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The Structure of the Ethiopian Economy - A SAM-based Analysis Alemayehu Seyoum Taffesse African Centre for Economic and Historical Studies Outline • • • A brief description of the 1999/2000 Ethiopian SAM; Some aspects of economic structure derived from the 1999/2000 SAM; and A diagnostic analysis of constraints to growth focusing on private investment – – Based on the SAM, and Information underlying the SAM. Economic Structure Key elements of economic structure: • the types and location of economic activity and the associated technological and behavioural relations. – sectoral shares in output and factor use – spatial distribution - rural vs. urban, – input-output coefficients, – openness to trade, – saving and investment rates, and – expenditure patterns. • the types of economic agents/organisations and institutions – elements of ownership patterns - the extent of public ownership; and – behaviourally distinguishable groups - households, firms, government The 1999/2000 Ethiopian SAM • SAM good framework for studying economic structure – summary of transactions • The 1999/2000 Ethiopian SAM has forty accounts (40x40 matrix); Activities • Fifteen activities - classification of activities reflects differences in type, location, scale, and ownership; Five agricultural • peasant farming (highland), peasant farming (lowland), peasant livestock production, private commercial farming, and public commercial farming, Seven industrial activities • - cottage/handicraft and small scale industry; large/medium scale agro-manufacturing (public); large/medium scale agro-manufacturing (private), large/medium scale other manufacturing (public); large/medium scale other manufacturing (private); other industry (public), and other industry (private) Two service activities • services (public) and services (private), and Food-for-work activity The 1999/2000 Ethiopian SAM Eight commodity groupings • food crops, • traditional agricultural exportables (livestock and livestock products, coffee, oilseeds, and chat), • non-traditional agricultural exportables (tea, pulses, flowers, and fruits and vegetables), • other agricultural products (forest products and fisheries), • agro-manufacturing products (processed food and beverages, textiles, leather and leather products, wood products), • other industrial products (chemical products, non-metallic mineral products, metal products, electricity and water, construction, and mining and quarrying), • public goods (education, health, public administration, and other related services), and • other services (trading services, transport and communications, banking and insurance). The 1999/2000 Ethiopian SAM Factors of production - family labour, wage labour, capital, and land. Domestic institutions. • Eight domestic institutions • three types of households - farm households, wage workers, and entrepreneurs, • three types of enterprises - peasant farms, private firms, and public firms, • a food-for-work project, and • the government. Saving and investment • Two capital accounts - government, other institutions combined. Transactions costs • marketing and transportation costs (or marketing margins) associated with commodity flows. The 1999/2000 Ethiopian SAM Mainly built using survey data Unique features • Peasant agriculture disaggregated into highland peasant farming and lowland peasant farming • Peasant livestock production separately treated • ‘Food-for-work’ activity is introduced to capture the potentially significant role that food aid plays via such programs. • Activities are partitioned into privately owned and publicly owned segments. Some structure size of the economy, sectoral shares, industrial sector, large/medium manfacturing Size of the Economy GDP at current market prices (million US$) 1999/2000 SAM 8772 GDP per capita at current market prices (US$) 138 National Accounts 6326 99 Sectoral Shares • suggest that the industrial sector plays a greater and the services sector a lesser role in the Ethiopian than implied by the national accounts; • Has implications for policy Share in GDP National Accounts (%) Share in GDP 1999/2000 SAM (%) Agriculture 43.6 48.4 Industry 10.7 21.0 Services 45.7 30.1 Industrial Sector Structure Share in industrial value-added (%) Cottage/handicraft and small-scale industry 11.55 Large/medium Agro- manufacturing - public 8.28 Large/medium Agro-manufacturing - private 1.71 Large/medium Other manufacturing - public 3.55 Large/medium Other manufacturing - private 2.76 Large/medium Manufacturing - total 16.29 Other industry n.c.e - public 10.5 Other industry n.c.e - private 61.66 Other industry n.c.e. - public + private 72.16 Large/medium scale manufacturing • • • • • • accounts for about 8% of output and 3.5% of value-added of the country dominated by Agro-manufacturing - 56% of output and 61% of value-added. publicly owned enterprises are a major player - 58% of output and 72% of value-added appears to be rather undercapitalised - US$6600 of fixed assets per worker and US$3600, of machinery and equipment capital per worker are low; characterised by relatively small-sized firms - average number of workers per firm of 120 and potential annual output per firm of US$ 2.5 million (public owned ones 5 times bigger) low capacity utilisation - 57% and 48% of annual capacity in 1999/2000 and 2001/2002 Why? • Aggregate private investment low – 11 % of GDP, 10% of GDE • Private investment in industry even lower Item Housing construction Industry Distributive services Farm Implements Change in Livestock Share 45.6 7.9 35.4 4.6 3.7 Why? • • • • • • • Low Returns - mean (10%) and median (13%) before-tax profit rates are low in large/medium manufacturing (during 2001/2002); High transactions costs – 21% of output in industry Irreversibility – increases the option value of waiting and lowers investment: High uncertainty – demand uncertainty, cost uncertainty, regulatory uncertainty reduce investment; Evidence - the pattern of private investment appears, albeit very crudely, to confirm the role of costly reversibility – agriculture less than 10% (by capital) of investments approved, manufacturing 32%, construction and services 55%; Low human capital – high returns to education an evidence Demand and inter-industry linkages – coordination failure; Weak Contract enforcement – 835 days in court on average What can be done? • • • • Continue with the on-going effort to reduce the costs of entrepreneurship – reforming the civil service, reducing bureaucratic obstacles, reforming tax administration – and periodically review outcomes with stakeholders participation; Continue investing in infrastructure with greater focus on connecting less accessible areas; Further liberalise the telecommunications sector by allowing private investment other than joint-ventures with the government, while using innovative ways to ensure universal service Expand the information and technical support capacity – a well organised industrial extension service; What can be done? • Select a number of activities with dynamic comparative advantage and implement an integrated program of development that encompasses: – Investing or encouraging private investment throughout the value chain (primary inputs, necessary services, marketing); – Temporary and performance-based protection; – Transparent and performance-related credit direction; – Skill formation and technological innovation; – Enhance product quality; Specific sectors with potential – leather textiles, and key imported intermediate inputs; What can be done? • Institutionalise the diagnostic and policy choice process to sustain growth • Expand the speed at and options through which investors could raise capital up to and including opening a public credit registry to facilitate credit transactions, establishing a stock exchange; • Expand the role of business associations in policy formulation and implementation – can, among other things, help: – improve the quality and flow of information, – reduce pessimism and doubt which can dampen private investment;