Ethiopia has emerged as one of the fastest-growing economies in Africa in the twenty-first century. Despite this rapid growth, however, structural transformation of the economy remains the country’s central challenge (evidence manufacturing sector contribution to GDP is 6.4% in 2017; manufacturing sector contribution to export 3 % in 2017, African economic outlook country note, 2018). The Government of Ethiopia is striving in taking different actions that are thought to facilitate and enhance the transformation.
Structural transformation refers to “the reallocation of economic activity across three broad sectors (agriculture, manufacturing, and services) that accompanies the process of modern economic growth” (Herrendorf et al., 2013, McMillan, 2014). An economy’s structural transformation is important because it reveals the extent of its economic development, and the degree to which policies put in place to steer the economy are effective. Structural change is also a key driver of economic development (McMillan, 2014). Timmer et al. (2012) give a list of four processes that define structural transformation, which are; a decline in the share of agriculture in gross domestic product (GDP) and employment, a rapid urbanization process, a rise in a modern industrial and service sector, and a demographic transition from high births and deaths to low ones. A country’s export content can also reflect its structural transformation (Das, 1998). For example, on average for the newly industrializing economies of Hong Kong, Korea, Singapore and Taiwan, from 1975 to 1996, exports of manufactured products as a percentage of total exports increased from approximately 70–90%. Given this connection between the structure of the economy and export content, what can Ethiopia’s comparative advantage tell us about the extent to which the structure of the economy has changed and transformed over the years?
Structural transformation of an economy can result from among others, a change in factor endowments and deliberate policies to drive the economy toward a desired path. As an economy grows, its factor endowments will also change, including the skill levels of its people. An improvement in the skill levels of labor can contribute to improving the goods produced in an economy, as the more skilled manpower are applied in productive activities and hence enabling the economy to move from low skilled products to high skilled products. This in turn allows the economy to move from exporting raw materials when the skill levels of its labor were lower, to exporting processed products as the skill levels become higher.
The comparative advantage of a nation can change if a change in government policies invites investment or favors some sectors that were neglected before. Thus, from a policy standpoint, the comparative advantage of a nation can be steered in a direction that policy makers see as encouraging and beneficial to the nation. For example, the governments of the East Asian Tigers put specific policies to steer their economies in a certain way, which accelerated their growth through becoming more export-oriented, resulting in structural changes (Das, 1998). Forbes and Wield (2002) also note that in Korea, subsidies and import protection were combined with export incentives for the local industry, which accelerated the building of an industry that beats world standards. In Singapore, the government combined strong investment in education with pushing industry up the value chain to create a strong industrial sector.
Given that the comparative advantage of a nation can change depending on how an economy’s structure evolves over time, the extent and nature of that structural transformation can be deduced from trade data, or specifically, its export content or basket. Indeed, numerous studies have been done which have employed the revealed comparative approach to assess the extent and nature of transformation of various economies. Revealed Comparative Advantage (RCA), developed by Bela Balasssa (1977, 1965), builds on the concept of comparative advantage, which reflects a country’s specialization, given differences in opportunity costs in producing the goods that it exports. The RCA index has been used in empirical studies on structural transformation, competitiveness and changing specialization. For example, Batra and Khan (2005) undertake a comparative study of China and India’s structural transformation using the RCA approach. In terms of sectoral transformation, Saboniene (2011) analyses how Lithuania’s manufacturing sector had transformed and how it could be assisted in becoming more competitive in Europe and Beatrice Kalinda Mkend (2012) worked for Tanzania.
This study employs the RCA approach to examine the extent to which the Ethiopia’s economy has structurally changed. The results are given and discussed in Sect. 4. The calculated indices are based on the SITC rev.3 products, by technological categories. This paper examines whether there has been any shift in Ethiopia’s comparative advantage. This assessment is done based on Ethiopia’s revealed comparative advantage between 1996–2018.