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Effects of ADLI on SET and Economic Growth of Ethiopia Essay

Updated August 8, 2022

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Effects of ADLI on SET and Economic Growth of Ethiopia Essay essay

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Ethiopia is dominantly an agrarian economy, characterized by low levels of farm productivity, pervasive and deep-rooted poverty, limited growth of non-farm employment and a long history of substantial food insecurity. In recent years, however, the economy has seen considerable economic transformation (NPC, 2018). While these significant growths have contributed to impressive poverty reduction in recent years, the growth records of Ethiopia are remarkable and uncontroversial, but what drives growth in the last two & half decadesare subject to debate(Dorosh, Schmidt, and Shiferaw, 2012).

Thus, for a least developing economies like Ethiopia, where socio-economic problem for instance poverty, low level of agrarian productivity, unemployment, poor human capital and investment influences policy decisions, it become noteworthy to examine the effects of key strategies and policies on the structural change and its pattern of growth based on major sectors of the economy (agriculture, industry and service sector), their linkage and how they boost economic growth. Therefore, a thorough realization of structural change from time to time is vital for policy makers to design effective policies to achieve broader objective of inclusive growth (Felipe, Mehta, and Rhee, 2015).

This study is highly pertinent in the Ethiopian context given the ongoing political debate in the country about whether Agricultural Development Led Industrialization (ADLI) policy should be sustained or whether more emphasis should be put on industrial led development policy.Accordingly, this chapter is an introductory part of the thesis and it discusses about the background, problem statement, rationale, research questions, objectives of the study, the significance of the study, scope and limitation of the research. It also briefly outlines and describes the organization of different chapters of the whole thesis and finally presents the summary of this chapter.

Regardless of their economic philosophy and structure, all economies of our globe aspire to grow as fast as they can and transform their economy on a sustained basis. Many of them have pursued different policies to bring about such transformations based on their endogenous factor endowment (Lin, 2009). Despite of their geographic and historical condition, almost all major economies of our globe, even the richest, started out primarily as agrarian economies (Mellor, 1995; Timmer, 1995; 2002). Overtime, economic progress has stimulated a process of Structural Economic Transformation (SET) during which broad-based productivity growth accompanied a shifting sectoral composition of economic activity, implying the role of SET is critical to promote rapid and sustainable growth for developing countries like Ethiopia(Hess and Ross ,1997; Timmer, 2012).

This exhibit, sustained economic growth is, therefore, inseparably linked to productivity growth and to SET implying economic growth, however, can only be sustainable, and therefore, lead to socio-economic progress if these two mechanisms work simultaneously (Felipe, Mehta, and Rhee, 2015). In other words, economic growth and development is not a linear process that combine exogeneous technological progress and capital accumulation, but, rather a process of SET, whereby new activities replace old ones and resources transferred from low to more productivity sectors. This leads us to the conclusion “Without SET, there would only be growth without development” (Lopes, Hamdok and Elhiraika, 2017:17).

To achieve SET in such economies, it is crucial to rapidly rise income, expenditure& labor productivity in agriculture, which will further accelerate structural change in the employment distribution of the labor force (Mellor, 1995). Successful agrarian transformation from a rural based economy to an urban-based economy requires the decline share of agriculture in output and employment. ‘The faster agriculture grows, the faster its relative sizes declines’ (Mellor, 1995:1). This idea designates the essence of agricultural growth and its causal relationship to SET and aggregate growth of an economy suggesting that agriculture has a potential for accelerated growth. The basic assumption here is that agriculture is a large component of economies in their early stages of development.

In this regard, there is widespread agreement that the share of agriculture will fall during this process of transformation and the transfers of capital and labor from agriculture help fuel growth in the expanding industrial and service sectors of developing economies (Chenery and Syrquin 1975). Hess and Ross (1997:122) argue that agriculture is the key to the overall development and a precondition for boosting non-agricultural activities. From the above illustrations it is wise to realize the necessity of agriculture led development strategy to fasten structural change and economic growth.

Disagreements emerge, however, about whether policy makers can channel resources from agriculture with exemption or whether prior investments in agricultural productivity are necessary to enable these resource transfers to take place without raising food prices, urban wage rates and choking off industrial development (Timmer 1988). Early development strategists such as Albert Hirschman’s (1958) emphasized the importance of promoting an economic policy which put industrialization first and advocated focusing on development resources in lead industries with strong spillovers throughout the economy.

Despite those disagreements, many empirical works, including the former World Bank chief economist Justin Lin (2009), strongly promote “development strategies that follow a country’s comparative advantage”, which is endogenous to its factor endowment and against what he calls “comparative advantage defying strategies” which include a leapfrogging industrial policy. For instance, in East Asia, many economies excel in this area. After the Second World War, following Japan, the “Asian Tigers” – Korea, Singapore, Taiwan (China) and Hong Kong (China) – are by now familiar success stories(Felipe et al., 2015; Lopes etal., 2017). Many more other economies in the region, including Malaysia, Thailand, and Indonesia, quickly followed, achieving higher growth rates than most other developing countries that had a comparable level of development in the 1960s by promoting ADLI (Zhi, Shang, and Anna, 2010).

