Does income growth of rural farm households provide market base for the manufacturing sector? Evidence from Tigray, Ethiopia

1. ETHIOPIAN DEVELOPMENT
RESEARCH INSTITUTE
Does income growth of rural farm households provide
market base for the manufacturing sector?
Evidence from Tigray, Ethiopia
Kibrewossen Abay
IFPRI ESSP
Ethiopian Economics Association
13th International Conference on the Ethiopian Economy
July 23-25, 2015
Addis Ababa
1

2. 2
Introduction
•Ethiopian Economy:
•Agrarian
•Poor
•Rich countries:
• Virtually Industrialized
•Development strategy- Industrialization
•Agricultural Development Led Industrialization (ADLI)
•The name is self explanatory- industrialization process to be
achieved after growth in agriculture
•There are presumptions put forward
•Are those presumptions really existing?
•Evaluate the viability of ADLI by investigating those
presumptions

3. 3
Why ADLI?
• Why ‘agriculture’?
• Predominant sector
− 50% GDP, 90% Export, 85% labor force
• Extract agriculture
The faster agriculture grows, the faster its relative size in the
economy declines
Relative size: other sectors will grow including the
manufacturing sector
• The growth is achieved
− Sustained growth in the past decade
• Will this growth give rise to industrialization?

4. 4
Potential inter-linkages
•Back ward linkages: demand for inputs of agriculture
–Less intensity of technological input use
–Level of input use decreases with plot size
–From among inputs only 5% is domestically produced
•Forward: Capital accumulation
–Farm households only satisfy 59% of basic needs
–Small holding agriculture- fragmented saving
•Surplus labor: dual economy model
–Surplus labor with zero marginal productivity
–Limited labor mobility due to threat of confiscation
•Demand for manufactured goods
–Large size of population
– Huge potential as income grows (?)

5. 5
Descriptive results
• In general, per capita expenditure has increased in all the
three groups
• Share increased for agriculture and durables
• In agriculture, partly because relatively higher inflation among
agricultural goods
Real expenditure in birr, 2006 as base price
Commodity group 2006 2010 2006 2010
Agriculture 439 1280 0.67 0.70
Manufactured consumables 154 287 0.22 0.16
Durables 86 238 0.11 0.14
Total 679 1805 -- ---

6. 6
Method of study
•Almost Ideal Demand System: Linear
where wi- budget share, Pj- price index of commodity group j, P-
general price index, Zh- other household characteristics, and M- per capita
expenditure
–Budget share restriction
•Elasticity values
–Expenditure elasticity
•Estimated on two years panel data
–Fixed effects (manual)
–Simultaneous estimation (seemingly unrelated regression)
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7. 7
Results
Share of
agriculture (%)
Share of manufactured
consumables (%)
Share of durables
(%)
Price index
agriculture items -5.16 (1.28***) 1.24(0.93) 4.67(1.18***)
Manufactured consumables -2.97(0.76***) 2.61(0.56***) 1.33(0.71*)
Durables -1.03(0.26***) 0.37(0.19**) 0.70(0.24***)
Per capita expenditure
(per household specific price index) -1.66(0.76**) -3.89(0.57***) 5.70(0.71***)
Household characteristics
Sex of household head (=1 if male) -1.86(1.74) -0.83(0.89) 1.27(1.25)
Age of household head (in years) 0.01(0.05) 0.06(0.03**) -0.07(0.04*)
Education of head (=1 if primary) 0.37(1.61) 1.27(0.83) -1.47(1.16)
(=1 if secondary) -4.51(4.88) 3.11(2.50) 0.95(3.52)
Family size in Adult equivalence units -1.66(0.32***) 0.70(0.24***) 1.27(0.30***)
Distance to market (in minutes) 0.04(0.01***) -0.06(0.01***) 0.03(0.01***)
Net sales (in birr, thousands) 1.38(0.11***) -0.29(0.06***) -0.66(0.08***)
Off farm income (=1 if there is an off-farm
income) -0.14(1.88) -0.49(0.96) 0.24(1.35)
Ownership of livestock (Tropical livestock
units) -0.89(0.54*) 0.47(0.27*) 0.07(0.39)
Wald chi2 355.05*** 826.64*** 192.32***
Number of observations 718 718 718

8. 8
Results
• Per capita expenditure increases share of durables
• A 1% increase in per capita expenditure (per price) increases share
of durables by 5.7%
• Compensated by a 1.66% decrement in share of agriculture items
and 3.89% decrement in share of manufactured durables
• Elasticity values:
Elasticity values
Expenditure on
agriculture
Expenditure on
manufactured consumables
Expenditure on
durables
-1.4 -4.6 9.2
1
agri
agri
agri
w



9. 9
Results
• Price elasticity
• Increase in price of agricultural commodities decreases share of
agriculture- and increases share of durables
•Income effect?
• Price increment in manufactured and durables increases share
of respective consumption groups
• Problem in interpreting these results:
•Many items stacked in one group
• Requires further grouping

10. 10
Results
• Household characteristics that affect expenditure behavior
• Distance to market
– Negatively affect expenditure share of manufactured
consumables
– Positive effect on agriculture and durables (?)
• net crop sales has a negative effect on both consumables and
durables
‒ Transaction and transportation cost could play a role
• ownership of livestock has a positive effect share of
consumables
‒ ownership of pack animals plays a role in lowering
distance barrier

11. 11
Summary
• Important differences between consumables and durables
• Income has a positive impact on durables
• The potential of rural sector in providing domestic demand
hinges on type of products the domestic industries produce
• Results support the primacy given to agriculture
• However, policy interventions may help to better appropriate
the surplus from the agriculture sector
‒ Support for domestic industries based on the items
produced
‒ Efforts to lower transaction and transportation cost