Labor productivity in Ethiopia grows 4.9% annually

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Photo: Anteneh Aklilu

According to the Ethiopian Productivity Report labor productivity in Ethiopia grew at an annual rate of 4.94% during the year from 2000 to 2016, starting from a very low point. Ethiopia’s productivity level is far below from those of such latecomer competitors such as Vietnam, Tanzania, Cambodia and Myanmar.
Among main sectors, services grew fastest in labor productivity, followed by manufacturing. Agricultural productivity lags in both level and rising speed.
“The Ethiopia Productivity Report offers necessary data for policy makers to go deep into the causes of this problem and find possible solutions,” said Prof. Kenichi Ohno, professor at the National Graduate Institute for Policy Studies /GRIPS/ and one of the participant on conducting the report.
A strong emergence of manufacturing to lead the nation’s growth into middle income has not been attained. The GDP shares and export contributions of policy supported sub-sectors such as leather; garment and food processing remain small and stagnant.
It is natural for highly industrialized economies to shift to high-tech services, but low income economies such as Ethiopia need to reinforce manufacturing first. Shrinkage of manufacturing before an economy attains full industrialization is in many countries as one symptom of middle income traps according to the report.
According to the data, in the future Ethiopia may face the risk of “premature de-industrialization.” Since around 2012, labor productivity has been driven mostly by heavy capital investment, which seemingly raises workers’ productivity even though they do not improve skills, because they have more machinery and equipment to work with. The contribution of total factor productivity /TFP/, a statistical indicator to gauge true efficiency, declined substantially. This is worrisome because investment-driven growth causes fiscal imbalance, excessive borrowing and foreign exchange shortage. Acceleration is required for further progress.
Labor mobility from rural to urban areas, and from agriculture to manufacturing, is quite limited in Ethiopia compared with other industrializing countries with massive internal labor migration.
The report also suggests for Ethiopia to set its first minimum wage. Using the carefully cleaned manufacturing database of the Central Statistical Agency from 1996 to 2016, the authors report manufacturing labor productivity growth of 4.6% per year but manufacturing labor cost per employee grew at 10.3% per year. For sound development, labor productivity and wage must rise in tandem. The nation should first attain high labor productivity, and then the fruits of this effort should be distributed fairly to workers as equally rapidly rising wages.
The Ethiopia Productivity Report contains statistical analyses, a firm survey and policy advice. It was prepared jointly by the Policy Studies Institute /PSI/, a policy think tank of the Ethiopian government, and the National Graduate Institute for Policy Studies /GRIPS/, a national university in Tokyo, Japan.
The research, which started in 2018, was co-funded by the Japan International Cooperation Agency /JICA/ and PSI. In the last one-and-half decades, Ethiopia made great progress in real growth, FDI attraction and the construction of hard infrastructure and industrial parks. Despite these achievements, structural transformation has not occurred.
The National Graduate Institute for Policy Studies, or GRIPS, is an elite and highly selective research graduate school located in Minato, Tokyo. Funded by the Japanese Government, it has the status of national university.