FEDERAL DEMOCRATIC REPUBLIC

OF ETHIOPIA

Structural Transformation in Ethiopia:

Enhancing the Transition from Agrarian to
Industrial Development
Berihu Assefa Gebrehiwot

Economic Policy Analysis Unit (EPAU)

Ethiopian Development Research Institute
October 2013
CONFIDENTIAL AND PROPRIETARY
Any use of this material without specific permission is strictly prohibited

STRUCTURAL TRANSFORMATION: POLICY TRANSITION

FROM ADLI TO INDUSTRIAL DEVELOPMENT

Introduction: Ethiopias Development and Governance Model

What is ADLI? Conceptual and Theoretical Underpinnings

Why ADLI? Motivation, Rationale and Country Context

ADLI as Practiced in Ethiopia: Experience and Evidence

Structural Transformation: Theory and Practice

What Does it Take to Make the Industrial Sector a Leading Sector?

Some Issues that Need Further Discussion and Sensitization

Ethiopias Development and Governance Model

Ethiopia officially rejected the Washington Consensus and

embraced the Democratic Developmentalism model (DD), which
is a reconfigured version of the East Asian developmental state
model
The DD involves both economic transformation (through
economic policies) and the transformation of non-economic
institutions.
The role of the state in the Developmentalism argument:
The state is actively involved in combating rent-seeking
and creating value addition
The state and the market complement one another and
provide an excellent joint outcome.
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Developmentalism: The State Assumes Active

Economic Roles

The State Assumes

Active Economic
Roles

National development planning (key

instruments and institutions: central
economic agencies, technocrats, Highlevel Councils or Committees, IPs, 5year plans)
Deliberate (systematic) resource
reallocation towards productive
investment (e.g., directed credit and
foreign exchange
Model state enterprises development
Nurture value-creation and combat rentseeking behaviors of economic actors.

Developmentalism: Key Conditions for Success

Strong and committed leadership

Policy structure - vision, strategy, actions, monitoring
Severely combat corruption

Efficient bureaucracy
Technocracy-led development planning
Strong tripartite relationship among government, business and
bank
National movement for mindset change (i.e., Rallying the public
for development)

STRUCTURAL TRANSFORMATION: POLICY TRANSITION

FROM ADLI TO INDUSTRIAL DEVELOPMENT

Introduction: Ethiopias Development and Governance Model

What is ADLI? Conceptual and Theoretical Underpinnings

Why ADLI? Motivation, Rationale and Country Context

ADLI as Practiced in Ethiopia: Experience and Evidence

Structural Transformation: Theory and Practice

What Does it Take to Make the Industrial Sector a Leading Sector?

Some Issues that Need Further Discussion and Sensitization

Agricultural Development Led Industrialization (ADLI):

Definition and Context (1)
ADLI is a development strategy which aims to achieve initial
industrialization by transforming agriculture first:
Robust agricultural growth
Productivity breakthrough by small farmers
Improved linkages with industrial sector
ADLIs Vision and Conception
Smallholder farmers can create wealth (but, of course, largescale commercial farming has been added to the ADLI policy
menu later)
Achieve economic growth and initial industrialization by
transforming agriculture first through the use of laborintensive and land-augmenting technologies and the
development of agricultural markets
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Agricultural Development Led Industrialization (ADLI):

Definition and Context (2)

ADLIs initial industrialization hypothesis (by focusing on

agriculture as the engine of growth) involves:
Transformation from subsistence to market activities (or
surplus)
Productivity breakthrough by small farmers
Raise capital (through savings, taxation, export earnings,
etc.) for industrial investment
Sustained food supply to enhance sustained industrial
growth (or to avoid the Ricardian trap)

ADLI Definition and Context: Shaping Resource Allocation

and Public Expenditure Priorities
ADLI guides national resource allocation and shapes public
expenditure priorities
Commit more resources and attention to agriculture (especially,
smallholder farmers)
Evidence: Ethiopia devotes about 17 to 18% of its budget to
agriculture, which is well above the 10% commitment agreed by
African countries via CAADP
This massive resource is spent on agricultural and rural programs
Extension programs
Agricultural technology
Rural financing (micro-financing)
Productive safety Nets (asset-building)

ADLI: How it Evolved?

