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Chapter 2 2.1. Introduction

• Ethiopia is a landlocked country with a
population of over 112 million people
• Located in East Africa in the Horn of Africa
Recent Performance of • The majority of the population is rural
Different Sectors – with about 80% of people living in rural areas
• The total land area 1,104,300 square kilo
in the Ethiopian Economy metres
• Has about 38.5 million hectares of agricultural
– Agricultural sector land of which
– Industrial sector – 16 million hectares are cultivate
– Service sector – and 20 million hectares are permanent pastures
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• Arable land in Ethiopia accounts for about 34%
of the country's total land area
• Oromia, Southern Ethiopia, Amhara are key
regions for agriculture
• Has a diverse climate, with
– hot, dry conditions in the lowlands
– and cooler, wetter conditions in the highlands
• The economy is one of the fastest-growing in
Africa, with GDP growth averaging 9.5% per
year from 2004 to 2019
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• However, the economy slowed down in 2020 due to
the COVID-19 pandemic
• And growth is projected to be 5.3% in 2023
• The size of Ethiopia's economy is estimated to be
– $200.133 billion (nominal, 2023 est.)
– and $460.247 billion (PPP 2023 est.)
– This makes Ethiopia
• the 59th largest economy in the world by nominal GDP
• and the 56th largest economy in the world by PPP
• Industry accounts for about 15% of GDP
• And is dominated by the manufacturing sector
• Produces textiles, food processing, and leather
products

• The service sector accounts for about 45% of

GDP
• Drought:
• It is growing
– Ethiopia is a drought-prone country
• The growth is driven by tourism,
– Climate change is expected to make droughts
telecommunications, and financial services more frequent and severe.
• The economy faces various challenges, including • Conflict:
• High poverty: -
– Ethiopia has been affected by conflict in recent
• About 30% of the population lives below the national years, which has disrupted economic activity and
poverty line displaced millions of people
• Inequality: -
• the richest 10% of the population controls about 40% of
the country's wealth
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2.2. Agriculture Sector Performance • The sector is dominated by smallholder farmers

 Historically, the agricultural sector has been at the core of • Smallholders produce a wide range of crops
Ethiopia’s Economy including
 In the 1960s, the agricultural sector accounted for – Cereals
 Over 85% of production and – Pulses
 Over 95% of the population (Timmer et al., 2015) – Oilseeds
– Fruits
 The sector has undergone a tremendous production and
productivity increase since the mid-1990s, – and vegetables
 With a six-fold increase in agricultural production • Livestock is also an important part of the
agricultural sector
 And emerging labor productivity improvement (Rohne
Till, 2022) • Is major producer of cattle, sheep, goats, and
 Currently agriculture plays key role in Ethiopia
camels
– Accounting for about 40% of GDP
• Is also the birthplace of coffee, which is one of
the country's most important exports
– And employing over 80% of the population
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• Under the strategy of agriculture development–led
industrialization (ADLI), agricultural production
increased substantially
• With increases in agricultural GDP averaging 7% per
year between 2004/2005 and 2013/2014
• Earlier part of this period, land area expansion was
the primary contributor to increases in agri. GDP
• In recent years, rising crop yields coupled with
continuing agriculture area expansion contributed to
GDP growth
 There has been a structural shift in terms of
production
 While the labor force is still predominantly engaged
in agriculture many aspects of the sector are no longer
traditional
– Fertilizer use increased four-fold since the early
1990s
– Mechanization is increasing
– and extension program is disseminating modern
farming technologies

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Basic Features • Varied agro-ecology