Since 1980s, China, becomes the new “growth miracles” – achieving the same high growth rates as Asian Tigers (Lopes et al., 2017). Ethiopia aims to follow this standard pattern of economic growth formally by adopting ADLI as a development strategy since the late 1990s, emphasizing investments to increase agricultural productivity and spur growth linkages with the rest of the economy . The strategy aspires to attain initial industrialization through vigorous agricultural growth and close linkage among the agriculture and the industrial sector. The strategy has been justified because agriculture is the largest sector in terms of output and, particularly, employment and exports; the bulk of the poor live in the agriculture-centered rural areas (MoFED, 2002).

ADLI targeted smallholder farms, especially crop producers, so as to achieve rapid growth in agricultural production, raise income for rural households, attain national food self-sufficiency, and produce surpluses which could be marketed to the urban or industrial sectors . A rise in agricultural output was expected to stimulate industrial production, including the production of consumer goods, thus establishing a supply link between the rural and urban sector. The industrial sector, in turn, could produce inputs to agriculture such as fertilizers and farming tools and equipment as well as consumption goods for rural households. This suggest that ADLI as a government basic strategy– is the use of policy to link agriculture to industry, particularly to manufacturing in guiding the industrial transformation and fastest growth based on a country’s factor endowment, which is fundamentally labor, land and other natural resources .

It indicates growth in agriculture will induce overall economic growth, through SET, by stimulating demand and supply. On the demand side, expansion in agricultural activities will increase demand for industrial products (both agricultural inputs and consumer goods) produced by domestic industries. On the supply side, the agriculture sector can supply food to domestic market, raw materials to industries and export products (Diao etal,2007). In the framework of ADLI, the “key assertion is that the primary driver of demand for industrial output will be domestic, rather than foreign demand, based on first initiating growth in agriculture” (Dercon and Zeitlin 2009). This reflects the view that the process of industrialization should build on domestic inputs.

ADLI has initiated a new push towards creating frameworks conducive for economic and social development. In this policy reform, “agriculture and industry are brought into a single economic policy framework and growth in agriculture is seen as an engine for growth in industry by supplying it with raw materials, a market base, surplus labor and capital accumulation (p.6)” . The strategy aims to boost agricultural productivity to raise overall production, as well as, invest in those industries with most production linkages to rural areas.

It assumes inter-sectorial linkages will strengthen the growth stimulus derived from increasing productivity in both sectors with agricultural sector obtaining input goods from manufacturing in exchange for raw material to manufacturing . ADLI aims to improve productivity of agriculture by enhancing its practices through raised use of modern fertilizers, advanced seeds, expanding extension and training programs for farmers, & establishing infrastructure through small & medium scale irrigation, enhanced micro-financing and promoting large-scale farming .

Guiding by the core principles and strategies of ADLI,Ethiopian economy is growing faster than it has been before 30 to 40 years. It is one of the six fastest in Sub- Saharan Africa (SSA) and one of the ten fastest growing economies in the world since 2000s at 8.4% on average a year. Nevertheless, the structure of Ethiopian economy has yet not changed much over the past 40 years. Production and exports are still based on a narrow range of agrarian commodities; with very limited application of scientific production techniques, the share of manufacturing in production and exports remains relatively low, as do the levels of technology and productivity. There is also high level of unemployment with high concentration of employment generation in the primary sector.

This sparks in mind questions like did ADLI helped in fostering SET in Ethiopian context? What were the effects of ADLI on ST and its contribution to sectoral reallocation? What was its impact on international trade particularly export diversification? Does ADLI facilitate inter-sectoral linkage to boost economic growth? Both opinions and some empirical evidences indicate variations because of differences in performance and commitments of leadership. If this is the case, what is behind this growth miracle?

These questions and others are debatable among scholars, politicians and others as Ethiopian economies shows only modest structural change. However, there is limited empirical evidence to realize the impacts of ADLI on economic growth and structural change in Ethiopia, although various discussions and debates have been conducted through political approaches, especially focusing on agricultural growth. This implies a necessity of depth understanding on the effects of ADLI in sectoral structural change of productivity, employment, output and its impact in boosting growth in Ethiopia. It also requests a comprehensive approach in studying the role of policy reforms in Ethiopian economy.

In this regard, little has done in academic perspective implying a large gap in the literature. To fill the gap this thesis attempted to serve the purpose through examining the effects of ADLI on SET and boosting economic growth in Ethiopia.

Effects of ADLI on SET and Economic Growth of Ethiopia Essay essay

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