ADLI and Future Directions for
Industrial Development
Kenichi Ohno (GRIPS)
June 2009Agricultural Development Led
Industrialization
Ethiopia’s ADLI (my definition):“The development strategy that aims to achieve initialindustrialization through robust agricultural growthand close linkage between the agricultural and theindustrial sector.”
An Economic Development Strategy for Ethiopia, Feb.1994
Industrial Development Strategy, 2002
Sustainable Development and Poverty Reduction Program (SDPRP),
2002/03-2004/05

A Plan for Accelerated and Sustained Development to End Poverty(PASDEP), 2005/06-2009/10

Core ADLI
Increase agricultural output and productivity
 Increase industrial output and productivity
 Close input-output linkage between the two sectors


OutputProductivity

OutputProductivity- Food- Raw materials

Industry(Urban)

Agriculture(Rural)

Commercializationof agriculture- Machinery, fertilizer,
other agri. inputs- Consumption goods

Export orientation
Labor intensivenessADLI: Motivation, Flexibility,
Time Scope
Poor, landlocked agrarian society  Peasants andpastoralists should be the growth engine; maximum
use of abundant resources (labor & land), creationof commercial farmers.
 ADLI is an evolving strategy which can respond tochanging circumstances and ideas.
(1994 Strategy  SDPRP  PASDEP  PASDEP II)
 Initial stage only:“Thus if ADLI strategy is successfully applied it will
be changed to industry led development strategy”(IDS 2002, Eng p.8).
Additional Requirements of ADLI(from IDS 2002)
Leading role of private sector
 ADLI link (use of domestic materials)
 Export orientation
 Focus on labor-intensive industries
 Proper roles of local and FDI firms
 Strong state guidance Mobilization of all social forcesFormulation of ADLIAn Economic Dev. Strategy for Ethiopia (1994)“…productivity improvement of smallholder agriculture andindustrialization based on utilization of domestic raw materials withlabor-intensive technology. The strategy is akin to what is known …
as ADLI, framed into the Ethiopian context.” (p.8)
Two-pronged approach:
Smallholder agriculture – better agronomic practices, more laboruse, research & extension, technology transfer, rural infrastructure
Extensive mechanized agriculture and intensive farming – efficientland allocation, labor supply, health and road for new lands,
research and training, quality, marketing, etc.

Implementation of ADLI #1
SDPRP 2002/03-2004/05:
Supply-side agricultural support(i) Extension services(ii) Training of extension agents and farmers(iii) Water harvesting and irrigation(iv) Improved marketing(v) Restructuring peasant cooperatives(vi) Supporting micro-finance institutions- Output volatility due to weather factor: crop failure (2002/03)
followed by recovery (2003/04)- No clear sign of rising productivity or structural change- Limitation on exclusively rural focus?

Implementation of ADLI #2
PASDEP 2005/06-2009/10 (Enhanced ADLI):- Strong emphasis on growth acceleration- Scope widened to include industry and urban sectors- Two added thrusts: commercialization of agriculture
and private sector development (Eng p.46)- High growth achieved, but how much was due topolicy? (weather, building boom, global shocks…)- Productivity and structural shifts?
 Performance review and innovation for next PASDEP?