• Most of Ethiopia’s agricultural production is
attributed to smallholder farmers
– Smallholders account for over 95% of production and
arable land (CSA, 2011–2013)
– The average farm size in Ethiopia is 1 ha
• Larger farms (cooperatives, state farms, and private
commercial farms) make up less than 5%
• Ethiopian agriculture has been
– rain-fed (only 3% of Ethiopia’s arable land is irrigated)
– drought-prone
– and traditional ……
 leading to several instances of famine
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• Most farms primarily rely on family labor
• While the use of hired labor is common
especially for Weeding and harvesting
• The share of total deployed hired labor is
small
• Wage income, on average, accounts for only
10% of household income in rural areas
(Bachewe et al., 2016)
• The small share of wage income indicates
agricultural production’s importance
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• Both total production and yields have
increased in recent decades
• But the number of farmers has also increased
more than land expansion
• This has led to more smaller farms
• The average farm size decreased from 1.4 ha
in 1977 to 1.0 ha in 2012 (Headey et al.,
2014)
• The growing rural population, combined with
a slow movement out of agriculture, likely
contributed to this development
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1. The smallholder farming system
• It is the most important or dominant system
• It accounts for more than 90 % of the agri production
• About 95% of the total area under crop production
2. The pastoral/nomadic system
• About 40% of Ethiopia’s land area is in the arid and
semi-arid zones
• and is located in the lowlands below 1,500 m.
• There rain fed crop production is not possible because
of low-level erratic rainfall
• And people rely more on livestock for subsistence.
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Production and Productivity
• Since 2004/2005, the agricultural sector in
Ethiopia has performed well
– Rising crop yields the primary driver of increased agri
GDP
– Followed by land area expansion
• These factors contributed 60 percent and 28
percent, respectively, to agricultural growth
• Cereals generated more than half of crop GDP
growth between 2004/2005 and 2015/2016
• The five major cereals …
– teff, barley, wheat, maize, and sorghum) constitute
73 percent of total cultivated area
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Structure of the Agricultural Sector
• The agricultural sector of Ethiopia is composed of
– the crop production
– Livestock
– forestry
– and fishery sub-sectors
• About 65% of the sector’s GDP comes from crop-
production,
• While animal husbandry contributes 25%
• The remaining 10% is generated from the allied sectors,
forestry, fishing and others
• Currently, the following farming systems are widely
practiced in Ethiopia.
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3. The modern commercial farming system:
• Was officially introduced during the third
five-year plan (1968 – 73)
• Among the strategies envisaged
– to modernize agriculture
– Increase marketable surplus
• the plan stated that available govt land be
utilised for the establishment of large
commercial farms
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• Where rain fed agriculture is the predominant
production system, agro ecological conditions
determine production patterns
• In the case of Ethiopia
– agro ecological conditions dictate the location of major
economic centers and transportation corridors
• Ethiopia’s topography has influenced demographic
and agricultural patterns throughout its history.
• The highlands of Ethiopia, defined as
– Locations with a minimum elevation of 1,500 meters
above sea level\
– More densely populated and reflect the physical and
climatic advantages that led to the country’s agricultural
development
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• The highlands are endowed with Contributions to real agricultural GDP, 2004/2005–2015/2016 (%)
– relatively more predictable rainfall
– and do not house vectors that carry diseases, such as
malaria or tsetse fly
• In contrast, the lowlands
• experience more erratic and limited rainfall
• and have greater risk for disease
 These factors have constrained expansive development
in lowland agriculture and have greater risk for disease
 Most agricultural production is in the highlands
 Which constitutes the breadbasket of the country
 90 percent of the area planted to cereals is found
 and 89 percent of total cereal production is obtained
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Contribution of cereals and noncereals

to agricultural GDP change, 2004/200
Problems of and Possible Remedies
2013/2014 (%) for the Agricultural Sector