PSNP
IDS
(2003)

PASDEP II (GTP I) (2010 2015)

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STRUCTURAL TRANSFORMATION: POLICY TRANSITION

FROM ADLI TO INDUSTRIAL DEVELOPMENT

11

Introduction: Ethiopias Development and Governance Model

What is ADLI? Conceptual and Theoretical Underpinnings

Why ADLI? Motivation, Rationale and Country Context

ADLI as Practiced in Ethiopia: Experience and Evidence

Structural Transformation: Theory and Practice

What Does it Take to Make the Industrial Sector a Leading Sector?

Some Issues that Need Further Discussion and Sensitization

The Choice of ADLI as a Development Strategy is Explained

by Structural Characteristics of the Economy and
Governments Socio-Economic Objectives
The choice of ADLI (or any development strategy) depends primarily on
1. The structural characteristics of the economy
2. Governments social objectives
Structural
characteristics of the
economy

Agrarian (agriculture is the largest employer and source of livelihood)

Abundant labor and land, but scarce capital
Overwhelmingly rural households

Given these, What Development Strategy?

Governments social
objectives

Poverty reduction (pro-poor strategy): What effective pro-poor strategy? Greater

impact on poverty reduction by focusing on agriculture, which is the largest employer
Economic justice (inclusive growth strategy): High coverage by agricultural growth

Given these objectives, What Development Strategy?

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Theoretical Underpinnings of ADLI: Static Comparative

Advantage, Pro-poor and Inclusive Growth Theories
Comparative advantage based on
factor endowment (HeckscherOhlin and Stolper-Samuelson)

Pro-poor growth theory

Inclusive growth theory

Development should
effectively utilize ones Factor
Endowment (i.e., abundant
labour and land)

Development should
address Poverty

Development should address

Income Inequality (i.e.,
equitable allocation of
resources and opportunities)

Comparative advantage as an
economic guide to
competitiveness and growth

Economic, social and moral

imperative for poverty
eradication

Economic, social and moral

imperative for economic
justice (i.e., involve everyone
the growth process)

Develop a development
strategy based on factor
endowment

Develop the largest employer

and source of livelihood

Develop inclusive and

empowering sectors

Economic specialization
strategy

Pro-poor growth
strategy
ADLI

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Inclusive growth
strategy

Theoretical Underpinnings of ADLI: Static Comparative

Advantage, Pro-poor and Inclusive Growth Theories

Agrarian middle
class
Growth

Investment

Employment

ADLI
(Agriculture
as the engine
of growth)

Foreign
exchange
earnings

Food supply
Savings

14

Income equality

STRUCTURAL TRANSFORMATION: POLICY TRANSITION

FROM ADLI TO INDUSTRIAL DEVELOPMENT

15

Introduction: Ethiopias Development and Governance Model

What is ADLI? Conceptual and Theoretical Underpinnings

Why ADLI? Motivation, Rationale and Country Context

ADLI as Practiced in Ethiopia: Experience and Evidence

Structural Transformation: Theory and Practice

What Does it Take to Make the Industrial Sector a Leading Sector?

Some Issues that Need Further Discussion and Sensitization

ADLI as Practiced in Ethiopia: Experience and Evidence

Structural characteristics of the Ethiopian economy

85%

(
7)

Widespread and rampant poverty that necessitate rapid and equitable

economic growth
Ethiopias pro-poor and inclusive growth commitment
More than 65% of the public expenditure has been spent on pro-poor
sectors such as education, water, health, agriculture, roads and
energy
Agriculture alone: about 18%, much higher than the 10% commitment
by African countries via the CAADP

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ADLI as practiced in Ethiopia: Experience and Evidence

Economic and social opportunities ADLI is expected to deliver

Employment, growth, investment, foreign exchange

earnings, savings, income equality and basic needs
provision

Creating an agrarian middle class and a domestic mass

market, both of which are necessary for ultimate
successful industrialization

Creating conditions for the industry to play key role in the

economy

17

ADLI as Practiced in Ethiopia: Experience and Evidence

ADLI Economic Outcomes

Source: World Bank Ethiopia Economic Update II (2013)

18

ADLI as Practiced in Ethiopia: Experience and Evidence

ADLI Economic Outcomes

Economic Growth: robust economic growth over the past
decade (growth averaged 10.7 percent per year in 2003/04 2011/12 compared to the regional average of 5.4 percent (WB
2013)).
Poverty headcount: people living below the poverty line has
declined from 45.5 % in 1995/96 to 27.8 in 2011/12 (GTPAPR MoFED, 2011/12)
Income inequality: low Gini-index (about 0.3, WB)

