Structural Transformation in Ethiopia’s Manufacturing Sector

Abstract

This study assesses the extent of structural transformation within the manufacturing sector by discomposing the source of labour productivity and TFP growth, shares of capital, and employment among other indicators. For the sake of the analysis, the manufacturing sector is classified into three categories: resource-based, low technology, medium and high technology. Labour productivity and TFP growth were estimated using data between 1982/83–2017/18 to assess the reallocation of resources among industrial groups. The findings show that resource-based industries still hold the largest share of output and capital in the manufacturing sector, and remains to be the most productive group. Low technology industries continue to maintain the largest percentage of workers although there has been high rate of growth of workers in medium and high technology industries in recent years. Albeit the prevalence of a slight movement of workers from lower productive to higher productive industrial groups with a given productivity level, there is no evidence of dynamic reallocation or a movement of labour driven by productivity changes across industries. Static comparative advantages or natural resource endowments seem to induce the establishment of most industries in Ethiopia, although these same industries heavily rely on imported inputs. In addition, government policies tend to favour resource-based and low technology industries in the form of, for instance, the provision of working premises and infrastructural facilities such as power through the establishment of industrial parks. Thus, there is a need to improve institutional and policy enablers to address existing binding constraints and strengthen inter-sectoral linkages not only to efficiently tap the available domestic resources, but also pave the way for the growth of medium and high technology industries as a pathway for faster pace of industrialization and economic development. JEL: D24 J63 L63 O490