Policy options to support the Rural Job Opportunities Creation (RJOC) Strategy in Ethiopia
This report provides quantitative evidence supporting policy options for the Rural Job Opportunity Creation Strategy (RJOCS) in Ethiopia. A Computable General Equilibrium (CGE) model specifically modified for the Ethiopian context was used to address the impacts of six policy options. For the purpose of the study, a disaggregated version of a 2015/16 Social Accounting Matrix (SAM) was developed for Ethiopia. Multi-sectoral analytical tools describe the Ethiopian economy and information about which sector has the greatest potential to generate employment. The report presents and discusses the results of modelling policy reforms from which implications for policy can be drawn.
The study
In 2017, the Ministry of Agriculture and Natural Resources of Ethiopia adopted the Rural Job Opportunity Creation Strategy (RJOCS) to address a lack of job opportunities in rural areas and its related effects (migration to urban areas and poverty). This report assesses the quantitative effects of six policy options in terms of job opportunity creation and key macroeconomic indicators. It employs a dynamic Computable General Equilibrium (CGE) model developed by the Joint Research Centre (JRC) tailored to the Ethiopian context.
Policy context
Agriculture is the backbone of the Ethiopian economy. The sector employs 78% of the country’s labour force and is characterised by subsistence farming and being heavily dependent on erratic rainfall. The rate of rural urban migration was 15% in 2008 and is projected to reach 39% between 2009 and 2014. People moving to urban areas do not have the required skills to engage in formal productive economic activities, and therefore often engage in low return activities and are vulnerable to food insecurity and poverty.
Six policy scenarios simulate the existing policy mixes of the Ethiopian government including, beyond the RJOCS, key documents such as the second Growth and Transformation Plan (GTP II) and the Climate Resilient Green Economy (CRGE) Strategy. The identified scenarios deals with the development of (i) industrial agro-processing parks, (ii) rural roads and infrastructure, (iii) irrigation facilities, (iv) livestock extension services, (v) productive safety net program (PSNP) or labour subsidy and (vi) rural skills enhancement.
Main findings
The analysis of the Ethiopian economy using multipliers shows that livestock has the greatest employment generation capacity, followed by cash crops, food crops, and the agri-food industry. This shows that polices focussing on rural and agri-food sectors have the greatest potential to create job opportunities.
The main findings of the study are:
- All scenarios show the capacity of Ethiopian agriculture and its food industry to generate job opportunities and improve the conditions of workers and their families, with particularly positive effects under scenarios supporting agroparks and developing worker skills through education.
- The increase in labour demand generates increased wages under almost all scenarios. This increase is significant under scenarios designed to boost labour productivity.
- An additional effect of policies fostering rural job opportunities is the reduction of worker migration towards urban areas, in particular Addis Ababa.
- Total employment is barely affected by the policies simulated due to model structure and lack of available data on the real level of employment or underemployment.
- The positive outlook associated with the policies simulated is emphasised by the increase in production factor income and consequently in household income in most scenarios.
- Fostering agro-industrial parks benefits food production the most with a massive increase in food exports and an improvement in the balance of payments between exports and imports. This scenario also increases agri-food prices on the Ethiopian market.
- Livestock extension services and irrigation have the greatest impact in terms of reduction in the price of agricultural and food products.
- Enhancing skills on the one hand while fostering extension services in rural areas targeting livestock production on the other are the most effective policy options for food and nutrition security.
- Investing in road infrastructure and in education has the greatest effects on the production of non agri-food products, allowing for broader development of the economy.
- The scenarios simulated have a positive effect on most of the indicators underpinning critical SDGs, such as SDG2: Zero Hunger, SDG 8: Decent work and economic growth, and SDG10: Reduced inequalities.
Policy recommendations
Based on an assessment of the social and economic impacts of the various policy interventions, this report suggests the following recommendations for the Rural Job Opportunity Creation Strategy in Ethiopia. Only policy directions are offered rather than concrete details. We consider the elaboration of concrete details to be a separate job that can only be done after overall policy directions are agreed by the bodies concerned.
1. Allocate a significant share of total public resources to the agricultural sector as part of a broad structural transformation agenda.
The level of expenditures in support of food and agriculture still falls short of the 10% target. It would be difficult to achieve the envisaged structural transformation agenda with this level of expenditure on agriculture. Therefore, a greater share of total public resources should be allocated to the agricultural sector. The effect on job opportunity creation in the agricultural and food industry sector is substantial.
2. Accelerate government investment in the livestock sector.
The analysis shows that livestock commodities have the greatest positive impact on employment generation, output, and value added. Therefore, accelerating government investment in the livestock sector should be considered. As available resources are limited, the government may need to redirect its investment more towards the livestock sector in order to realise Ethiopia’s livestock potential.
