© 2017 Wolkite University, Department of Economics WKU/ECON//003/2018

WKU ECON Working Paper

Department of Economics

“Industrialization Led Agricultural Development (ILAD) strategy for

Ethiopia: A new insight”

Paper Type: Argumentative Essay

Prepared by: LemmaShallo1

Authorized for distribution by: Biruk Birhanu
November 2017

Abstract
The issue of countries’ development remained debatable for the last three centuries by different schools of
thoughts. Some of old economic thoughts, such as Physiocrats, emphasized the role agricultural sector
for the development of a nation, while the mercantilists, classical and neo-classical argued that industry
and trade sectors rather than agriculture which are constituted the basis of nations’ economic
development.I strongly agree with the arguments of the mercantilists, classicals and neo-classicals that
industrial development based policy would be crucial to promote the economic growth of a country.
Accordingly, I strongly argue that industrialization led agricultural development (ILAD) strategy is better
than Agricultural Development Led Industrialization (ADLI) strategy for Ethiopia. Lewis two-sector
model and the Structuralist theory are the two main models/theories which strengthens my argument.
Thus, to carry out this strategy/policy, it needs strong commitment from the government side in
formulating policy changes, launching strong institutional frameworks, intervening in establishing and
stabilizing the market channels and in creating linkages among agricultural processing industries and the
rural agricultural sector.

Keywords: ADLI, ILAD, Development Theories, Ethiopia.

Author’sE-Mail Address: lema.shallo@wku.edu.et

1
Lecturer at Wolkite University, Department of Economics

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 Contents

Item Page

1. Introduction 1

2. Industrialization led agricultural development (ILAD) strategy for Ethiopia 1

3. Development Theories (Models) supporting the idea of ILAD strategy in Ethiopia2

4. Experiences of East Asian countries 4

5. Conclusion 5

References 6

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 1. Introduction

The issue of countries’ development remained debatable for the last three centuries by different
schools of thoughts. Some of old economic thoughts, such as Physiocrats,emphasized the
roleagricultural sector for the development of a nation. This is because, according to them,
agriculture was whispered to be the source of all wealth and growth since they believed that
agriculture alone generated net surplus over the cost of production while industry merely broke
even and trade is considered even as sterile.

However, other schools of economic thoughts, such as, mercantilists, classical and neo-classical
argued that industry and trade sectors rather than agriculture which are constituted the basis of
nations’ economic development.In the viewsof classical economists, although both agriculture
and industrial sectors can bring growth, the long run economic growth of a country is ensured by
establishing and strengthening the manufacturing or industrial sector. According to them, the
process of economic growth starts by extension of market specialization and division of labor
which leads to labor productivity by shifting the labor form from unproductive to productive
activities, accumulation of capital and its investments, and hence boosted national income. Most
of the neo-classical growth and development theories also underlined the industrial sector as an
engine of economic growth for a nation.

I strongly agree with the arguments of the mercantilists, classicals and neo-classicals that
industrial development based policy would be crucial to promote the economic growth of a
country. My argument of industrial development led policy for developing countries, also remain
the best strategy for Ethiopia, unlike the existing country’s policy. This argumentwill be
supported with some justifications, evidences, theories and experiences of some
advanceddeveloping countries.

2. Industrialization Led Agricultural Development (ILAD) Strategy for

Ethiopia

Even though the government designed agricultural development led industrialization (ADLI)
strategy, I strongly argue that industrialization led agricultural development (ILAD) strategyis

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better for Ethiopia. The reason is that focusing on the agricultural development would not
guarantee the growth of industrialization. Moreover, unless there is an equivalent aggregate
demand for the supply of agricultural products from the manufacturing sector, increasing the
supply of agricultural production becomes useless.

