The study examines the impact on labor reallocation across sectors, domestic production, domestic price and household consumption, household’s welfare and implication on major macroeconomic indicators.
Effect on labor reallocation
In rural Ethiopia, water fetching and firewood collection is commonly accomplished by reducing the daily agricultural labor time. On the other hand, in urban parts of the country, unskilled workers commonly collect water and firewood. Water fetching and firewood collection are labor-intensive household activities. An improved TFP of water fetching and firewood collection results in reduction of labor required to perform these activities. Table 2 describes the change in labor demand across sectors in response to improved TFP of water fetching and firewood collection activities.
The simulation result indicates that because of a 50% rise in TFP, labor demand declines on average (weighted) by 22.3% for firewood collection and by 21.7% for water fetching activities. Because of better access to water facility, households consume additional water and relatively more labor is required to fetch the extra drinking water. Therefore, the labor demand for water fetching does not decline by the full 50%. On the other hand, employment of labor in agriculture, industry, and service activities increases on average by 1.6%, 0.9% and 0.5% respectively because of absorbing the released labor from water fetching and firewood collection. The agricultural sector absorbs a larger percentage of labor relative to industry and service sectors. This happens because large shares of water fetchers and firewood collectors are agricultural laborers in Ethiopia. Thus, when water fetching and firewood collection activities are effectively accomplished, agriculture absorbs a relatively larger proportion of freed laborers relative to other sectors (such as industry and service). Furthermore, most of the freed laborers prefer to enjoy extra leisure and hence labor is reallocated to leisure (4.6%).
Table 2 Simulated changes (percentage) in labor demand across sectors
Sectors
|
Base
|
Simulation
|
Absolute change
|
%Change (weighted)
|
Agriculture
|
4436.54
|
4508.15
|
71.61
|
1.61
|
Industry
|
258.33
|
260.60
|
2.27
|
0.88
|
Service
|
1305.81
|
1312.92
|
7.11
|
0.54
|
Water fetching
|
603.32
|
472.73
|
-130.59
|
-21.65
|
Firewood collection
|
537.75
|
417.61
|
-120.15
|
-22.34
|
Leisure
|
3675.43
|
3845.35
|
169.92
|
4.62
|
Source: Author’s computation based on model results
Effect on domestic production
Table 3 depicts the change (weighted) in domestic production because of increased TFP of water fetching and firewood collection activities. Production of water fetching on average increases by 17.5% and firewood collection on average increases by 16.5% due to enhanced TFP. Furthermore, labor released from water fetching and firewood collection is transferred into other sectors and stimulates agricultural and non-agricultural (such as industry and services) production in the destination sector. Production of agriculture, industry and services on average increases by 1.2%, 0.6% and 0.4%, respectively, due to employment of extra labor which is attracted from water fetching and firewood collection. Production in the agricultural sector increases by a higher proportion relative to other sectors (industry and services).
Higher TFP in water fetching and firewood collection activities provides larger proportions of released labor for agriculture relative to industry or services and hence production in this sector increases more. Furthermore, the production of leisure increases by 4.6%, which is relatively greater than other sectors such as agriculture, industry, and services. This happens because there was less or no time left for leisure activities when household collects water and firewood from the distant sources and therefore, the freed labor prefers to enjoy leisure and hence more labors are reallocated to leisure. Additionally, the larger production of leisure can be explained by the fact that the consumption of leisure is more sensitive to the income changes relative to other commodities. Therefore, an increase in household income (due to reallocation of labor to income generating activities) raises the demand for leisure that leads to a more production of leisure.
Table 3 Simulated changes (percentage) in domestic production by sectors
Sector
|
Base
|
Simulation
|
Absolute change
|
%Change (weighted)
|
Agriculture
|
7243.98
|
7331.41
|
87.43
|
1.21
|
Industry
|
3396.94
|
3416.97
|
20.03
|
0.59
|
Service
|
10366.24
|
10409.66
|
43.41
|
0.42
|
Water fetching
|
606.85
|
713.22
|
106.37
|
17.53
|
Firewood collection
|
543.93
|
633.55
|
89.62
|
16.48
|
Leisure
|
3675.43
|
3845.35
|
169.92
|
4.62
|
Source: Author’s computation based on model results
Effect on domestic price and household consumption
In response to higher TFP in water fetching and firewood collection activities, a large amount of labor is released and reallocated to other activities. The labor reallocated to other sectors enhances domestic production Table 3 and at the same time results in higher income for households through increased factor payments. The simultaneous rise in both domestic production and household income differently affects domestic prices and household consumption. Conceptually, increased domestic production results in higher commodity supply in the market and this can potentially reduce domestic supply prices of commodities (PQS) and purchaser prices (PQD). On the other hand, the freed labor from fetching water and firewood and subsequently reallocated to marketed sectors brings extra income to the households which increases household consumption demand (QCD). This potentially increases domestic prices.
