Industrial Policy and Structural Transformation in Ethiopia

Motivation: Since the launch of the first Growth and Transformation Plan (GTP 2010-2015), followed by the second GTP (2015-2020), Ethiopia has moved towards a more active industrial policy aimed at both economic growth and structural transformation. Ethiopia's impressive economic growth has received a great deal of attention, but little attention has focused on whether strong economic growth has translated into structural transformation. Purpose: The paper analyses structural transformation in Ethiopia at three levels: at the sectoral level, within the industrial sector, and within the manufacturing sector. The paper also identifies the main constraints to structural transformation in Ethiopia and possible lessons for other comparable countries with industrial policies to enhance structural transformation. Approach and Methods: Our approach adopts a broad conceptualization of structural transformation focusing on four dimensions of structural transformation - value added, labour productivity, employment, and exports - across sectors, within sectors, and within subsectors, using secondary data from national and international sources. Findings: Several key points emerge from our findings: first, despite strong economic growth over the last decade and a half, Ethiopia still faces high unemployment, poverty, and macroeconomic imbalances, suggesting that growth has not been accompanied by structural transformation. Second, not only has the pace of structural transformation been limited, but the limited structural transformation that the country has experienced has been towards services rather than manufacturing. Third, manufacturing exports remained weak in terms of both export intensity and diversification. Fourth, there are large productivity differentials within and across sectors, suggesting a large potential for structural transformation if the constraints to structural transformation are adequately addressed. Policy implications: Unless economic growth is accompanied by robust structural transformation, poverty persists as a significant percentage of the population may remain employed in low-productivity sectors. Therefore, it is crucial to identify and remedy the key constraints to structural transformation.