As everybody aware, market is a place where sellers and buyers meet and exchange goods and
services. Farmers are suppliers of agricultural products to industrial sectors and to consumers as
a fulfillment of their raw material needs and consumption purpose, respectively. As recent
studies revealed, relying on the raw materials exportmarkets for farmers does not accelerate the
growth of agricultural sector. For the agricultural sector to be enhanced and sustainably grownin
Ethiopia, there must be a strong demand and linkage established from the industrial sector. Thus,
providing primary concern to the growth of industrial sector in Ethiopia, is a best mechanism to
accelerate the agricultural sector growth in a sustainable manner.

The mainfocus of widening the industrial sectorin Ethiopia would have astonishing benefits in
strengthening the linkage with the agricultural sector growth. This strong connection is
established by creating modern market channels between the two sectors. The industrial sector
also supports the rural agricultural sector in the country by constructing and extending
infrastructures, such as, roads, electricity, telecommunication networks and so on.

For the industrial sector to be developed, appropriate and continuous raw materials supply is
must. In Ethiopia, there is a surplus labor force in rural areas of the country. So, the expansion of
industries in the nation would enjoy the surplus labor found in the rural areas by attracting and
hiring them with fair cost. Due to this reasons, the linkage to the agricultural sector will be
fashioned and strengthened. The industrial sector supports the modernization of agricultural
practice by providing proper technologies, building the capacities of farmers in technology usage
unceasingly, displaying the modernized irrigation systems, help the farmers with appropriate
information in producing market based agricultural products, assistant in creating access to
improved seeds and fertilizers by making connectionwith agricultural research institutes and
suppliers, etc.

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 3. Development Theories(Models) Supporting the Idea of ILADStrategy in
Ethiopia

There aredifferent theories that strengthens my argument of industrialization led agricultural

development (ILAD) strategy in Ethiopia. Out of these, Lewis two-sector model and the
Structuralist theory are the main ones.

3.1. Lewis Two-Sector Model

One of these is Lewis two-sector model, which was one of the best-known early theoretical
models of development that focused on the structural transformationof a primarily subsistence
economy. It was formulated by Nobel laureate W. Arthur Lewis in the mid-1950s. According to
Lewis model, the underdeveloped economy consists of two sectors: a traditional, overpopulated
rural subsistence sector characterized by zero marginal labor productivity and a high-
productivity modern urban industrial sector into which labor from the subsistence sector is
gradually transferred. The primary focus of the model is on both the process of labor transfer and
the growth of output and employment in the modern sector. The speed with which output
expansion occurs is determined by the rate of industrial investment and capital accumulation in
the modern sector, which I strongly argue this situation to be the best option for Ethiopia.

Lewis model as a structural change model, it underlined the importance of transfers of resources
from low-productivity to high-productivity activities in the process of economic development,
attempting to analyze the many linkages between traditional agriculture and modern industry.
Therefore, for a country to promote sustainable growth, it must boost up the urban
industrialization. This is because, the urban industrial sector will create new employment job
which attracts the rural surplus labor to the urban. For every increment in the number of labor
force, unlike the rural agricultural sector, the marginal productivity increases in the urban
industries.

Therefore, since there is abundant labor force available in rural areas of Ethiopia, industries can
hire man power with constant wage rate, as explained by Lewis, which enhances production of
goods and services with least cost, i.e. economies of scale.The process of modern sector is self-

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sustaining growth and employment expansion is assumed to continue until all surplus rural labor
is absorbed in the new industrial sector, which triggers the commercialization of the agricultural
sector. Self-sustaining growth occurs when theeconomic growth that continues over the long run
is based on saving, investment, and complementary private and public activities.

3.2.Structuralist Theory

Another very important theory which builds up my argument of industrialization led agricultural
development (ILAD) policy in Ethiopia is the structuralist theory, which has had a significant
influence on the international economic policy of the developing countries. This theory
suggested some prescriptions for promoting economic development in the developing countries
(named as the south). The main prescriptions praised by the structuralists were import-
substituting industrialization (ISI) policy and south-south (inter-developing countries) investment
and trade agreement. According to the structuralists’ argument, production and export of raw
materials and agricultural commodities hurts developing countries in world trade because of the
declining terms of trade for those products. The structuralists’ argument strongly supports my
idea of policy changes for Ethiopia.