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STRUCTURAL TRANSFORMATION: POLICY TRANSITION

FROM ADLI TO INDUSTRIAL DEVELOPMENT

20

Introduction: Ethiopias Development and Governance Model

What is ADLI? Conceptual and Theoretical Underpinnings

Why ADLI? Motivation, Rationale and Country Context

ADLI as Practiced in Ethiopia: Experience and Evidence

Structural Transformation: Theory and Practice

What Does it Take to Make the Industrial Sector a Leading Sector?

Some Issues that Need Further Discussion and Sensitization

Theories and Patterns of Structural Transformation (1)

Petty-Clark Law, Lewis Theory of Development and
Chenerys Patterns of Development
The center of gravity in economic activities shifts from the
primary to secondary sector, and further to the tertiary
sector as income continues to rise.
Put differently, Agriculture cedes its place to manufacturing;
and manufacturing cedes its place to services.
Intersectoral migration (e.g., agricultural labor becomes
factory worker)
Change in consumer demands
Demographic transition
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Theories and Patterns of Structural Transformation (2)

What drives structural transformation?
Structural change through market-led changes and resource reallocations

1.

Market-led Intersectoral Resource

Allocation

Economic growth/rising level of income

Changes in the composition of internal demand (greater demand for nonagricultural goods)

Rising level of Skills and Competencies

International Shifts in comparative advantage

This is relatively a slow structural change process

Even if the comparative advantage theory tells countries to focus on their factor
endowments, some countries
Push the limits of their static comparative advantage and diversify into new activities

2.

Correct-policy-mix

Dont rely only on factor endowments (or static comparative advantages)

Discover new economic activities and create new comparative advantage
Learn that comparative advantage can be created (i.e., the dynamic comparative
advantage theory)
This is a policy response to expedite structural transformation

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Structural Transformation: East Asian Experience

East Asias Dynamic Growth Experience

Pushed the limits of their static comparative advantage and were able to quickly
diversify into more sophisticated activities (i.e., breaking a conventional
development thinking)
For example, Joseph Stieglitz wrote: The theory of comparative advantage told
South Korea, as it emerged from the Korean War, that it should specialize in rice.
But Korea believed that even if it were successful in increasing the productivity of
its rice farmers, it would never become a middle or higher income country if it
followed its static comparative advantage. It had to change its comparative
advantage, by acquiring technology and skills . It had to focus not on its
comparative today, but on its dynamic comparative advantage.

During their early stage of industrialization, their factor endowments were similar to
Ethiopias abundant in labor and scarce in human and capital endowment.
Were bold enough and embarked on light and heavy manufacturing at their very
early stage of development
Question: how did they solve their savings gap and capital constraint?

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Structural Transformation: East Asian Experience

What is the role of agriculture in early development?
Because of the dominance of the agricultural sector in poor countries, capital
required to finance industrial expansion (at least in the early stages of
development) would have to be largely raised from agriculture by taxation,
voluntary transfer (savings), or even by forced savings.
For example, agriculture provided resources for industrialization through taxation
and foreign exchange earnings in countries below
Silk and tea exports (Japan 19th c)
Rice and sugar (Taiwan up to 1960s)
Rice export (Thailand up to 1980s)
Fish and shrimp (south east Asia)
Grapes and salmon (Chile)
How about Ethiopias experience?
Low agricultural saving (lack of innovative financial institutions in rural
areas)??
Agriculture is largely untaxed??
No belt-tightening (or forced saving) policies??
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STRUCTURAL TRANSFORMATION: POLICY TRANSITION

FROM ADLI TO INDUSTRIAL DEVELOPMENT

25

Introduction: Ethiopias Development and Governance Model

What is ADLI? Conceptual and Theoretical Underpinnings

Why ADLI? Motivation and Rationale

ADLI as Practiced in Ethiopia: Experience and Evidence

Structural Transformation: Theory and Practice

What Does it Take to Make the Industrial Sector a Leading Sector?

