Ethiopia’s Growth and Transformation Plan: A Computable General Equilibrium Analysis of Alternative Financing Options

Abstract: Under the Plan for Accelerated and Sustained Development to End Poverty (PASDEP), implemented from 2005/06 to 2009/10, Ethiopia achieved rapid economic growth and laid a foundation for future growth by making substantial investments in infrastructure and human capital. The Growth and Transformation Plan (GTP) for 2010/11–2014/15, Ethiopia’s new five year plan, sets even higher growth and investment targets. This paper analyzes these new GTP investment and growth targets using a Computer General Equilibrium (CGE) model of the Ethiopian economy to assess the implications of the plan on sectoral growth and household incomes.
The analysis of the GTP investment plan indicates that achieving its high growth targets will require rapid increases in total factor productivity and large-scale mobilization of domestic and foreign savings. The 4.9 percent annual Total Factor Productivity (TFP) growth needed to reproduce the high Gross Domestic Product (GDP) growth under PASDEP (2005/06 to 2009/10) or to continue this growth into the future is very high in comparison to those that have been achieved in other fast-growing economies such as India, China, and Indonesia. Achieving the GTP target GDP growth rates requires even higher TFP growth: by 5.8 and 7.6 percent per year respectively in the medium and high growth GTP scenarios. To some extent, some of this productivity growth could be achieved through reduced underemployment.

Nonetheless, these results suggest that the projected GDP growth outcomes are very optimistic. Meeting the financing requirements for the GTP will also be challenging given the large amount that needs to be mobilized, as compared to the low historical savings in Ethiopia. In the model simulations where the additional finance is mobilized from domestic sources, household savings rates increase from an average of 5.5 percent of total household income in 2014/15 in the base case to 12.5 percent of total household income in 2014/15 in the increased household savings / medium case scenario. Achieving this high rate of domestic savings would also require changes in macroeconomic policy, such as increases in tax rates or increases in interest rates to encourage private savings. If the additional finance is mobilized through increased foreign borrowing or transfers, foreign savings would need to increase from 47.7 billion birr in 2014/15 of the base case to 96.8 billion birr in 2014/15 of the medium case scenario in real terms (i.e. from 7.5 to 14.8 percent of GDP).
Regardless of the financing strategy, the high TFP and GDP growth rates under the GTP imply high average income growth for both poor and rich households, in both rural and urban areas. Because the GTP involves a greater concentration of investment in non-agricultural sectors than did PASDEP, growth of incomes of urban households is higher in the GTP than under PASDEP. Conversely, income growth of the rural poor is slightly lower under the medium growth scenario with domestic savings (10.0 percent) than under a continuation of PASDEP growth and investment (10.6 percent).
Thus, this analysis shows that if the GTP investment and sectoral growth targets are achieved, real incomes of the poor in Ethiopia would rise substantially. The base simulations indicate that real incomes of the poor rose under PASDEP from 2005/06 to 2010/11. Under GTP, this real income growth would be accelerated, provided there is sufficient foreign savings or mobilization of domestic savings to achieve the targets. Nonetheless, the simulations also suggest that agricultural growth will still be crucial for raising incomes of Ethiopia’s rural poor. Thus, investments that raise agricultural productivity will need to continue in order to ensure that the rural poor share in the substantial projected benefits that would result from achieving the high economic growth targets of the GTP. Download the pdf (801KB).

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