Recent Economic Performance(Ethiopian year) 1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
(Western year) 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08
Real GDP growth (%)
5.2
6.1
8.3
1.5
-2.2
13.6
11.8
10.8
11.1
11.3
Nominal GDP (millions of Birrr)
58,789 66,648 68,027 66,557 73,432 86,661 106,473 131,641 171,834 245,585
Nominal GDP (millions of USD)
7,828
8,188
9,167
7,794
8,559 10,042 12,306 15,164 19,539 27,939
GDP per capita (USD)
129
131
127
118
126
143
171
205
257
357
Sector share (% of GDP) 1/
Agrilculture
51.2
49.8
50.9
49.1
44.9
47.0
47.4
47.1
46.3
44.6
Industry
12.4
12.4
12.1
12.9
14.0
14.0
13.6
13.4
13.3
13.1
Service
37.2
38.7
38.0
38.6
41.7
39.7
39.7
40.4
41.4
43.4
External relations (% of GDP)
Export
11.6
12.0
12.0
12.6
13.3
14.9
15.1
13.8
12.7
11.8
Import
24.0
23.9
23.7
26.6
27.4
31.6
35.5
36.5
32.1
26.9
Trade deficit (export - import)
-12.4
-11.9
-11.7
-14.0
-14.1
-16.7
-20.4
-22.7
-19.4
-15.1
Total trade (export + import)
35.6
35.9
35.7
39.2
40.7
46.5
50.6
50.3
44.8
38.7
FDI (approval, millions of Birr)
1,080
1,627
2,923
1,474
3,369
7,205 15,405 19,980 46,949 92,249(approval, % of GDP)
1.8
2.4
4.3
2.2
4.6
8.3
14.5
15.2
27.3
37.6
Population (million)
60.8
62.9
64.4
66.3
68.2
70.1
72.1
74.1
76.1
78.2
Population in rural area (%)
85.5
85.3
85.1
84.9
84.7
84.4
84.2
84.0
83.8
82.9
Population in poverty (%)
41.9
38.7
Exchange rate (Birr/USD, period average)
7.51
8.14
8.33
8.54
8.58
8.63
8.65
8.68
8.79
8.79
Sources: Ministry of Finance and Economic Development, National Bank of Ethiopia, and Ethiopian Investment Agency.
1/ Do not add up to 100% due to estimate errors of intermediary margins of financial institutions (service sector).

Remarks on the Evaluation ofCurrent PASDEP
Review of macro, sectoral, poverty results is important,but it does not directly test the validity of ADLI as anindustrialization strategy (other factors, causality?) Cause of recent overheating and inflation?


WB/IMF: expansionary fiscal & monetary policies, exchange rate
overvaluation, supply and global shocks, etc.
Alternative hypothesis: excessive injection of foreign funds (FDI,ODA, remittances) relative to GDP

Distinguishing two kinds of poverty
Traditional – road & water access, low technology, diseases
Market/globalization driven – inflation, asset bubbles, urban
migration and unemployment, etc.

Foreign Fund-Driven
Overheating and Bubble
Many countries faced this problem around 2005-08:
Large export earnings from extractive resources (“DutchDisease”)
Russia, Kazakhstan, Mongolia, UK, Nigeria, Zambia, SouthAfrica, Botswana, Mauritania, Angola…
Other large inflows (manuf. exports, remittances, FDI,ODA, bank loans, securities, etc.)
China, Vietnam, UAE, UK, (Ethiopia?)
Large inflow (up to 20-30% GDP)
 Increase in money supply & credit
 Consumption & construction booms, asset bubbles, inflation,
trade deficit, currency overvaluation, (rise in foreign reserves:
not observed in Ethiopia)

Issues for the Next Round ofADLI Implementation
Difficulty of Core ADLI Broadening policy scope Agricultural strategy in current PASDEP Industrialization strategy in current PASDEP MethodologyDifficulty of Core ADLI
East Asia’s high performers did not rely exclusivelyor even mainly on Core ADLI, although agriculture
sometimes played positive roles in industrialization.
 No example in the rest of the world either.
 Productivity breakthrough and commercialization of
scattered smallholder farmers is extremely difficult.
 In Ethiopia, leather industry is building a core ADLI
link successfully. But its impact may not be large
enough to lead and sustain overall industrialization.
East Asian Experiences
Agriculture generated foreign exchange and/orfiscal revenue for industrialization (AI) Meiji Japan (late 19c to early 20c)—silk and tea
exports paying for machinery imports; land tax.
 Taiwan up to 1960s: rice and sugar were taxed andprice controlled.
 Thailand up to 1980s (Newly Agro-industrializing
Country: NAIC)—processed food export (frozenchicken, canned food, shrimp) and rice export tax;
generating F/X for import substitution industries.