Thus, I believe and think that Ethiopia needs to divert away from agriculture and raw materials
toward manufacturing and services activities. To do this, it may need to adopt high tariffs
initially to encourage the establishment of domestic manufacturing facilities (import substitution)
and reduce trade barriers by making agreements with the other developing countries in order
compensate the domestic small markets and achieve economies of scale.

I strongly agree with the above mentioned two theories, since they emphasized my argumentof
providing prior focus for industrialization will promote economic growth in developing countries
like Ethiopia. In addition, I believe that as the theories suggested, industrial sector development
has great potential in promoting economic development in Ethiopia.

4. Experiences of East Asian Countries

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The East Asian Tiger economies, such as South Korea, Taiwan, Singapore, Malaysia and Hong
Kong are best examples of fast growing developing nations by diversifying and widely engaging
their investment into manufacturing and exports for the last few decades.

For instance, South Korea carried out a thoroughgoing land reform in the late 1940s and 1950s,
so agriculture was not neglected; but otherwise its growth through rapid expansion of the
percentage of the labor force in industry has broadly conformed to the Lewis model of
development.South Korea’s rise over the past five decades has been characterized by shifts of
labor from agriculture to industry, the steady growth of the capital stock, of education and skills,
the demographic transition from high to low fertility and rapidly increasing agricultural
productivity.South Korea’s per capita income grew by more than 7% annually for the whole
1965 to1990 period. After about 1970, productivity growth in agriculture also increased rapidly,
owing in part to a successful integrated rural development program. Therefore, the shift of labor
force from agriculture to the industrial sector is South Korea boosted up the production of
industrial products and increased exports, which in turn accelerated the agricultural sector to
grow rapidly. The lesson from experience of South Korea can help Ethiopia to bring structural
and policy changes in the country which will enhance the economic growth of the country.

5. Conclusion

The primary focus should be given to the development of industrialization which boosts up the
production of goods and services, which in turn accelerates the rural agricultural development in
Ethiopia. The industry supports the agricultural sector for the sake of raw materials and surplus
labor of the rural areas in the country. For industries to sustain their growth, they must support
the agricultural sector with regard to use of improved technologies, capacity building for farmers
and creating favorable markets chains for the agricultural products.

Great lessons can be adapted for Ethiopia from the experiences of fast grown East Asian
countries in channeling the investment into industries which its growth is important for the
country’s sustainable economicgrowth. Some strategicallyuseful lessons can be well-read from
these countries, such as: protection to help create an internationally competitive set of industries
in the nation, give high priority to export promotion policies, welcome multinational companies

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but direct them toward exports and promote a bank based financial system under government
control. Multinational companies are very important for the country, in which they primary
source of knowledge of technology, production and marketing.

6. Outlooks

I argue the industrialization led agricultural Development (ILAD) strategy could be the best
alternative for Ethiopia not without the assumption of some challenges. The main challenge may
be expected to come from the political atmosphere. Thus, to carry out this policy, it needs strong
commitment from the government side in formulating policy changes, launching strong
institutional frameworks, intervening in establishing and stabilizing the market channels and in
creating linkages among agricultural processing industries and the rural agricultural sector.

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References

 David Harvey (2005); A brief history of Neoliberalism, Oxford university press, New
York, USA.
 E. Wayne Nafziger (2006); Economic Development (4th edition), Cambridge university
press, New York, USA.
 Joan E. Spero and Jeffrey A. Hart (2010); The Politics of International Economic
Relations (7th edition), published by Wadsworth – Cengage Learning, Boston, USA.
 Mikael P. Todaro and Stephen C. Smith (2012); Economic Development (11th edition),
Addison-Weslay publisher, Boston, USA.
 MoFED (2002); Sustainable Development and Poverty Reduction Program (SDPRP),
Addis Ababa, Ethiopia.
 MoFED (2003); Rural Development Policy and Strategies, Addis Ababa, Ethiopia.