Making ADLI Work: Viable option for combating recurrent famine in Ethiopia

Rufael Fassil, DENGO, Bremen University January, 2004

Bremen, Germany

Outline

Introduction

Basic Facts on Ethiopia economy

Why making ADLI work Crucial in Ethiopia?

Limitations/challenges of the policy

Conclusion & Recommendations

1. INTRODUCTION

Location: Ethiopia is located in Eastern Africa, in the so-called "Horn of Africa" .

Population:70 Million (2003): 83.8% resides in rural areas

Age structure:0-14 years: 47.18% 15-64 years: 50.03% 65 years and over: 2.79%

Population growth rate:2.3% (2002)

Natural resources: small reserves of gold, platinum, copper, potash, natural gas, hydropower

Agriculture productions: cereals, pulses, coffee, oilseed, sugarcane, potatoes; hides, cattle, sheep, goats.

Industrial productions: food processing, beverages, textiles, chemicals, metals processing, cement

2. Basic Facts on Ethiopia Economy

Indicator (2002) Ethiopia SSA

(48)

World

GDP per capita (Current US Dollar, not 1995 )

683 1797 7416

Life -expectancy 44 46 59

Access to safe water 28 42 76

Population living under the poverty line

44 40 ---

Average GDP growth(1991-2001)

4 % 2 % 3 %

Total debt (US $ billion) 10.4 224 ---

In terms of broad social indicators or narrow economic aggregates, Ethiopia isone of the poorest countries in the world and highly indebted.

The low level of social and economic development is also reflected in thestructure of the economy, in which agriculture constitutes about 50 per cent ofGDP and around 85 per cent of employment.

GDP-composition by sector (2000) compared SSA Agriculture: 52.3% (17%) Industry: 12% (31%) Services: 35.7% (53%)

Exports: US$ 984 million (2000)Commodities: coffee, gold, leather products, oilseeds

Imports: US$ 1.9 billion (2000)Commodities: food and live animals, petroleum and petroleum products, chemicals, machinery, motor, vehicles (2000)

Such low level of development is also reflected in acute resource gaps at themacro economy level, which made the country dependent on external financialflows in the form of loans, grants and aid.

3. Policy Changes introduced to address these issues

To address the above economic problems the governmentintroduced new policy measures in 1991(new regime). Thesepolicies include: devaluation of the domestic currency,removing price controls, liberalizing trade, and opening up theeconomy for foreign investment.

But most importantly, it adopted what it called an Agricultural-Development-Led Industrialization (ADLI). The policy aims toimprove the lively-hood of the rural population by enhancingrural productivity and hence ensuring food security.

In addition to its role in reducing poverty, ADLI is accorded therole of Serving as both medium- and long -term growthstrategy. Further, the government claims that education, healthand other social sector programs are designed in conformitywith ADLI

4. Why making ADLI work Crucial for Ethiopia ?

A Sustained and permanent alleviation of poverty, requires thatthe economy, overall, and not only the agriculture sector grow

Agriculture has been the “leading” sector that has acceleratedgrowth in countries such as China, India…..

But it has not always been the case In 18 and 19 century Europe=industrial innovations

In other countries, it has been exports (manufacturing oragricultural or of labor) /services (tourism)=Korea, Malaysia orSpain

However, when the main productive sector in the economy isagriculture, rapid growth will not occur unless agriculturalproductivity increases (recurrent Famine).

4.1 What Determines Agricultural Growth?

Agricultural growth (productivity) is accounted by:

Availability of standard inputs= such as land, labor and capital in the agriculture sector (the more land, the more you can produce, etc.)

Improving research and extension= (some studies indicate a return of 50% to expenditures on research)

Rural infrastructure= (rural roads, rural telephones, electricity, irrigation)

Education= (and also health)

Structural factors= For instance, the structure of land ownership

Institutional factors= such as change to market mechanisms

The functioning of input and output markets= (input distribution and access to markets).