3. Provide public support for the development of industrial parks and agro-processing industrial parks.
The government of Ethiopia should continue to support and encourage the development of industrial parks and agro-processing industrial parks. As indicated by the model results, doing so generates the greatest gains in terms of job creation in the sector, especially for semi-skilled labour. Moreover, it results in a significant improvement in the income of rural households, thereby reducing poverty in rural areas. The development of the sector will also be helpful in reducing the movement of workers towards bigger cities due to an increase in capacity to absorb workers in rural areas. Rural-urban migration in Ethiopia currently poses a social challenge. The sector also brings about significant improvement in the country’s trade deficit by increasing export earnings. Overall, the development of agro-industrial parks speeds up the structural transformation of agriculture by supporting commercialisation by taking advantage of permanent rural-urban linkages, and has significant positive impacts on per-capita GDP.
4. Promote expenditure on education to enhance human capital productivity.
The government should increase expenditure on education, particularly in Agricultural Technical Vocational Education and Training (ATVET). This enhances labour productivity and labour force participation, generating employment opportunities. It also results in the wages and incomes of workers increasing, is associated with the creation of "better" (more skilled) jobs, and has the advantage of reducing population pressure in the long term.
A social accounting matrix for Ethiopia for 2015-2016
Access the SAM dashboard
An original SAM for Ethiopia has been estimated for 2015/16, jointly by the JRC-Seville and the former Ethiopian Development Research Institute (EDRI), now Policy Studies Institute (PSI) based in Addis Ababa. This is especially noteworthy because there is no Input-Output framework from which to build the SAM. The estimation is based on microdata from various statistical sources. After preliminary data work, an initial SAM was obtained with additional statistical information, adjusted using official macro-magnitudes, appropriately balanced and refined. This process produced a highly disaggregated SAM, consistent with Ethiopian economic figures. Mainar Causape et al., (2018)
The Computable General Equilibrium model
DEMETRA is an extended version of the single-country CGE model documented in Aragie et al. (2017), which in turn is based on McDonald (2007). It incorporates a series of additional behavioural relationships to improve its accounting for economic relationships in developing countries especially in the least developed and sub-Saharan African countries. This version of the model includes several enhanced features compared to its original form. Firstly, it includes a recursive dynamic version, with a new approach to handling domestic migration. In addition, the model accounts for impacts of investment in physical and human capital, an enhanced version of the treatment of demographics, and the inclusion of completely flexible nested production. See Boulanger et al. (2018a) and Boulanger et al. (2018b) for additional details on the modelling techniques.
Policy scenarios
Agropark
The development of agro-industrial zones aims to accelerate the structural transformation of agriculture by supporting commercialisation by exploiting permanent rural-urban linkages. This scenario aims to develop a more commercial and market-oriented agricultural sector by constructing new agro-industrial parks. The demand for agricultural raw-material as well as rural and skilled labour will be positively affected through forward and backward linkages.
Road
Investment in rural road development lowers the cost of bringing products to the market for all agri-food sectors, and raises accessibility to agricultural inputs for smallholder farmers, with positive repercussions on productivity and rural labour demand. For example, the time saved to reach the working site may be allocated to other activities (economic, agricultural and non-agricultural). Furthermore, the construction of new roads pushes demand for labour in other related labour-intensive sectors of the economy such as construction, transportation services, and light manufacturing.
Irrigation
Currently, around 15 Mha of land in Ethiopia is under cultivation, of which about 0.4-0.5% is irrigated. Ethiopia's surface water, groundwater, and rainwater resources cover at least 5.3 million hectares of potential irrigation (one-sixth of the country’s arable land). GTP II gives top priority to the production of commercial agricultural crops in small and large irrigation schemes. Investments in new irrigation infrastructure stimulate the demand for semi-skilled labour and intermediate inputs in the construction activities while raising crop production increases demand for rural labour.
Livestock
Under the LMP, 7,762 million Birr (USD 388.1 million) has been invested in the agro-livestock sector. The increased productivity for high value commodities – such as livestock products (skins and hides, leather, live animals, and meat) but also pulses, textiles, natural gum, and mineral products – benefits smallholder farmers, increases participation of women and youth in rural economic activity, and improves variety in the household diet. This is reducing poverty and helping family farms to move from traditional to improved market-oriented systems. The increased government expenditure on extension services affects the productivity of labour employed in agriculture and livestock, rural capital invested in the livestock sector, and creates employment opportunities for rural youth.
Labour subsidy
Labour subsidies contribute to the sustainable development of the Ethiopian economy by creating new employment opportunities in rural areas (participation in labour-based public works). To model the impact of expenditure on safety net programmes, the increase in the government agricultural budget is devoted to subsidising less skilled labour (unskilled and semi-skilled) irrespective of the sectors in which they are employed. This measure reduces the cost of hiring unskilled and semi-skilled labour in all rural regions.
Skills
Increasing public spending on social services, education, and training in rural areas help less qualified labour to increase productivity of agricultural and off-farm activities. Promoting Agricultural Technical Vocational Education and Training (ATVET) increases labour productivity and labour force participation, generating employment opportunities. Measures to enhance the labour skills of rural youth include: provision of knowledge and skills building; business training and service development; support for programmes focusing on youth and women; integrated support for citizens engaging in various rural job opportunity creation schemes as individuals, groups, cooperatives, mid-size enterprises and others; and expansion of job opportunities through evidence-based contextual analyses.
