Parameter Values, Changes and Predicted Growth Effects (real GDP per capita) Ethiopia is catching up with peers, its income level Offical-Release_final.pdf.

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ACKNOWLEDGEMENTS .viiLIST OF ABBREVIATIONS ixEXECUTIVE SUMMARY .xiPART A: EXPLAINING GROWTH .1THE GROWTH ACCELERATION .31.1 Recent Economic Growth in Perspective 31.2 Rapid Growth in the Context of Development Progress .31.3 Proximate Growth Determinants 6ECONOMIC STRATEGY ˜ ‚THE ETHIOPIAN WAY™ .132.1 Main Elements of Economic Strategy 132.2 Did Ethiopia Fo he Insights of ‚˜e Growth Commission™? 162.3 Fast Growing Non-resources Rich African Peers ..162.4 An East Asian Strategy? .20EXPLAINING GROWTH: STRUCTURAL, EXTERNAL AND STABILIZATION FACTORS ..233.1 Introduction ..233.2 Explaining Ethiopia™s Recent Growth Performance .24Annex 3.1 Methodology ..30Annex 3.2 Model Robustness 35GROWTH AND STRUCTURAL CHANGE ..394.1 Introduction ..394.2 Structural Change in Ethiopia ..414.3 ˜e Rising Services Sector ..464.4 Ethiopia™s Experience in the International Context .474.5 A Regional Perspective and Potential Implications for Ethiopia 49Annex 4.1 Selected Structural Change Indicators .54DRIVERS OF AGRICULTURAL GROWTH ..575.1 Introduction ..575.2 ˜e Growth of Agriculture 2004Œ2014 58

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5.3 Land Intensi˚cation and Adoption of Improved Agricultural Technologies 605.4 Drivers for Change .635.5 Evidence on Changes in Drivers ..655.6 Conclusion and Further Challenges 73PART B: SUSTAINING GROWTH ..77MANAGING GROWTH EXPECTATIONS 796.1 Introduction ..796.2 Growth Accelerations: ˜e International Experience ..796.3 Growth Tailwinds and Headwinds ..816.4 Cyclical Factors .836.5 Benchmarking ..836.6 Scenario Analysis .866.7 Summary .89ETHIOPIA™S FINANCING CHOICE: PUBLIC INFRASTRUCTURE OR PRIVATE INVESTMENT? ..917.1 Introduction ..917.2 Is Ethiopia™s Current Level of Public Infrastructure Investment Optimal? 917.3 Firm-level Constraints: Infrastructure or Credit? ..957.4 Domestic Finance Reform ..977.5 Complementary Infrastructure Financing Options ..100Annex 7.1 Public and Private Investment: Model, Empirical Results and Calibration .107GROWTH AND STRUCTURAL REFORMS .1138.1 Introduction 1138.2 Trends and Status in Structural Reforms 1148.3 ˜e Potential Growth Impact of Reforms .1178.4 Productivity Impacts of Services Trade Liberalization ..1248.5 Reform Sequencing: Best Practice and Ethiopia™s Experience ..1268.6 Reform Risks ..1278.7 Quo Vadis Ethiopia? 1298.8 Growth Model Sustainability Monitoring .130Annex 8.1 Methodology for Estimating Growth Impact of Reforms 134Annex 8.2 Robustness Checks 135Annex 8.3 Estimating the Impact of Services Inputs Quality on Firms™ Productivity .138REFERENCES .141LIST OF FIGURES Figure 1.1: Recent Economic Growth in Perspective .4Figure 1.2: Ethiopia™s Development Performance 5Figure 1.3: Growth Characteristics 7