Table 4 describes the percentage change (weighted) in domestic prices and household demand in response to higher TFP in water fetching and firewood collection. The simulation results indicate that because of higher TFP in water fetching and firewood collection, QCD increases for all commodities: agricultural by 1.7%, industrial by 1.3%, services by 0.6%, water fetching by 17.5%, firewood collection by 16.5% and leisure by 4.6%. Domestic prices for agricultural, industrial, and service commodities on average increase by 2.1% and for leisure commodities on average increase by 2.3%. This implies that the effect of increasing income dominates the price effect. The extra income results in upward shift in households’ consumption demand and hence increases domestic prices.
On the other hand, household demand for water fetching and firewood collection commodities increases but domestic prices for these commodities decrease on average by 32.2% and 32.1%, respectively. Household demand for water fetching and firewood collection increases by 17.5% and 16.5% respectively. This can be explained by the fact that because of efficiency gains in water fetching and firewood collection, large quantities of water and firewood are produced and supplied to the market. Water and firewood become relatively cheaper and hence consumption demand for these commodities increases (due to income and substitution effects).
Table 4 Simulated changes (percentage) in domestic price and household demand
Commodities
|
PQD+PQS
|
QCD
|
Agriculture
|
2.10
|
1.69
|
Industry
|
2.05
|
1.32
|
Service
|
2.10
|
0.57
|
Water fetching
|
-32.19
|
17.53
|
Firewood collection
|
-32.10
|
16.48
|
Leisure
|
2.25
|
4.62
|
Source: Author’s computation based on model results
Effect on household welfare
Increased TFP of water fetching and firewood collection also affects household welfare. Figure 3 shows the equivalent variation (EV) in percent of base income to examine the actual welfare changes across household groups. Welfare improvement happens to all groups of rural households but the amount of welfare gains varies among households. Different household groups allocate divergent quantities of labor for water fetching and firewood collection. Accordingly, welfare gains depend on household endowment of labor that can be potentially allocated to water fetching and firewood collection. In other words, households that allocate a relatively larger proportion of labor to water fetching and firewood collection obtain high welfare gains. For instance, non-poor and poor rural households in agro-ecology zones 1 and 5 allocate the highest proportion of labor to water fetching and firewood collection relative to other groups of households. Because of increase in the TFP of water fetching and firewood collection, welfare gains by these household groups are higher than to other household groups.
On the other hand, the divergent share of water and energy consumption expenditure also results in different welfare gains across household groups. The share of consumption expenditure to water and energy commodities differs by household groups. Better access to water and energy infrastructure increases the supply of water and energy and these commodities become relatively cheaper. Households that spend a larger share of their consumption expenditure on water and energy commodities gain more welfare relative to others. For example, poor rural households located in agro-ecology zones 1 and 5 spend a larger proportion of consumption expenditure on water and energy commodities. Because of better access to water and energy facility, the welfare gains to these household groups are higher than to other household groups.
Similarly, the welfare of poor urban households is also positively affected by increasing TFP of water fetching and firewood collection. Since urban households allocate less labor for collecting water and firewood, their welfare gain is lesser than for rural households. However, the welfare of urban non-poor households is negatively affected. This can be explained by the fact that some portions of financing the construction of water and energy facility are obtained from government savings that are raised through income tax. Since urban non-poor households contribute, a larger share of tax to the government, their consumption expenditure decreases and hence welfare declines.
Macroeconomic effects
Reallocation of released labor from water fetching and firewood collection to other sectors creates economy-wide linkages and positively affects the macroeconomic indicators such as gross domestic product (GDP), total domestic production, absorption, import, export and exchange rate.
Figure 4 depicts the macroeconomic effect of higher TFP in water fetching and firewood collection. Total domestic production increases by 2%, GDP by 2.6%, absorption by 2.8%, imports by 1.5% and the exchange rate by 1.3%. The released labor from water fetching and firewood collection is reallocated to productive sectors that accelerate domestic production. This leads to an increase in domestic consumption (absorption) and import. Furthermore, reallocated labor promotes the growth of the economy and hence the GDP increases.
