Inter-sectoral linkages of the manufacturing sector: a sam-based analysis

inputs from other sectors and as suppliers of inputs to other sectors. According to Herischman’s terminology, the former is termed as backward linkage and the latter is called forward linkage (Sadoulet and Janvry 1995). Backward linkage measures the proportion of an activity’s output that represents purchases from other activities, while forward linkage measures the proportion of an activity’s output that is used as inputs by other sectors. Such inter-sectoral linkages between the different sectors, especially between agriculture and industry are the basis for self-enforcing and sustaining

economic growth. For instance, basic industry cannot be built without a well- developed agriculture, which will provide raw materials, labor, food, etc. And transformation of the agricultural sector requires a robust industrial sector that will supply farm tools, equipments, and other chemical inputs necessary for the agricultural sector. Such type of inter-relationships can be captured using Social Accounting Matrix (SAM)-based multiplier analysis, which shows the inter- connections of the various sector of the economy. In that regard, the linkage analysis will be based on a recently constructed SAM for Ethiopia (for detailed description of the SAM, see Alemayehu and Tadele 2004).

6.5.1. Analysis of linkages using SAM multipliers

Following the pioneer work by Stone (1978), SAM has been widely used as a consistent accounting framework to analyze and model the structure of an economy. The SAM framework represents a matrix of double-accounts in which rows and columns denote receipts and expenditures, respectively. As a consistent accounting framework, it is an accounting necessity that receipts and expenditures must balance in all entries and this ensures the consistency of the system.

The present SAM is a 40x40 matrix and contains fourteen production activities, five factors of production, eight commodities, a transaction cost account, fifteen institutions, combined capital account and rest of the world account. This SAM captures diverse production activities, interdependencies among the various sectors and institutions that govern the distribution of resources among the different socio- economic groups. Production activities have been disaggregated into four agricultural activities, seven industrial activities, two services and a food-for-work activity.

Apart from providing an overview of the structure of the economy during the reference period (i.e.1999/00 in this case), SAM provides the degree of interdependence of the economy. For the purpose of assessing inter-sectoral linkages, the SAM accounts need to be partitioned into endogenous and exogenous, and such distinction may depend on what is perceived as endogenous or exogenous for the operation of the economy. Following the usual distinction, government and rest of the world accounts are treated as exogenous. In this study, capital account is considered as endogenous due to the fact that the level of investment or resource stock is endogenously determined by investment decisions undertaken by different economic agents distinguished in the SAM.

Following the conventional approach of input-output models, the relationship between endogenous and exogenous accounts can be expressed as:

x y A

y= _n + _(6.10)

where, y, An and x are, respectively, a vector of incomes of endogenous accounts, a matrix of average propensities and a vector of incomes of exogenous accounts. This intuitively implies that the row totals of the endogenous accounts can be obtained by multiplying the average expenditure propensities for each row by the corresponding column sum and adding exogenous income. The income of endogenous accounts can be expressed as:

[

]

y= − n = a

−1

(6.11)

where, Ma is termed as the social accounting multiplier since it measures the income

accruing to endogenous accounts as a result of a unit injection, i.e. it shows how a change in any element of the exogenous accounts will affect the endogenous accounts. That is, through income and consumption linkages within the SAM, changes in the exogenous accounts determine the level of income of endogenous accounts.

The above methodology has been employed to examine inter-sectoral linkages in the Ethiopian economy. Accordingly, the ith column sum of the aggregate multiplier matrix (Ma) gives the total input requirement from all sectors and this is the economy-

wide backward linkage of this sector. The ith row sum of the aggregate multiplier matrix indicates the total forward linkage of the ith sector. These linkage types can be used for assessing the degree of interdependence of a given sector.

A look at the aggregate multiplier matrix reveals that, among the production activities, peasant farming-lowland mixed has got the highest backward linkage (14.92), followed by peasant farming-highland mixed (14.80) (see Table A6.1 in the annex). The inclusion of income and final consumption linkages into input-output matrix makes agriculture superior in terms of growth linkages. Since agriculture is the main source of income and expenditure, it induces industrialization under the force of effective demand. Note that linkages based on inter-activity flows only reveal that peasant agriculture has weak forward and backward linkage effects. This is due to the fact that it is a producer of primary and final commodities.

Manufacturing activities have relatively low backward linkages indicating their high dependence on imported sources and less dependence on domestic materials (i.e., weak integration with the rest of the domestic economy). It should be noted that of the manufacturing activities, large/medium agro-processing public and private manufacturing industries (these are mainly food processing, textiles and leather industries) have relatively better backward linkages with the rest of the economy. With regard to forward linkages, the agricultural sector has relatively high forward linkage compared to the manufacturing sector. For instance, peasant farming- highland mixed has got the largest forward linkage followed by peasant livestock production (mainly pastoralists). Within the manufacturing activities, large/medium agro-processing (public) has got relatively high forward linkages followed by large/medium other manufacturing, compared to other manufacturing activities distinguished in the SAM. Thus, the manufacturing sector has weak linkage effects with the domestic economy, especially with the agricultural sector mainly because the sector is highly dependent on imported raw materials and hence, fails to be the sources of dynamism for the economy at large.

Overall, the performance of the manufacturing sector in terms of employment generation and poverty reduction has been limited. Employment in the manufacturing sector had grown by about 0.4 per annum almost for the past two decades (well below labor force growth rate). Similarly, the employment intensity of output of the sector declined in the post reform period. Average real labor productivity weighted by employment share of the manufacturing sector declined in the 1980s, but marginally improved during the post reform period. In particular, employment expansion has

been observed in food and beverages, chemical and chemical products, other non- metallic mineral products, and furniture manufacturing not elsewhere classified (n.e.c.) during the post reform period.

In expanding sectors such as food and beverages, productivity increase does not translate into employment reduction. However, in shrinking sectors (e.g. textiles), higher productivity leads to a reduction in employment. In the remaining activities, employment share remained unchanged. These are slow growing activities and hence higher productivity is accompanied by employment contraction. The majority of the manufacturing activities have not served as a source of job creation for the growing labor force. Accordingly, a fall in the real earnings of the sector was also observed during the pre-reform period despite some improvements in the post-reform program. From the point of view of pro-poor growth, food and beverage, textiles, chemical and chemical products, other non-metallic mineral products, and furniture have been identified as having high labor-intensity and relatively strong linkages with the rest of the economy. Although labor-intensity has shown a declining trend over time, these activities have a good potential for future growth and can serve as a source of job creation if their problems have been adequately addressed. The major problems facing these manufacturing activities can be classified as technology, market, finance, input, policy issues, and human resources related problems. Specifically, the main factors constraining their operation include, among others, shortage of raw materials, lack of demand, lack of working capital, frequent machinery break/failure, and shortage of spare parts. A solution to these problems has become very difficult in Ethiopia because of the government’s reluctance to involve chambers and other associations in policy decisions, implementation and monitoring. The current practice is largely top- down with no formal institutional arrangement for participation of stakeholders in key decisions. Businessmen and industrialists also suffer from the old perception (propounded under the socialist regime) that they are exploiters and do not contribute to the good of society.