Resource Allocation across Industrial Sectors, Growth, Poverty, and Income Inequality in Ethiopia: A Macro-Micro Approach

Ethiopia has endorsed a Growth and Transformation Plan intended to transform the manufacturing sector through the construction of industrial parks that target priority industries such as textiles and garments, leather and leather products, sugar, cement, metals and engineering, chemicals, pharmaceuticals, and agro-processing. Using the 2010 Social Accounting Matrix (SAM), a dynamic CGE model, and data from the 2009-2010 survey of Household Income and Expenditure, we examined the effect on economic growth, poverty, and income inequality in Ethiopia when resources were allocated to selected industrial activities. We simulated the effect of financing industrial parks through borrowing and then repaying loans through a five-percent tax on non-priority industrial sectors. The results showed that Ethiopia’s Gross Domestic Product increased slightly across time. Both production and exports of priority industries operating inside the industrial parks and household income increased while production and exports in similar sectors outside the industrial park decreased. The production of non-priority industrial and service activities showed mixed results, and poverty and income inequality were reduced by a small amount. Transforming the manufacturing sector and stimulating both economic growth and poverty reduction requires attention to attracting direct foreign investment.