Sensitivity analysis
The sensitivity of model results due to the change in the core model parameters such as the income elasticity of leisure is discussed in this section. Specifically, this section discusses the sensitivity of labor demand, domestic production, household welfare, and major macroeconomic effects due to the change in the income elasticity of leisure. Sensitivity analysis is carried out by changing the income elasticity of leisure from 2 to 3 (50% increase) and 4 (100% increase). The sensitivity of model results in response to the change in income elasticity of leisure is provided in appendix B. The percentage change in labor demand and domestic production varies when the income elasticity of leisure increases from 2 to 3 and 4. When the income elasticity of leisure is higher, a larger share of the freed labor gets into leisure and a smaller proportion is reallocated to other sectors (agriculture, industry and services) (see appendix B.1 for details).
Household welfare is not very sensitive to the change in the income elasticity of leisure. All groups of households except urban non-poor households have less welfare gains when the income elasticity of leisure increases from 2 to 3 and 4 (see appendix B.2 for the details). The reason is that leisure does not create multiplier effects through commodity demand. The macroeconomic indicators such as absorption, import demand, GDP from expenditure and total domestic production also slightly vary due to the change in the income elasticity of leisure. Specifically, absorption, import demand, GDP, and total domestic production increase by a lesser percentage when the income elasticity of leisure is higher (see appendix B.3 for the details).
Therefore, the change in the income elasticity of leisure leads to some changes in labor demand, domestic production, household welfare, and major macroeconomic indicators. Although the changes in the income elasticity of leisure result in slight disparities in the magnitude of simulation outcome, the direction of changes remains the same as well as the order of size.
Comparison of results with previous studies
The expansion of improved drinking water infrastructure has both costs and economic benefits. Some of the costs include investment cost (for example, cost associated with the initial construction of the water facility) and recurrent cost (for example, maintenance cost). The benefits of improved access to drinking water supply include health related benefits (for example, reduction of waterborne diseases, less mortality, avoidance of the loss of productive time due to diseases and saved health care expenditure) and the opportunity cost of travel and waiting time saved from fetching water.
The World Health Organization (WHO) estimates the benefit cost ratio (BCR) of universal access to improved drinking water for 136 low and middle-income countries in 2012 (World Health Organization, 2012). These countries are grouped into nine sub-regions: South-Eastern Asia (S.E.Asia), Sub-Saharan Africa (SSA), Latin America and Caribbean (LAC), Southern Asia (S.Asia), Eastern Asia (E.Asia), North Africa (N.Africa), Western Asia (W.Asia), Caucasus and Central Asia (CCA) and Oceania. The BCR was estimated for individual countries initially and then it was aggregated to a region weighted by the respective country’s population.
According to the WHO’s study, the benefits of universal access to drinking water outweigh the costs for most of the countries (Figure 5). Figure 5 depicts the BCR of universal access to improved drinking water across countries ranging from 0.6 in Oceania to 3.7 in S.Asia. Each additional dollar of investment provided for improved drinking water results in 0.6 to 3.7 dollar worth of benefits. The bigger proportions of these benefits are derived from the opportunity cost of labour time saved due to improved access to water supply.
On the other hand, improved access to household energy (for example, improved cooking stove) has costs and economic benefits. The costs include the purchase of stoves and installation cost among others. On the other hand, the benefits include health related benefits (reduction of diseases caused by IAP), less expenditure on health care services linked to IAP, productivity gain due to better health, time saved from cooking and fuel collection, environmental benefits (for example, fewer trees cut down). Figure 6 shows the BCR of reducing the share of the population without access to improved cooking stove by 50% across WHO sub-regions. The WHO regions are South-East Asia Region (SEAR), Western Pacific Region (WPR), Eastern Mediterranean Region (EMR), and Region of the Americas (AMR), African Region (AFR) and European Region (EUR).
The estimated BCR of access to improved cooking stove varies across different sub-regions; it ranges from 37.4 to 137.4 in AFR and WPR respectively. Each additional dollar of investments to provide improved stoves results in 37.4 to 137.4 worth of US dollar benefits. The largest share of benefits is derived from the saved time that would have been used for cooking and collecting firewood (Hutton et al., 2006).
Because of the difference in the methodologies used and in the context of case study area, it is not easy to compare the result of this study with the previous studies. Although the methodology applied and the case study areas in the previous studies mentioned above are varied, this study is in consistent with the findings of the previous studies that confirm the cost of providing water facility and improved stoves outweighs the benefits gained.