Agriculture-Industry Linkages for Employment and Economic Transformation in Ethiopia

The quest for structural transformation, sectoral linkages, and employment creation are among the most primary development aspirations of Ethiopia. Using two Social Accounting Matrices (SAMs) (2005/2006 and 2015/2016), the study investigated sectoral linkages between agriculture and agro-processing to examine the Ethiopian economy’s potential for structural transformation and job creation. The study used the Hirschman index to analyze the linkage between agricultural and agro-processing activities and SAM decomposition to sort out the key sources of the forward and backward linkages between agricultural and agro-processing activities and a decomposition of structural change analysis to examine the primary source of growth of outputs in key agro-processing activities. The study also examined the contribution of technical change to the total change in total production of various activities in the Ethiopian economy. The results in general showed that there was a weak linkage between the agriculture and agro-processing sectors over the period from 2005 to 2016. As of the result, all key agricultural activities have strong backward linkages. However, except for cereals and livestock, all agricultural activities have weak forward linkages. which entails that that there is no strong agro-processed sector that uses intensively domestically produced agricultural outputs as intermediate inputs. Some agro-processing activities, notably bakery/grain, vegetable oil, dairy, and alcohol, have higher backward linkages while the rest of the agro-processing sectors have weaker forward and backward linkages. Using the SAM decomposition analysis, the study found that the closed loop (consumption effect) is quite stronger than the within effect (production linkage). The study shows that there was a significant change in the production of various activities in the economy between 2005 and 2016. However, the change was due to a massive increase in final demand than to technical changes. The analysis further signified that the agricultural sector creates more demand for labor than agro-processing activities. The study recommends that policymaking focus on improving implementation capacity to promote systemic linkages between the agricultural and industrial sectors to improve the economy’s overall productive capacity. Furthermore, national planners should give more attention to improving linkages between the agriculture and the agro-processing activities by focusing on technological or technical upgrades and fixing the looseness in the value chains of each agro-processing activity.