Report Takes Behind the Scenes Look at Ethiopian Economic Growth

Report Takes Behind the Scenes Look at Ethiopian Economic Growth

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A new report analyzing Ethiopia’s labor force shows that the country has made great progress in reducing unemployment and providing widespread education. However, more work must be done to sustain Ethiopia’s strong economic growth.

The report, called “Ethiopia – an agrarian economy in transition,” was written by Yared Seid, Alemayehu Taffesse, and Seid Nuru Ali. It provides a detailed assessment of the country’s efforts toward a more modern economy, including its economic growth, labor outcomes, and structural changes.

Taffesse works for the International Food Policy Research Institute, Ali works for the Ethiopian Economics Association, and Seid represents the London School of Economics and Political Science International Growth Centre.

Here is an overview of the report’s main points.

State of the Economy

Ethiopia’s economy has grown at a significant rate since 2005, according to Ethiopia’s Ministry of Finance and Economic Development. It now is one of the fastest-growing economies in the world.

The country’s gross domestic product increased at an average of 10.5 percent annually between 2004 and 2005 as well as between 2012 and 2013. Ethiopia’s five-year Growth and Transformation Plan (GTP) concluded in 2015, and planners are continuing to assess Ethiopia’s economic situation and look for ways to keep the economy expanding. The second phase of the GTP calls for a focus on creating more manufacturing jobs.

Notably, as Ethiopia’s economy has grown, it has shifted from a dependence on agriculture to more growth in the industrial and service sectors. Now, agriculture and the service sector contribute near-equal shares to Ethiopia’s GDP.

The economic expansion has impacted poverty and income distribution. This is partly because the government’s investment in infrastructure has created better-paying jobs in construction, and related markets have served as a catalyst for growth elsewhere.

This trend has increased employment, especially among youth in urban areas, and it also increased a demand for goods and services. These shifts all are favorable for a more diversified, stable economy that can sustain growth.

While overall trends have been positive, the report notes that Ethiopia still has work to do and issues to overcome in a number of sectors.

Growth and the Labor Market

Much of Ethiopia’s growth was due to an increase in education nationwide. According to the report, Ethiopia has nearly reached its goal of universal primary education. However, the rapid growth has resulted in lower quality of education in Ethiopian primary schools.

Expanded vocational programs, designed to produce “semi-skilled and relatively well-suited workers [for] the growing manufacturing and construction sectors,” also have not performed as well as expected. Students often do not have all of the skills that potential employers need, the reported stated.

The labor market also has grown due to a significant increase in women who are working, specifically women who live in rural areas. Many of these women work in the fields of social work, health, and education.

The Skills-Job Disconnect

Even as an increasing number of graduates enter Ethiopia’s workforce – 600,000 annually according to the World Bank – the economy does not have enough jobs for all of them. Additionally, a “youth bulge” likely will greatly increase the number of young people looking for jobs in the next few years.

Unfortunately, educational deficits mean that many youth don’t have the necessary skills that available jobs require. The result is chronic unemployment for Ethiopia’s young people, especially recent college graduates.

Service, Manufacturing, and Construction Industries

Integrating manufacturing into the economy has proven to be a long process for many African countries, and Ethiopia is no exception. The initial shift in the labor market has been from the agriculture industry to the service industry.

Between 2005 and 2013, Ethiopia’s manufacturing sector’s share of the labor market declined by .4 percentage points. The authors of the report suggest several reasons for this, including insufficient import of raw materials, inadequate infrastructure, and too much risk for investors and banks.

Meanwhile, Ethiopia’s construction sector saw employment growth of 11 percent between 1990 and 2011. This could be due to Ethiopia’s large infrastructure projects, including the Grand Ethiopian Renaissance Dam.

Conclusion and Recommendations

The report issued the following recommendations as Ethiopia implements phase two of its GTP:

  1. Improve the ways that university and vocational school students connect with job information by providing resources such as job fairs and career placement offices.
  1. Provide urban safety net programs, particularly for people who are facing long periods of unemployment. At the same time, the government also should consider policies that promote savings, investment, and job creation.
  1. To maintain the country’s growth, policymakers should focus on sectors that are productive and target manufacturing.
  1. Even as Ethiopia focuses on manufacturing, it should continue investing in infrastructure, encourage private industries to consider moving from service to manufacturing.

The report was part of the African Lions project, which is a partnership between the University of Cape Town’s Development Policy Research Unit, the Brookings Africa Growth Initiative, and the United Nations University-World Institute for Development Economics Research. The overall project examines six African economies and explores how they can achieve sustained economic growth.

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