Role of cooperatives and the functioning of the financial marketsand particularly improving the availability of rural financing……

4.2 How Agricultural Growth Affects Rural Poverty?

By increasing farmers income=directly through the adoption of improvedtechniques which increases agricultural output and therefore theirrevenue

By increasing the assets farmers= Switch from unproductive to productive savings (bank vs. jewelry)

Enhanced property rights= through land distribution/land reform

Human capital= (education, health)

By generating non-agricultural employment as a source of additional income

By Keeping domestic prices for staple foods stable

By Shifting production to high value intensive agricultural commoditiesthat stimulate demand for agricultural labor

Therefore, in an overwhelming agricultural country, such as Ethiopia as agriculture accounts for 50% of GDP, 90% of exports, and 80% of total employment, agricultural growth (i.e. This does notmean neglecting industrial development which is key to the diversification and long-termstructural transformation of the economy) is an essential ingredient for growth and foralleviating poverty – as China ,India …shown us…..

Cases from other countries (20 years) Experience

Country

Share of GDP

in Agriculture

Growth rate of

Agriculture

GDP/capital

income

1980 2000 1980 2000 1980 2000

China 30.1 15.9 5.2 220 840

India 38.6 24.9 3.2 270 450

Ethiopia 56.1 52.3 1.2 _ 167

Sudan 32.9 37.2 n.g 470 310

5. Factors inhibiting positive roles of the current policy (i.e. making ADLI not effective?)

I. Internal Factors:

Although government development strategy favours agriculture over othersectors, actions are not commensurate with rhetoric:

The economic reform program has failed to direct available credit tothe agricultural sector. EX-1991-98 Credit to Agriculture(14.7%), domestictrade ( 32.2%), industry (13.2%).

The volatility of prices for agricultural products is anotherproblem. Prices fell by up to 25 percent, during the 1996 and 2001bumper harvest years

Weak Rural-urban linkages (interface of rural-urban sectors )

Policy and institutional configuration: land policy (insecurity, absenceof land markets, diminishing size holding, inhibiting migration, powerlessness);**Agriculture Development Led Industrialization (only technology improvementsemphasized without institutional and structural change)

Structure of production: micro and decreasing size holding, lowtechnology, low skill, rain dependent agriculture

II. Challenges beyond /externalities

Huge amount of debt

The total debt accumulated reached 10.4 billion US$ by 1998. Thisrepresents 149.5 per cent of GDP. The magnitude of the debt in 1975was only US$371 million. More than half (US$4.744 billion or 54%) of thetotal debt was contracted for defense purposes.

Clearly, the debt contracted until the 1990s was largely used for defensepurposes (54% directly contracted and 30% ) helped neither in improvingthe productive capacity of the economy nor in alleviating poverty.

The scheduled debt service is about 54 per cent of current exportearnings. To cope with its unsustainable debt, Ethiopia has beenengaged in negotiations with its creditors since 1992. Consequently, atotal of US$ 372.89 million was agreed to either be cancelled (US$101.60 million) or rescheduled (the remaining US$ 271.29 million) ( i.e.only 1%)

Fair Trade (Export….Coffee (57%)Ex-Empirical study (For every dollar spent on

coffee, only 20 cents go to the farmer and the remaining 80 cents go todistribution and marketing charges )

6. Conclusion and Recommendation

1) Land reform

So there is a need to revisit the land tenure issue and change it so it ismore flexible, more dynamic and provides greater security (through issuing land titles for collateral and certificates). ….

2) Encouraging institutions and technologies that increaseproductivity and improve the weak linkages within the ruraleconomy

developing or strengthening marketing and credit institutions that provide market access and opportunities for the poor in the farm and non-farm sectors

improving the research and extension system (not rain fed..)

Public and private investments must be channeled to overcome theweak linkages that exist in the rural economy

(Example-expanding agro-industries, cottage industries, the development ofsmall towns in rural areas, the release (through encouraging migration) of theover-populated rural population …(Lewis Model)

3) ADLI strategy’s emphasis is on inputs (Export) , the

demand side should also be properly addressed

The government has focused on success in agricultural exports leading to demand for locally produced industrial goods..

( High transportation cost and 70 percent of household budgets )

4) In the context of enhancing accountability of the

government to the public and in the fight againstcorruption action must be Taken and the governmentshould be engaged seriously in negotiations with itscreditors and improve fair trade/add value (Minimum

level of Gov’t intervention and regional trade )…..recurrentfamine

THANK YOU!