CHAPTER FOUR
4 RESULTS AND DISCUSSION
4.1 Overview of the Ethiopian Economy: Description of the trends of the Major Variables considered
4.1.1 Gross Domestic product and Growth Trends
Despite the dismal growth records and poor economic performance in the Derg regime and early periods of EPRDF, the country started to make improvement in the performance of the economy.
The track of progress in economic growth is strong especially after the year 2003/04(i.e.
immediately after the country emerges from conflict with Eritrea). Real GDP in 2000/01 maintained an upward growth of 8.3 percent from a 6.1 percent growth in 1999/00 and the yearly average of 3.6 percent from 1991/92-1998/1999. However, the consequence of the war was significant in reducing the progress of economic growth especially in the years 2001/02 and 2002/03 with a growth record of 1.5 and -2.2 percent, which is far below the average of 3.6 percent. However, the growth record was relatively good as compared to the period before where the average growth rate was 1.9 percent. The average growth rate of real GDP in the present regime is 5.042 percent.
In Ethiopia as agriculture is the mainstay of the economy growth performance is significantly (if not totally) determined by the performance of agriculture, which in turn is influenced highly by the vagaries of nature. Strong performance in the agricultural sector is reflected by a record of high economic growth. A case in point is the year 2001 according to the African Economic Outlook (2003) which states that the strong growth in total output in 2000/01 was reflected in all sectors of the economy. Agriculture remained the mainstay of the economy, increasing its share to 45.1 percent in the year from 43.6 percent of GDP in 1999/00. The agricultural sector expanded strongly in 2000/01 with a real growth rate of 11.5 percent, compared with 2.9 percent in 1999/00. The strong growth in agricultural production in the year was due largely to improved weather conditions. The strong linkage between agricultural performance and economic growth is presented by the graph below.
Figure 1 strengthens the above argument and further shows the co-movement of growth of agricultural output and growth of GDP. This implies that economic growth is highly volatile and its performance is constrained by natural calamities. Whenever there is a good agricultural harvest which indeed is a result of good climate mainly adequate rainfall, there will also be a good record of economic growth. This co-movement of growth in GDP and growth in agriculture further shows not only the rain-fed nature of agriculture but also the sensitivity of the whole economy to climatic shocks. The strong correlation between growth in GDP and agricultural growth is supported both by upward and downward co-movement; for instance, in the year 2007/08 growth in GDP and agricultural output was 44.6 and 33.53 percent respectively.
Whereas the poor growth performance of agriculture in the years 1984/85(-17.7 percent) and 1997/98 (-1.62 percent) is reflected by the poor growth figure of -10.4 and -3.9 percent in the respective years. In general the figure shows that GDP growth attains the highest figure whenever there is a good climate(most importantly adequate and timely rainfall) and a dismal GDP growth is recorded owing to the poor performance of agriculture when a shortage of rainfall(dry season) is experienced in the country.
Figure 1 Trends of agricultural and GDP growth rates (in nominal terms)
Source: Own computation based on the data from NBE (National Bank of Ethiopia)
The extreme dependence of the economy on the rain-fed agriculture can be solved (or at least minimized) if an alternative scheme of irrigation agriculture is practiced widely to enable farmers produce more than once in a year.
Alemayehu (2005) argues that dependence on rain-fed agriculture has a far reaching consequence on the overall performance of the economy. According to him dependence on rain-fed agriculture has a negative multiplier effect on production levels in subsequent years; that is, the shock in one period is carried over into the next as the early years of the drought deprive peasants not only of current income but also of wealth(e.g., they may sell or otherwise lose assets, in particular oxen). Further he explained that more promising weather during the next agricultural season may not see an increase in harvest due to the perpetuation of the effect in terms of lack of capital or the farmers may be forced to migrate in search of food.
-100 -50 0 50 100
1970 1980 1990 2000 2010
time
Agri. growth GDP Growth rate
Despite the fact that agriculture takes the lion’s share of the GDP, the industrial and service sectors also play their own role in the economy. Agriculture remained the main engine of economic growth with almost 50 percent of the GDP even though its share declined slightly below 50 percent 1999/00 onwards due to the increasing role of the service sector, where the industrial sector constitutes still a meager share of the GDP. On average the agricultural, service and industrial sector constitutes 51.7, 35.6 and 11.6 percent of the GDP.
Table ii. Structure of the economy
Sectors Share of GDP(period average)
1974/75-1990/91 1991/92-2008/09
Agriculture 55.57 47.7
Industry 11.44 11.8
Service 32.97 38.06
Source: Own computation based on the data from the National Bank of Ethiopia (NBE).
As it is displayed on the table agriculture remained the dominant sector constituting nearly 48 percent in the EPRDF regime (1991/92-2008/09) and more than half of the GDP (55.57) in the Derg regime (1974/75-1990/91). The dominance of the sector also in the present regime implies the failure of the ADLI (Agriculture Development –led Industrialization) policy from being materialized, the inadequacy of the agricultural sector to put the industrial sector in progress and also shows the weak linkage among the sectors. Evidences also show that the agricultural sector is at a very backward development stage to strengthen its linkage with the manufacturing sector (let alone feeding the mass growing population). The other sectors contribution is almost similar despite the change in regime and policy, notably industry’s share is nearly equal in the two periods while the service sector showed a slight improvement in the post-Derg regime.