Jobs
According to data extracted from the International Labour Organisation (ILO), unemployment in Ethiopia is relatively low. Given the exogenous growth of GDP and population growth, unemployment is almost fully absorbed during the baseline period in all regions but not in the capital city. The data (especially that related to own production and informal workers) and model do not fully capture the phenomenon of underemployment so although the impact on job creation presented provides information on the impact of policies on the labour market, figures should be treated with some caution.
Under these conditions, labour employment grows most under the labour subsidy scenario as this policy stimulates demand for labour, especially rural labour.
Less qualified labour (unskilled and semi-skilled) is favoured more under the labour subsidy scenario. The agropark scenario increases the demand for labour, especially the semi-skilled type.
All policy scenarios except the labour subsidy manage to reduce unemployment in the Addis Ababa region. In particular, the skills scenario, which has the advantage of increasing labour productivity, makes labour more attractive and increases wages.
The Ethiopian labour market is reshaped by the policy scenarios. Firstly, they create the conditions to favour development of the agri-food sector labour market, absorbing more workers than in the baseline. Labour demand in agriculture and the food industry increases and moves away from the other sectors of the economy.
Wage rates (i.e. returns on labour) increase under the scenarios that directly boost labour productivity such as the skills scenario, which has a positive impact on wages for all labour types. In other words, this means creating ‘better’ jobs for Ethiopian workers. Other scenarios, such as agropark, increase demand and consequently salaries for unskilled labour.
Migration
Movement of labour across regions and other areas is also affected by all policy scenarios. The urbanisation rate is expected to increase between 2016 and 2030. The model accounts for this increased urbanisation by allocating an exogenous quota of people moving from rural areas to small towns, and from small towns to urban areas. All rural development-oriented scenarios decrease the migration of people towards urban areas compared to the baseline, especially the skills, agropark, and labour subsidy scenarios. All scenarios show the capacity of rural-oriented policies to reduce the movement of workers towards bigger city centres due to increased capacity to absorb workers in rural areas. Addis Ababa is experiencing some moderate decreases of jobs in many scenarios, particularly for unskilled labour. This is mainly due to a decrease in the movement of workers towards the capital city compared to the baseline. In other words, this results in a reduction of the urbanisation growth rate.
Income
Production factor income represents the sum of the returns paid from all activities to production factors (labour, land, and capital). It is a combination of change in production factor returns (e.g. wages) and change in production factor demand by activities. Changes in production factor income are positive but with some exceptions depending on the scenario and the specific production factor within each category.
Labour income increases under all scenarios as they all directly boost labour productivity or raise labour income, especially in rural areas. The scenario which has the biggest impact on labour income is skills, which directly increases labour productivity, making all workers better off.
The irrigation scenario increases the rent to irrigated land as its productivity is positively affected. Returns to capital increase the most in those scenarios where investment in such a production factor is relatively larger, such as investments in agropark.
The impact of policy scenarios on household income is positive and in some cases appreciable, with very few exceptions. Rural household income increases under all policy scenarios. The same holds for small town’s household income. When looking at urban household income, the pattern is more differentiated and changes are smaller, although positive in most scenarios except labour subsidy.
Agricultural markets
All scenarios increase agri-food production except the labour subsidy. Furthermore, investing in agropark most benefits agri-food production.
All scenarios except labour subsidy benefit HPHC production, with rural skills enhancement being the most effective. Together with rural road improvement, these are the only scenarios which present positive effects in the production of every agri-food (except cut flowers for the skills scenario) and non agri-food product.
Welfare
GDP per capita grows by 82.3% during the baseline between 2016 and 2030. Most scenarios generate a positive impact on national per capita income, especially the skill, agropark, and livestock scenarios. On the contrary, per capita GDP growth decreases with respect to the baseline under the labour subsidy scenarios because from a market perspective, the efficient allocation of resources achieved by free market allocation is exogenously changed to channel resources into less efficient uses (i.e. unskilled rural labour).
Income decomposition
Consumption decomposition
SDGs
The DEMETRA CGE model computes Sustainable Development Goal (SDG) indicators by following Philippidis et al. (2018) and M'barek et al. (2019). The methodology and coding to depict model outcome in the SDG framework has being developed since 2017 for the Modular Applied GeNeral Equilibrium Tool (MAGNET) with a global coverage. It is co-developed and co-funded by Wageningen Economic Research (WeCR) and the European Commission - Joint Research Centre, Seville (JRC.D.4).
As an illustrative example, model results show a generalised positive effect on SDG2 indicators under most of the scenarios.
With regard to SDG8 and SDG10, the agropark scenario is positive under all indicators so increasing GDP, reducing the wage gap between the skilled and unskilled, and with a significant improvement of the net trade position. Even though with a lower intensity, most of the other scenarios show generalised improvement in terms of SDGs.
