Ethiopia has experienced rapid economic growth since 2005, with gross domestic product (GDP) growing at an average rate of 10.5 per cent per annum in real terms for the period between 2004-05 and 2012-13 (Ministry of Finance and Economic Development, MoFED 2013). This makes Ethiopia one of the fastest growing countries in the world.

The rapid economic growth has a multifaceted effect on a number of social, economic, and political domains. Considering 2015 is the year the first Growth and Transformation Plan (GTP) – the country’s comprehensive five-year development plan with targets aligned to the aim of achieving middle-income status by the mid-2020s – ends, it is a good time to explore the pattern of economic growth in Ethiopia and the relevant growth opportunities and challenges.

Available evidence suggests that economic growth in Ethiopia has been accompanied by signs of a structural shift away from traditional and primary sectors and towards secondary and tertiary ones. For instance, the pace of output growth has been decreasing in agriculture whereas growth rates of industrial and service sectors have been increasing. As a result, the share of agriculture in GDP is now comparable to that of the service sector – a significant change from a couple of decades ago.

Both economic growth and structural shifts have important implications for poverty reduction and income distribution. Labour market outcomes are a major potential avenue through which these influences take place. The high rate of public investment in infrastructure has generated growth in construction and related industries and triggered growth in other sectors through linkage effects. There are three major channels through which the process is believed to have influenced income distribution in the country. First, investment on infrastructure and buildings led to higher employment of urban youth and rural migrants in construction and allied sub-sectors. Second, partly caused by this expansion of employment, the demand for goods and services increased. This is particularly significant to the agricultural sector, thereby leading to terms of trade improvements in favour of the sector. Policy responses to these pressures aimed to raise productivity in agriculture and include the expansion of the agricultural extension system. Structural change formed the third channel.

As a consequence of the changes noted above, the role of agriculture has decreased continuously in the face of an increasing role of the service and construction sectors, and this has led to reallocation of jobs and labour from the low-productive agriculture sector to the high-productive service sector. Historical evidence shows that this type of labour reallocation is vital for more secure employment and higher living standards. The nation’s effort following these changes is to diversify the shift of economic activities towards the manufacturing sector to ensure more durable jobs and sustainable growth. This is the focus of the second phase of the GTP that began in late 2015.

Another aspect of sectoral reallocations is their potential to engender more unequal outcomes. The possibility of this out-turn is not small since the jobs created in the service sector are, on average, relatively more knowledge-intensive and higher paying. The earnings gap between skilled and unskilled workers in Ethiopia can thus widen. This is obviously an empirical question. In this study, we, accordingly, attempt to collate and analyse the relevant evidence, such as within- and between-sector employment shifts, to ascertain whether economic growth and structural change in Ethiopia are pro-poor. Moreover, the study explores related social and economic changes that have affected employment of both skilled and unskilled workers in Ethiopia, including population growth and its demographic structure, the expansion of education, returns to education, and the role of the public sector and social protection programmes in employment.

Trends in economic growth in Ethiopia

After being stagnant for many decades, Ethiopia’s economy has experienced robust and continuous growth over the last decade since 2005. In the 1990s, GDP growth in Ethiopia was not only low on average, it was also highly volatile, with both high positive and negative growth rates throughout the decade. The outcome reflected a combination of factors including recovery from a lengthy civil war, war with Eritrea (towards the end of the decade), and volatile weather combined with heavy reliance of Ethiopian agriculture on rainfall and its very large contribution to total GDP.

Since the mid-2000s, on the contrary, Ethiopia has enjoyed accelerated and sustained economic growth for more than a decade now, where growth rates exceeded global averages. Indeed, it has become one of the fastest growing countries in the world along with some Asian countries. Even during the global economic recession that began around 2008, Ethiopia continued to grow steadily.

In addition to favourable weather conditions for agriculture, a set of factors has contributed to the economic growth in Ethiopia. Conducive government policies, including large market reforms in the 1990s, are a vital and defining element of this set. Improvements in access to basic services (such as health and education) and heavy investment in infrastructure (such as roads and telecommunications) have also significantly helped by addressing critical bottlenecks. Overall growth has also been symbiotically accompanied by greater commercialization of agriculture and private sector development, more broadly.

An important attribute of this high growth episode is that it has been resilient to various shocks such as drought and international economic crisis. This is contrary to the historical susceptibility of the economy to such shocks: war in the 1990s and very early 2000s and drought in 1975, 1985, 1997, and 2003 have had adverse effects on the Ethiopian economy.

Sources of growth

The acceleration of GDP growth after 2004 is clear. Perhaps not surprisingly, the contribution of all factors can be noted to increase in later years. Labour (employment expansion) continues to be an important source of growth. Interestingly, the role of labour quality improvements (changes in labour composition) has edged upwards again, although from a very low base and it is still small. This is most likely linked to the expansion in education and elements of structural change outlined later. The importance of capital as a source of growth is also growing. Aggregates of capital-labour and capital–output ratios have been increasing. There is also some micro evidence suggesting capital intensity is rising and, more specifically, generating discernible productivity differentials in industry. Finally, consistent with Ethiopia’s significant exposure to shocks in the past, changes in TFP were negative or low as a source of growth up to 2004. In contrast, they have been the largest contributor during the decade up to 2014. Nevertheless, TFP growth and its share in GDP growth appear to diminish slightly in the last half-decade (2010-14), perhaps indicative of things to come.

Finally, a comparison across the African Lions – the six large and rapidly growing African economies – reveals broad similarity among them regarding the role of employment expansion as a source of growth over the two and a half decades since 1990. Whereas Ethiopia and Mozambique show comparable contributions from non-ICT (information and communication technologies) capital and TFP growth, South Africa, not surprisingly, is a clear outlier.

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This paper is part of the African Lions project, which is a collaboration among United Nations University-World Institute for Development Economics Research (UNU-WIDER), the University of Cape Town’s Development Policy Research Unit (DPRU), and the Brookings Africa Growth Initiative and explores the key constraints facing six African economies as they attempt to maintain long-run economic growth and development trajectory.