• Agriculture has been the mainstay of the

Ethiopian economy for decades
• Why is this so?
• What are the problems?
• What are some possible remedies?
• However, its performance in achieving food
security and generating capital for the other
sectors is poor
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• This situation has attracted the concern of policy b. Human-Made Problems

makers, experts, and international – These are negative effects that result from
organizations, who hope to change the the political, social and economic practices
situation. • These problems include:
Problems: – land fragmentation
– lack of infrastructure
• According to the studies made so far, the sector’s
problems identified fall into two major – lack of credit facilities
categories: – lack of effective land-ownership entitlement
– traditional practices
a. Natural problems –
– the use of backward technology
– Unpredictable Weather Condition
– and inadequate rural market
– Erosion and land degradation
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• Remedies: to reduce or mitigate the problems,

• Land Tenure and Fragmentation
the following possible remedies
– Land tenure issues have been a longstanding problem
in Ethiopia
– With unclear property rights leading to disputes and Reduce the prevailing heavy dependence on rain-
inefficiencies fed agricultural practices
–
– The fragmentation of land holdings among small Production of drought-resistant crops in drought-
farmers also reduces economies of scale and limits prone areas so that the recurrence of acute
their ability to invest in modern agricultural practices shortages of food will be minimized.
• Technological Adoption
– While there has been progress in adopting modern Pursue an effective land-ownership right so that
agricultural technologies, many smallholder farmers
still lack access to improved seeds, fertilizers, and
the farmers will develop long-term developmental
irrigation systems. commitments
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Promote committed literacy campaigns to help

farmers understand price and farm-technique
information
Promote infrastructure facilities as per their
Reading Assignment
availability • Industrial sector in Ethiopian
Inclusion of the issue in school curricula
 Promotion of extension services supported with consistent
Economy
capacity- building tasks
• Service Sector

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2.2. Industrial Sector in Ethiopian Economy
• Ethiopia is one of the least industrialized nations in the
world
• The objective of any developing nations, including Ethiopia,
is industrial development
• A developed industry is likely to boost the entire
economy by
– Making it nationally integrated
– Flexible
– And capable of self-generated and self-sustained growth
• Economic development cannot be achieved without
the development of this sector.
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• According to Sutcliff, there are three criteria for a
country to be an industrialized
– 25% of the GDP should come from the industrial
sector
– At least 60% of the industrial output should
originate from the manufacturing sector
– At least 10% of the population should be engaged
or employed in the industrial sector
• The national income account of Ethiopia classifies the
industrial sector into these sub sectors:
 Manufacturing
 Mining and quarrying
 Construction
 Water and energy supply
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1. Industry Sector Output Contribution:

The Role of the Industrial Sector in the
Ethiopian Economy  The manufacturing sector is characterized by
• The Ethiopian industrial sector is composed of  The physical or chemical transformation of materials
into new products
• Mining and quarrying Whether the work is performed by power-driven
• Manufacturing machines or by hand
• Electricity And whether it is done in a factory or in the
• Water supply worker’s home
• Construction • The manufacturing sector can be classified into groups of
• food and beverage
• The manufacturing sub-sector is • Textiles
• leather and
• the most dominant • Footwear
• and dynamic component of the industrial sector, • wood and furniture
• paper and printing
• Chemicals
• non-metal and metals
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• In terms of the value added the food and 2. Employment Contribution:

beverage industrial group is the leading
• For example in 2007/08, the contribution of
the food and beverage industrial group was
50.7%
• Revenue obtained from sales, the food and
beverage industrial group generated around
8.3 billion Birr
• which is close to 48.5% of the total revenue
obtained from large and medium scale
manufacturing in 2007/08
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• The industrial sector, (the manufacturing sub-
sector in particular) important sources of
employment
• Especially for the rapidly growing urban
population in Ethiopia
• In 2007/08, there were 1,677,906 persons
engaged
• Out of which 678,911 were employees in the
industrial sector
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• The employment capacity of each in the 3. Foreign Exchange Contribution:

manufacturing sector, as of 2007/08 • The poorly developed industrial sector
• The food and beverage group employed • Contributes very little to the foreign currency
50% earnings
• The non-metal 14% • According to CSA, 2009
– textiles generate 41.5% of the sector’s foreign
• Paper and printing industrial groups 10.9% exchange
• The rest of the industrial groups, in terms of – Which is the largest contribution
employment • Food and beverages 32.9%
– 2.1% in wood and furniture • leather and footwear 10.8%
– 8.8% in textile-product manufacturers • This pattern has remained almost the same in
recent years
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• The only noticeable change is in the wood and

furniture and chemical groups
• The total value in 2007/08
– Wood and furniture Birr 43,269.7
– Chemical exports Birr 30,198.9
• This is an indicator of the potential the
nation has in bringing in foreign currency
from non-traditional commodities