Some Issues that Need Further Discussion and Sensitization

Making the Industrial Sector a leading Sector: From ADLI to

Industrial Development Led Growth
In terms of structural change, Ethiopia fared little i.e., the share
of the industrial sector has remained stagnant at about 13%,
which is low even compared to the SSA, which is about 25%
However, initial conditions for structural transformation have
been created
Since Ethiopia did very well in terms of economic growth (a double
digit growth for the last 10 years)
Peoples income has grown , which means people would demand
more non-agricultural goods (i.e., Engles Law)

So, income growth means high demand for industrial goods

26

Making the Industrial Sector a leading Sector: From ADLI to

Industrial Development Led Growth
So, what is the rationale for a policy transition from ADLI to
Industrial development led growth? What are the economic
and social opportunities?

27

Sustained economic growth (per capita income growth) market for

industrial goods is created
Sufficient infrastructure has been laid out for industrialization to take-off
Capital (e.g., saving and FDI) and skill accumulation has reasonably grown
(e.g., saving rate is 17.7%)
Education policy twinning (70% to join science and technology )
Industrialization drive industry as a sustainable source of prosperity and
employment
Enhanced foreign-technology learning From China, Japan, German, USA
Mind-set change (can-do thinking, improvements in working culture, time
management, etc.)

Making the Industrial Sector a leading Sector: From ADLI to

Industrial Development Led Growth
Additional Opportunities for Industrial Development
Cheap labor (much lower than the sub-Saharan average)
Young population
Publicly-owned land (readily available for investment and infrastructure
development)
Large domestic market size

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Expected outcomes of a policy shift to Industrial

Development-Led Growth
Question: If the industrial sector starts to enjoy high policy support and public resources
in an attempt to make the industrial sector an engine of growth, then what happens to
agriculture, industry and the overall economy?

The industrial sector is expected to exhibit a

much faster growth. Why?

Despite diminished public resources (because some

of the resources are going to be allocated to the
industrial sector), the agricultural sector is also
expected to grow . Why?

a)

Because, the industrial sector is expected to

a) benefit from increased public resources
b) Benefit from the internal and external
demands created
c) benefit from the economic and social
opportunities created (see previous slide)

Expected outcome: Enhanced industrial growth

b)

The growing industrial sector and urban

population will create a huge demand for
agricultural products (i.e., demand for food and
inputs)
Better adoption of agricultural technology - as
many rural labour become factory worker (as a
result of industrial growth), those who remain
farming will have larger agricultural land. And
owning large agricultural land would lead to
better technology and modern variety adoption
because of scale economies.

Expected outcome: continued agricultural modernization

and growth

Overall economy growth and transformation (ceteris paribus)

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Putting the transition to Industrial Development-Led

Growth into Context
Note that it does not mean that the industrial sector has taken the
lead in terms of contribution to GDP
It is rather a policy metamorphosis to make more resources
available to the industrial sector to stir industrialization
Or it is a transition from the static comparative advantage to the
dynamic comparative advantage thinking
Dynamic comparative advantage means that a country can create
new comparative advantages through smart industrial policy

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Discovery process
Nurture new economic activities (economic diversification)
A countrys policy choice matter more than endowments.

STRUCTURAL TRANSFORMATION: POLICY TRANSITION

FROM ADLI TO INDUSTRIAL DEVELOPMENT

31

Introduction: Ethiopias Development and Governance Model

What is ADLI? Conceptual and Theoretical Underpinnings

Why ADLI? Motivation and Rationale

ADLI as Practiced in Ethiopia: Experience and Evidence

Structural Transformation: Theory and Practice

What Does it Take to Make the Industrial Sector a Leading Sector?

Some Issues that Need Further Discussion and Sensitization

Some Policy Issues for Discussion and Sensitization

Defining Sectoral Roles and Priority Areas
Industrial sector - Industrial Policy
Expand the current industrial policy (IP) in terms of scope. Instead of focusing on a
few priority areas, try to discover or create new comparative advantages
Both export promotion and import substitution strategies but export promotion
should be the pillar policy for import substitution does not enjoy economies of scale.
Only a few strategic industries need to be substituted
Enhance the role of private sector in industrial development

Agriculture Agricultural Policy

Less massive but innovative support for smallholders food self-sufficiency versus
surplus production??
Tapping the huge commercial farming opportunities Ethiopia has

Public support should aim for narrower but higher-impact agricultural projects
Encourage private sector investment in agriculture (e.g., seed development, fertilizer
production and distribution, rural finance)
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