East Asia (cont.)
Agriculture generated some revenues first, but
full-scale industrialization was FDI-led.
 Thailand since late 1980s (cars, electronics).
 Malaysia—initially rubber, tin, timber exports; sincelate 1980s FDI-led industrialization in electronics.
 Vietnam—Liberalization stimulated rice and fisheryexports; but industrialization since 1990s wasessentially FDI-driven.
Rural-urban labor migration under rapid
industrialization
 Observed almost everywhere in East Asia.

East Asia (cont.)
Agriculture serving as a shock absorber Japan after war defeat (late 1940s)—food shortageand high unemployment.
 Vietnam in early 1990s—laid-off workers from SOE
privatization.
Agriculture receiving transfer from industry/urban sector (IA) Post WW2 Japan—lagging agriculture: transfer fromurban to rural sectors for political stability.
 S.Korea 1960s-70s—Saemaul Movement: agri. support
for productivity improvement and better rural life.

Links and Transfers between
Agriculture and Industry
Besides direct input-output links (Core ADLI), the two sectors may have thefollowing links, which may occur directly or through fiscal or financial systems:(1) Labor supply(2) Agro/land tax(3) Price control(4) Export earnings
Agriculture(Rural)

Industry(Urban)(1) Production support(2) Food & service delivery(3) Agricultural protection(4) Public investment

Broadening of ADLI Scope
Core ADLI is possible, but that alone may not beenough for achieving desired high growth.
 While keeping Core ADLI, other channels should be
explored to:(1) Accelerate agriculture(2) Accelerate industry(3) Build various links between two sectors (not necessarily
input-output links)

Industrialization and agricultural/rural development
may be pursued jointly or separately.
 Export orientation, use of domestic resources, andlabor-intensiveness should be applied flexibly.
Broadening the Policy SpaceCore ADLI (original) – strong input-output linkage
between two sectors
 Enhanced ADLI (current PASDEP) – for accelerated
growth, add commercialization of agriculture and PSD
 Further broadening – keep Core ADLI, but explore
more channels for agricultural and industrial growth,with or without sectoral linkage. Apply strategic
requirements flexibly for each case (exportorientation, labor-intensiveness, use of domestic
resources).
Agricultural Development
Strategy in Current PASDEP
A long section (Eng. 42 pp.) with broad scope Is policy capacity sufficient? How does MoARDimplement and monitor so many policies?
Many numerical targets for each crop and action
every year (similar to Leather M/P)
 Re-organize targets and measures strategically.
 Limit target crops and areas sharply and draft M/P& A/P for each: “agriculture” or “food processing” is
too broadRethinking the Strategy for
Small Farmers
Two pillars: supply-side support and quality-of-life
support (cf. Rural Life Improvement Movement) Multiple time scopes:- Rural life improvement & MDGs – S-Medium term
- Productivity & commercialization – Long-term- Rural infrastructure, rural industrialization
 Broaden policy menu to include “closer” targets:- Produce for nearby/local markets- Tourism- Specialties (processed agro products, handicrafts)- One-Village-One-Product- Michi-no-Eki (roadside stores to sell local products)
Industrialization Strategy inCurrent PASDEP
A short section for industry (Eng. 12pp.)
 Summarizes IDS and existing M/Ps; plus export
strategy, PSD, PPP.
 New PASDEP should discuss key issues & strategies
in target sectors (incl. kaizen, engineering capacity)
as interface between IDS and individual M/Ps.
Food processing – sugar & flowers only?
 With more M/Ps and TA available, new PASDEP
should contain more sectors/crops and strategicdetails.

Final Remarks on
PASDEP Methodology
The role of PASDEP in policy formulation process (esp.
agriculture and industry) MoFED-MoARD-MoTI coordination in drafting PASDEP Policy capacity vs. scope broadening:- Agriculture: start with a large number of crops and targets- Industry: start with selected sectors, scale up later Broaden policy scope but reduce targets under limited budget
and human resourceCustomer-driven approach in TVET and technology
transfer