Economic Growth, Urbanization
and Poverty Reduction in Ethiopia
Paul Dorosh
International 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
40
42
20
40
0
38
Agric Share of GDP (%)
44
(2008/09)
60
2007/08
46
2006/07
80
2005/06
48
2004/05
100
2003/04
50
2002/03
120
2001/02
52
2000/01
140
1999/00
billion (1999/2000) Birr
Ethiopia: Economic Structure
1999/00 – 2008/09
Agriculture
Industry
Electricity and Water
Construction
Other Private Services
Public Administration
Agric Share of GDP
Source: Calculated from World Bank, World Development Indicators data.
3
Ethiopia: Industrial Output and Growth
1999/00 to 2008/09
Agriculture
Industry
Mining
Large, Medium Scale Manuf
Small Scale, Cottage Industries
Electricity and Water
Construction
Other Private Services
Public Administration
Total
2008/09
(bn Birr)
160.6
34.0
1.3
8.6
4.0
4.0
16.1
114.2
10.3
319.2
2008/09
Share of GDP
(percent)
50.3%
10.7%
0.4%
2.7%
1.3%
1.3%
5.0%
35.8%
3.2%
100.0%
Growth Rate
1999/00-08/09
(percent)
7.0%
9.2%
4.2%
8.1%
5.8%
7.6%
12.3%
11.2%
4.2%
8.6%
Source: Calculated from Ministry of Finance national account statistics.
4
Ethiopia: Urbanization
1984
1994
2007
Official
Estimate
(percent)
11.4%
13.7%
15.9%
Agglomeration
Index
(percent)
3.7%
7.1%
14.2%
1984
1994
2007
(mns people)
4.55
7.33
11.72
(mns people)
1.48
3.80
10.50
(growth rate)
1984-1994
4.9%
1994-2007
3.7%
1984-2007
4.2%
Ethiopia is urbanizing faster than people think!!!
(growth rate)
9.9%
8.1%
8.9%
5
Ethiopia: Alternative Urbanization Estimates
14
12
(millions)
10
8
6
4
2
0
1984
1994
Agglomeration Index
2007
Official CSA
6
Road Infrastructure and Urbanization
Travel Time 1984
INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE – ETHIOPIA STRATEGY SUPPORT PROGRAM
7
Road Infrastructure and Urbanization
Travel Time 1994
INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE – ETHIOPIA STRATEGY SUPPORT PROGRAM
8
Road Infrastructure and Urbanization
Travel Time 2007
INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE – ETHIOPIA STRATEGY SUPPORT PROGRAM
9
Percent Population by Travel Time to 50K+
Urban Agglomeration
90
80
70
60
50
40
30
20
10
0
Ethiopia
1984
Ethiopia
1994
Ethiopia
2007
Mozamb. Mozamb.
1997
2007
> 10 hours
Nigeria
1991
Nigeria
2006
5-10 hours
Source: Schmidt and Kedir (2009); Mozambique and Nigeria country papers.
10
Ethiopia: Percent Population connected to
Urban Agglomeration
45
60%
40
50%
Millions of People
35
30
40%
25
30%
20
15
20%
10
10%
5
-
0%
1984
Under 1 hour
1997
1- 3 hours
Source: Schmidt and Kedir (2009)
2007
Share of Total Population
11
Ethiopia: Electricity Generation Capacity
1958 to 2011*
2000
25
1800
20
1400
1200
15
1000
800
10
watts/person
megawatts (mn watts)
1600
600
400
5
200
0
1958
1961
1964
1967
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009
0
Total Installed Capacity
Non-Hydro Capacity
Capacity/capita
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.
12
Ethiopia: Fixed Line and Cellular Telephones
2003 to 2010
10
9
8
(millions)
7
6
5
4
3
2
1
0
2003
2008
Cellular Phones
2009 (plan)
2010 (plan)
Fixed Lines
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
13
Ethiopia: Fixed Line and Cellular Telephones
2003 to 2010
2003
2008
2009
(plan)
405
9,553
909
10,617
3,000
---
4,400
---
51
35,251
3,168
245,608
7,500
---
9,900
---
3.9
5.3
32.5
9.0
-----
11.5
-----
Main (fixed) telephone lines
Ethiopia
Africa
Mobile cellular subscriptions ('000s)
Ethiopia
Africa
Mobile cellular subscriptions (per 100 people)
Ethiopia (share of total population)
Ethiopia (share in connected area)
Africa (share in connected area)
0.1
0.1
3.7
2010
(plan)
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
14
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
66.9
---
93.6
65
---
94.9
---
41.2
---
---
37.2
---
51.1
0
94.6
46.2
0
96.1
Rwanda
Sudan
Uganda
Source: World Bank World Development Indicators.
15
Rural – Urban Expenditure and Welfare
Poverty Incidence
50
48
46
(percent)
44
42
40
38
36
34
32
30
1995/96
Rural
1999/00
Urban
2004/05
Total
16
ERHS: Self-Reported Perceptions of Poverty
1994
8
33
8
Destitute
Poor
2004 1
20
Never quite enough
13
Can get by
Comfortable
2009 2 11
0%
Rich, very rich
13
20%
40%
60%
80%
100%
17
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.
18
Ethiopia: Impacts of Growth on Poverty
National poverty headcount (%)
40
40.0
35
30
25
22.7
Baseline scenario
20
All agriculture scenario
15
17.6
With non-agriculture scenario
13.3
10
2005
06
07
08
09
10
11
12
Source: Dorosh and Thurlow (2009), ESSP2 Discussion Paper No. 2.
13
14
15
19
Rural – Urban Migration
Source: de Brauw et al., (2010).
20
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.
21
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).
22
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).
23
Key Development Strategy Policies
• Sectoral allocation of public investments
– Agriculture Development Led Industrialization
(ADLI) or greater emphasis on urban investment?
24
Ethiopia: Development Budget
1999/00 and 2007/08
35
30
(bn 2007/08 birr)
25
20
Rural
Urban
15
Other
10
5
0
1999/00
2007/08
Source: Ministry of Finance and Economic Development data.
25
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
26
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
Share of new public capital stocks allocated to each region (%)
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
Reallocating public investments
Results: Regional economic growth
Average annual change from baseline (%)
• Rural-focused investment
-1.00 -0.50
0.00
0.50
1.00
slows national economic
Total GDP
growth, while urban
investment accelerates it.
Agriculture
• Raising urban investment
favors industry and services,
but reduces agriculture
• Conversely, increasing
agricultural productivity
reduces nonagricultural
growth (due to resource
competition e.g. capital)
Industry
Services
Rural areas
Small urban
Major cities
Cities
Towns
Rural areas
Reallocating public investments
Results: Welfare and poverty
Average annual change from baseline (%)
• Despite slower economic
-0.20
0.00
0.20
0.40
growth, shifting public
resources towards rural
National
areas significantly improves
national household welfare
Rural areas
• Rural investment benefits
both rural and urban
households
• Clear trade-offs between
growth and welfare
objectives
Small town
Major cities
Poor
Non-poor
Cities
Towns
Rural areas
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
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 SubSaharan 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 IFPRIISSER Conference, Accra, Ghana. 10-11 May, 2011.
Dorosh, Paul and James Thurlow (forthcoming). “Agglomeration,
Growth and Regional Equity: An Analysis of Agriculture- versus Urbanled Development in Uganda”, Journal of African Economies, (accepted
July, 2011).
33
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