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An economy in transition
Bereket Gebru
Ethiopia is still an agrarian nation. The fact that over 80 percent of its population lives in rural areas and depends on agriculture as its source of livelihood boldly underlines that fact. Although the share of agriculture in the national economy has gone down considerably in recent years, it still contributes above 40 percent of GDP.
Efforts to change this reality have, however, picked up pace with the rapid economic development over the last fifteen years and the achievements of the first Growth and Transformation Plan (GTP). GTP 2, the current five year strategic plan of the country, also aspires to push the transformation from an agriculture led to an industry led economy much further. Despite the overwhelming section of society still engaged in the sector, a recent study indicates that the economy is already in transition. The study entitled “Ethiopia – an agrarian economy in transition,” argues that there is a “slow but unmistakable structural change.”
In this article, we take a look at the major indicators used to arrive at this conclusion, explaining the findings more along the way. The study states that Ethiopia has been exerting efforts in laying foundations to transform its economy in the two decades since the mid-1990s. The most noticeable endeavours that have been rewarded with a high rate of economic growth, the study argues, took place under the country’s ‘Plan for Accelerated and Sustained Development to End Poverty’ (PASDEP) spanning the period from 2005-06 to 2009-10, and the GTP (2010-11 to 2015-16).
The study points out capital accumulation (both physical and human), high rate of growth in per capita income, and a shift in economic activities from sectors of low productivity to sectors of high productivity as key signs of structural transformation.
Capital Accumulation
The investopedia website states that “capital accumulation refers to profits that a company uses to increase its capital base. Capital accumulation involves acquiring more assets that can be used to create more wealth or that will appreciate in value.” These assets can be physical and human.
The study states, “The country’s public investment in economic and social infrastructure and its intervention in the rural economy have been paying off both in terms of accumulations and in the form of high economic growth. For instance, the rate of gross capital formation expanded from 27.5 per cent in 2010 to 40.3 per cent in 2014. Efforts in domestic resource mobilization resulted in a significant increase in the rate of gross domestic saving from 7.6 per cent in 2010 to 22.5 per cent in 2014.”
The thousands of kilometers of roads constructed throughout the country have definitely helped create more wealth as more people have gained access to new markets through increased connection. The modern agricultural practices that have been introduced widely to farmers and helped increase productivity and production in the sector have also helped capital accumulation. The numerous micro, small, medium and large industrial enterprises that have sprung up in the country in the past couple of decades are also part of the country’s capital accumulation.
The hundreds of health centers built in the lowest tiers of local government and the schools that have accompanied them to ensure better life to the people of Ethiopia at large are the bases of its human capital accumulation. The various projects that have blessed the people with clean water, electric energy and other social services also do human capital accumulation in the country some justice.
High rate of Per Capita income growth
The World Bank indicates that the per capital income of the country has risen sharply from around 270 USD in the early years of the 1990s to 619USD in 2015. Data from the Bank show that there was a fall in GDP per capita between 1990 and 1995 with the figure plummeting to lower than 150 USD. The figures from the bank indicate that the condition also persisted until 2005. The figures then rose rapidly with the per capita for 2010 hitting nearly 350 USD. This number then kept soaring up with it reaching 500 USD in 2013 and 619 in 2015.
As has been clearly depicted by the data from the World Bank, Ethiopia’s GDP per capita has shown a high rate of growth over the past decade.
A shift in economic activity to sectors of high productivity
The study states that measures of sectoral contributions to GDP growth reveal that the role of agriculture, which jointly led the growth momentum with the service sector during the period of PASDEP, has declined during the first phase of the GTP. The industrial sector, on the other hand states the study, which had a declining contribution to growth during PASDEP, has reversed its momentum and doubled its contribution to growth during the first phase of the GTP.
The changes in the growth contributions of sub-sectors also corroborate the fact that changes in the structure of the economy are occurring across sectors, from agriculture to service and construction. Crop production, traditionally a dominant contributor, has been overtaken by construction and wholesale and retail trade sub-sectors. The increase in the industrial sector’s contribution to growth has largely originated in the construction sub-sector.
It has now become common knowledge that the Ethiopian government has made the growth of the manufacturing sector a major focus of its second and subsequent five-year development plan. It is actively encouraging the private sector to diversify activities from localized services to manufacturing. The efforts geared towards promoting investment and the major improvements in the country’s infrastructure over the years have held the manufacturing sector in good stead. The study corroborates this fact by stating that the manufacturing sector had an encouraging performance with its value added growth at an annual average of 17.2 percent between 2010 and 2014.
The shift in economic activity to sectors of high productivity is also demonstrated by the transition of labour from the informal to the formal sector in the past decade. The study states, “Between 1999 and 2013, the share of labour force in the informal sector is seen to decline from 50.6 to 22.8 per cent. The usually high rate of female labour force in the informal sector is found to decline from 64.8 per cent in 1999 to 36.5 per cent in 2013, and the share of male labour force is found to have more than halved, dropping from 38.9 to 18.1 per cent.”
Following investments and other policy interventions, concludes the study, economic activities have shown signs of a shift from the agriculture sector to the services and construction sectors. It goes on to indicate that the contribution of the traditionally dominant crop sub-sector to the growth of GDP has been overtaken by the construction sector, followed by the wholesale and retail trade sector. The change in the share of labour force, according to the study, has also been in line with changes in productivity.
Changes in the labour force participation rate and employment-to-population ratio, in particular among the female labour force, the reduction in unemployment rate, and the movement of labour outside the agriculture sector (up to 7.5 percentage points), concludes the study, are indicative of change in the structure of the economy. Still, the country has to continue to deepen its focus on long-term capabilities towards industrialization.
