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Economic Growth, Urbanization and Poverty Reduction in Ethiopia

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

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Economic Growth, Urbanization and Poverty Reduction in Ethiopia

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  1. 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.

  2. Presentation outline • 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 • Key policies • Implications of agricultural investments • Land policies • Industrial structure and constraints • Allocation of Public Investments: Model Simulations • Concluding Observations

  3. Ethiopia: Economic Structure1999/00 – 2008/09 Source: Calculated from World Bank, World Development Indicators data.

  4. Ethiopia: Industrial Output and Growth1999/00 to 2008/09 Source: Calculated from Ministry of Finance national account statistics.

  5. Ethiopia: Urbanization Ethiopia is urbanizing faster than people think!!!

  6. Ethiopia: Alternative Urbanization Estimates

  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.

  11. Ethiopia: Percent Population connected to Urban Agglomeration 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 TanaBeles (460 Mw) in 2010. 2011 figures is 2010 figure plus Gile Gibe II (420 Mw) for which the tunnel collapsed in December, 2009.

  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

  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

  15. Net Primary School Enrollment Source: World Bank World Development Indicators.

  16. Rural – Urban Expenditure and WelfarePoverty Incidence

  17. ERHS: Self-Reported Perceptions of Poverty

  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 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.

  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

  27. 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 (%)

  28. 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)

  29. 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

  30. 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.

  31. 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

  32. 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).

  34. Ethiopia Strategy Support Program Capacity Building GIS Training 2009 CGE Paper Authors EEA Conference 2010  CGE Course Ceremony 2009

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