls on private banks in an effort to curb speculative investments and inflation. In general, only large firms were able to access bank capital.

– Firms that carry out the largest investments account for about 80 percent of total manufacturing investment.

• Uncertainty– There are almost no secondhand markets in machinery and

equipment in Ethiopia, which contributes to irreversibility of decision making.

– Possible disruption in electricity also raises risks, as productivity per work is strongly linked to electricity (Ayele et al. 2009).

– Both electricity supply and the proxy measure of irreversibility have a statistically significant negative effect of on investment decisions in Ethiopian manufacturing (Shiferaw, 2009).

24

Key Development Strategy Policies

• Sectoral allocation of public investments– Agriculture Development Led Industrialization

(ADLI) or greater emphasis on urban investment?

25

Ethiopia: Development Budget 1999/00 and 2007/08

Source: Ministry of Finance and Economic Development data.

1999/00 2007/080

5

10

15

20

25

30

35

RuralUrbanOther

(bn

2007

/08

birr

)

26

Key Development Strategy Policies

• Sectoral allocation of public investments– Agriculture Development Led Industrialization

(ADLI) or greater emphasis on urban investment?

• Land and Migration Regulations:– Easing of regulations?• Prohibition of sale of land, loss of land rights for those

who leave rural areas• Registration requirements for new migrants

Implications of Allocation of Public Investments: Model Simulations

• We increase the share of new public capital allocated to either cities, towns or rural areas by 10%

• No new public capital is created

Rural areas Towns Cities Ethiopia

Baseline 9.0 9.6 81.4 100.0

City scenario 19.0 8.5 72.5 100.0

Town scenario 8.0 19.6 72.4 100.0

Rural scenario 4.2 4.4 91.4 100.0

Share of new public capital stocks allocated to each region (%)

Reallocating public investmentsResults: Regional economic growth

• Rural-focused investment slows national economic growth, while urban investment accelerates it.

• Raising urban investment favors industry and services, but reduces agriculture

• Conversely, increasing agricultural productivity reduces nonagricultural growth (due to resource competition e.g. capital)

Total GDP

Agriculture

Industry

Services

Rural areas

Small urban

Major cities

-1.00 -0.50 0.00 0.50 1.00

Rural areas Towns Cities

Average annual change from baseline (%)

Reallocating public investmentsResults: Welfare and poverty

• Despite slower economic growth, shifting public resources towards rural areas significantly improves national household welfare

• Rural investment benefits both rural and urban households

• Clear trade-offs between growth and welfare objectives

National

Rural areas

Small town

Major cities

Poor

Non-poor

-0.10 0.00 0.10 0.20 0.30

Rural areas Towns Cities

Average annual change from baseline (%)

Ethiopia: Model Simulation Results

• Accelerated urbanization… – Increases economic growth– Improves rural welfare – Reduces the rural-urban divide

• However, without supporting public investment in urban areas, there is simply an “urbanization of poverty” and rising urban inequality.

Ethiopia: Model Simulation Results (2)• HOWEVER, there are trade-offs when public capital is

reallocated to urban centers (i.e., faster economic growth but a deterioration of poor households’ welfare)

• By contrast, rural investment generates less growth, it leads to more significant welfare improvements.

• To further stimulate economic development and structural transformation in Ethiopia requires a judicious balance of…– Reforms to overcome the constraints to internal migration– Investments in urban areas to maintain government capital per

capita in urban areas – Allocation of additional new resources to rural areas

Conclusions

• Urbanization and industrialization are a crucial part of development and accelerating growth.

• However, given:– Low levels of GDP/capita in Ethiopia– A high concentration of poverty in rural areas– Realistic prospects for increasing agricultural

productivity and production• Ethiopia and other poor SSA countries with similar

structures should NOT neglect agriculture, if these countries are to rapidly increase food security and reduce poverty

33

Sources

Dorosh, Paul Emily Schmidt and Admasu Shiferaw. 2011. Economic Growth without Structural Transformation: The Case of Ethiopia. Paper presented at the Understanding Economic Transformation in Sub-Saharan Africa IFPRI-ISSER Conference, Accra, Ghana. 10-11 May, 2011.

Dorosh, Paul and James Thurlow. 2011. “Trade offs between Public ‐Investments in Rural and Urban Sectors”. Paper presented at the Understanding Economic Transformation in Sub-Saharan Africa IFPRI-ISSER Conference, Accra, Ghana. 10-11 May, 2011.

Dorosh, Paul and James Thurlow (forthcoming). “Agglomeration, Growth and Regional Equity: An Analysis of Agriculture- versus Urban-led Development in Uganda”, Journal of African Economies, (accepted July, 2011).

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