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• Major Components of the Industrial Sector (as • As indicated in Table

% of total industrial GDP) the GDP contribution of large- and
medium-scale manufacturing industries
declined for the three decades of 1980 -
2008
The share of small-scale and handcrafts
showed marginal increments
‘Other’ sub-sectors which, together,
contributed about 20.3% and 58.6% to the
total industrial GDP during the periods of
1991-1999 and 2000 -2008, respectively,
include mining and quarrying, water, and
electricity.
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Table - Structure of the Manufacturing Sub-Sector by Number of

The sectoral structure of the manufacturing Establishments, 2007/08
sub-sector, 2007/08 based on numbers
establishments

food and beverage accounted for 52% of the total

manufacturing enterprises

while textiles accounted for 22%

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4. Problems of and Possible Remedies for the
Industrial Sector
• The manufacturing sector of Ethiopia is in its
infant stage
• Faces many interrelated problems
• These problems are generally related to
a. Lack of Finance:
• The possible sources of this finance have
been
– agricultural
– and non-agricultural-commodity producing sectors
in the economy
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b. Market-Related Problems
• According to CSA, 2000, market-related problems
accounted for 39.5% of the underutilization of the
capacity observed in the large- and medium-scale
manufacturing establishments
• Market-related problems arise due to the following
factors:
– Weak domestic demand for manufacturing output — this is
due to the subsistence nature of agriculture on which the
vast majority of the people rely for food, etc
– As a result, the purchasing power of the people is very low.
– Lack of marketing information about both local and export
markets.
– Strong competition from cheap imports
– A consumer bias against local products
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• The technology we use is also capital
intensive
• This approach is basically not recommended
for economies like Ethiopia where
unemployment is rising.
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 The agricultural sector not been capable of generating
the required surplus because of
 its subsistence nature and
 backwardness
 Other commodity-producing sectors, especially the
manufacturing industry, are underdeveloped
 And most public enterprises are heavy users of foreign
exchange hence have no surplus
– That is, they are highly import-dependent. This means that
they have not been net savers and
• Given such a low saving rate, it is difficult to
undertake industrial investment
• High collateral requirements by the formal lending
institutions aggravated the problem of financial shortage
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c. Technology-Related Problems
• It is argued that it is impossible to think of
industrial development without the application
of modern science and technology.
• Technological problems reveals themselves in
one of the following ways:
– Lack of sufficient information on appropriate
technology
– The technology we have today is not developed
based on available local raw materials
– This limits the linkage that is expected in the
domestic economy of the manufacturing sector
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D. Input-Related Problems
• Input-related problems also hamper the
development of industry in Ethiopia
• This is mainly due to
– the high cost
– shortage of foreign exchange for imported inputs
– and to the unreliability of domestic sources of
inputs and their poor quality
– The survey conducted by CSA in 2000 ranked the
shortage of raw materials as the second most
serious problem accounting for 25.9% of the total
underutilization
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e. Others
• There are also other problems like
– Policy problems and
– human-resource-related problems in relation to
– lack of skilled manpower an
– absence of industrial discipline and work ethics

• These and other problems do not only limit new

investments, but also reduce the productive
capacity of the already existing enterprises
• For instance, according to CSA (2000), the
large- and medium scale manufacturing
establishments used only 49.2% o their capacity
due to various problems
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