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Ethiopia Needs Long-term National Development Plan (Part Six)

June 6, 2024

Tsegaye Tegenu, PhD

The Ten Years Development Plan: A Pathway to Prosperity 2021-2030 has a design problem even if it is formulated on the understanding of the macro and sectoral levels economy. The macroeconomic and sector performance assessment have limitations for the purpose of long-term planning. Both focus on the formal economy that are officially recorded, regulated, and taxed by the government. If they are the only sources, economic policies might be biased towards formal sectors, potentially neglecting the needs and contributions of the informal sector. Both macroeconomic and sector assessments potentially neglect the needs and contributions of the informal sector which often primarily manifests itself at the micro level.

The informal economy consists of small-scale, often unregistered economic activities carried out by individuals, households and small enterprises. Examples include street vending, informal labor, small-scale subsistence agriculture, and unregistered service providers. It provides a source of income and employment for a large number of the labor force which could not be absorbed by the formal economy. It is a result of the survival strategies of households and individuals facing poverty and unemployment.

It is important to study the livelihood strategies, behavior, decision-making processes, and market interactions of these agents of the informal economy. Why and how do they make choices about resource allocation, production, and consumption. Why and how are they using inputs in the production process, such as labor, capital, land, and technology. In addition to factor analysis, it is also important to investigate their involvement in various markets and how the market mechanisms affect allocation of resources. What are the impacts of government policies on the choice of their livelihood strategies.

In countries experiencing rapid population growth, the informal economy often becomes a significant and sometimes dominant part of the overall economy. This phenomenon can be attributed to several factors related to the pressures of population growth and limited capacity of the formal economy to absorb the increasing labor force. Rapid population growth increases the labor force faster than the formal economy can create jobs, leading many to seek livelihoods in the informal sector. For many households and individuals, informal work becomes a necessity for survival due to the lack of formal employment opportunities. For details see Population pressure and dynamics of household livelihoods in an Ethiopian Village: An elaboration of the Boserup-Chayanovian framework.

The nature of the economic system of Ethiopia inherently involves interactions of the formal and the informal economy. The value and composition of output produced in the country over a period of time (growth patterns), and the relative changes in the size and productivity of the various components of the economic activities and structure can be measured and accounted using these formal and informal dimensional models. For details see 3-D System Approach to Private Sector Development in Ethiopia. In Ethiopia, the informal economy accounts for a substantial portion of GDP, exceeding 50%. For details, see 100 Million People Economic System in Ethiopia. When comparing the employment share, a large percentage of the workforce is engaged in informal activities, providing crucial income for millions of households.

Traditional macroeconomic indicators cannot fully capture the extent and impact of the informal economy, leading to underestimation of economic activity and employment. Informal activities often dominate sectors, such as agriculture, retail, and services, where formal sector growth is limited.

The formal and informal economic systems co-exist side by side because the formal economy has limitation capacity to absorb the labor force, accommodate new business activities, and meet the growing needs of the population. Uneven economic growth, skills mismatch, high labor costs, lack of business growth, infrastructure deficiencies, complex regulatory barriers, inefficient management practices, lack of saving and investment, have all contributed to limited job creation.

Institutional weaknesses have also limited the capacity of the formal economy. Corruption, lack of transparency, and weak rule of law can undermine economic activity and deter investment. A complex and burdensome regulatory framework can stifle business operations and innovation. Inadequate public services, such as healthcare, education, and social protection, have limited human capital development and economic participation. Inefficiencies within public institutions have slow downed processes, increased the cost of doing business, and reduced overall economic efficiency.

Given the broader implications of the informal economy, to what extent is attention given to it when thinking about long-term national development plan. Is there a comprehensive collection of data on informal economic activities to understand the true economic landscape? How are the findings integrated with the formal sectors to provide a realistic picture of the economy? Is there a national development vision that recognize the role of the informal economy and aim to create pathways for its change into a formal economy?


  1. I agree with the dear brother that the old country needs to have a long term economic plan.

    There is always a question we, the more fortunate in our Diaspora, should ask ourselves. What can we ourselves do to help the old country that produced us all to industrialize itself? I am not asking all of us who have the required resources to go back. For many of us and various legitimate reasons it may be prohibitively difficult to return. But we can always make a useful return by making our assets available to those still inside the country to open businesses that create jobs for the desperately unemployed. Many of us have already done that by giving financial and know-how assistance in opening businesses and factories to relatives and others we know very well to have the entrepreneurial skills. Opening factories can be a tall order for most of us financially but we still can play a part in that role by lobbying companies to open factories there and also by putting together our resources among friends and open small factories of our own. Some of us have done that or at least tried to do that already for decades now.

    I am a big believer of industrialization and the spread of factories throughout the country because I had seen first hand what that did to other countries going back to the 1970’s. Industrialization have the means and power to create sizable middle class in a society. It ushers a new way of thinking for the citizens. It shapes up a new outlook makeup in the citizens psyche. They don’t need someone else to give them answers to what, why and how questions they may have. This is the middle class our commies have been bedeviling since 1960’s even before it began taking deep roots in that region. Middle class is a tough cookie for connivers. It knows how to single out a lonely cross eyed bee among a swarm of millions.

    The other windfall from major industrialization is its role in liberating the women currently in bondage. It has the wherewithal to create a vast middle class of women which will play a big role in bringing the runaway population to a screeching halt. I had seen it myself in other countries in Asia. Factories will bring vast numbers of women out of their homes into humming factories giving them ‘Now I got it!’ moment. That will give them the power to be part of decisive roles in the affairs at home. Until industrialization starts playing the major role in shaping up the society in every country in the Horn of Africa, the population will continue to explode beyond control creating a haplessly unemployed majority of young population that will avail itself to bigots and connivers to their destructive schemes. That is what we are witnessing now. In a society where industrialization is spreading the youth will be too busy in factories, offices and schools working, adapting and learning. Please don’t forget that the old country with its huge and young population it has a potential huge market to consume what it can produce. Again, without industrialization on steroid, the old country will continue to be the poster child violence, instability, internal displacements and killer famines. In other words, the ugly cycle will continue until it goes belly up for good. .

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Ethiopia Needs Long-term National Development Plan (Part Five)
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Ethiopia Needs Long-term National Development Plan (Part Five)

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Ethiopia Needs Long-term National Development Plan (Part Seven)

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