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The Structure of the Ethiopian Economy - A SAM-based Analysis Alemayehu Seyoum Taffesse African Centre for Economic and Historical Studies.

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Presentation on theme: "The Structure of the Ethiopian Economy - A SAM-based Analysis Alemayehu Seyoum Taffesse African Centre for Economic and Historical Studies."— Presentation transcript:

1 The Structure of the Ethiopian Economy - A SAM-based Analysis Alemayehu Seyoum Taffesse African Centre for Economic and Historical Studies

2 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.

3 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

4 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

5 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).

6 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.

7 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.

8 Some structure size of the economy, sectoral shares, industrial sector, large/medium manfacturing Size of the Economy GDP at current market prices (million US$) GDP per capita at current market prices (US$) 1999/2000 SAM8772138 National Accounts632699

9 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 (%) Agriculture43.648.4 Industry10.721.0 Services45.730.1

10 Industrial Sector Structure Share in industrial value-added (%) Cottage/handicraft and small-scale industry11.55 Large/medium Agro- manufacturing - public8.28 Large/medium Agro-manufacturing - private1.71 Large/medium Other manufacturing - public3.55 Large/medium Other manufacturing - private2.76 Large/medium Manufacturing - total16.29 Other industry n.c.e - public10.5 Other industry n.c.e - private61.66 Other industry n.c.e. - public + private72.16

11 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

12 Why? Aggregate private investment low – 11 % of GDP, 10% of GDE Private investment in industry even lower ItemShare Housing construction45.6 Industry7.9 Distributive services35.4 Farm Implements4.6 Change in Livestock3.7

13 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

14 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;

15 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;

16 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;

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