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Table 5.1: Probit Model: Adoption of Improved Seeds or Chemical Fertilizer in Cereal Production .64Table 6.1: Benchmarking Structural, Stabilization and External Factors (2006Œ10 data) 85Table 6.2: Assumed Annual Growth Rates of Policy Variables by Scenario (percent) 87Table 6.3: Illustrative Scenarios and Growth Projections until Early 2020s 88Table 6.4: Summary of Growth Expectations for Ethiopia 90Table 7.1: Estimated Excess Returns of Public Investment 94Table 7.2: Most Binding Constraints to Doing Business in Ethiopia, Various Rankings .96Table 7.3: Predicted E˛ects of Financial Sector Reforms 99Table 7.4: Alternative Infrastructure Financing Options ..104Table A7.2.1: ˜e Response of Private Investment to Public Investment .108Table A7.2.2: ˜e Response of Output to Public Investment 109Table A7.3.1: Calibration Results ..110Table 8.1: Average Values of Structural Reform Indices 119Table 8.2: Baseline Growth Regressions (Dependent variable: Real GDP Per Capita, Growth Rate) ..120Table 8.3: Coe˝cient Estimates and Potential Growth Impact of Reforms .121Table 8.4: Coe˝cient Estimates and Potential Long-run Growth Impact of Reforms 121Table 8.5: Reforms, Growth, and Distance to the Technology Frontier 123Table 8.6: Labor Productivity Determinants Based on Perception of Services™ Performance 125Table 8.7: International Best Practice Guidance on Reform Sequencing ..127Table 8.8: Ethiopia Growth Model Sustainability Indicators .131Annex Table A8.1: GMM Regression: Coe˝cient Estimates and Growth Impact of Reforms 136Annex Table A8.2: Control Variable Check: Coe˝cient Estimates and Growth Impact 136Annex Table A8.3: Coe˝cient Estimates and Potential Growth Impact (1973Œ1989) ..137Annex Table A8.4: Coe˝cient Estimates and Potential Growth Impact (1990Œ2006) ..137LIST OF BOXES Box 1.1: When Did Ethiopia™s Economy Take O˛? 11Box 2.1: ˜e Banking Sector in Ethiopia .17Box 4.1: ˜e Demographic Dividend 45Box 6.1: Stylized Facts about Growth Accelerations and their Aftermath .80Box 7.1: Literature Review: Does Financial Repression Inhibit or Facilitate Economic Growth? ..98Box 7.2: A ˜eoretical Model of Financial Repression and Interest Rate liberalization ..101Box 8.1: Structural Reform Indices: Data and De˚nitions 115

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˜he World Bank greatly appreciates the close collaboration with the Government of Ethiopia (the Ministry of Finance and Economic Cooperation, in particular) in the preparation of this report. ˜e report was prepared by a team led by Lars Christian Moller (Lead Economist and Program Leader, AFCE3). It draws upon a series of background paper commissioned for the study, including: 1. Shahid Yusuf (2014): Chapters 2 and 6. 2. Lars Moller and Konstantin Wacker (2015): Chapters 3 and 6.3. Pedro Martins (2014, 2015): Chapter 4 4. Ejaz Ghani and Stephen O™Connell (2014): Chapter 45. Fantu Bachewe, Guush Berhane, Bart Minten, and Alemayehu Ta˛esse (2015): Chapter 5 6. Maya Eden (2015ab): Chapter 7 7. Aart Kraay and Maya Eden (2014ab): Chapter 7 8. Fiseha Haile (2015): Chapter 8 9. Claire Hollweg, Esteban Rojas and Gonzalo Varela (2015): Chapter 8Excellent research assistance was provided by Mes˚n Girma (Economist, GMFDR), Eyasu Tsehaye (Economist, GPVDR), Ashagrie Moges (Research Analyst, GMFDR), and Fiseha Haile (Consultant, GMFDR). Helpful comments were provided by: Kevin Carey (Lead Economist, GMFDR) and Michael Geiger (Senior Country Economist, GMFDR). ˜e report was prepared under the overall guidance of Albert Zeufack (Practice Manager, GMFDR), Guang Zhe Chen (Country Director, AFCS1), Carolyn Turk (Country Director, AFCE3), Pablo Fajnzylber (Practice Manager, GPVDR) and Sajjad Shah (Country Program Coordinator, AFCE3). The peer reviewers were: Barry Bosworth (Brookings), Cesar Calderon (Lead Economist, AFRCE) and Andrea Richter (IMF).

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ADLI Agricultural Development Led Industrialization AGP Agricultural Growth Program AGSS Agricultural Sample Survey AISE Agricultural Input Supply Enterprise ATA Agricultural Transformation Agency ATVET Agricultural Technical and Vocational Education and Training CA Capital Account CBE Commercial Bank of Ethiopia CIMMYT International Maize and Wheat Improvement Center CPIA Country Policy and Institutional AssessmentCSA Central Statistical Agency DA Development Agent DB Doing Business DBE Development Bank of Ethiopia DSA Debt Sustainability Analysis EES Ethiopian Electric Service EEU Ethiopian Electric Utility EEU Ethiopia Economic Update EIAR Ethiopian Institute of Agricultural Research EPRDF Ethiopian Peoples™ Revolutionary Democratic Front ERA Ethiopia Railways Corporation ERHS Ethiopia Rural Household Survey ESE Ethiopian Seed Enterprise ESLSE Ethiopian Shipping and Logistics Services Enterprise FAOSTAT Food and Agriculture Organization Statistics FDI Foreign Direct Investment FtF Feed the Future FY Fiscal Year GCI Global Competitiveness Index GDP Gross Domestic Product GMM Generalized Method of Moments GNI Gross National Income Govt C Government Consumption GTP Growth and Transformation Plan GVA Gross Value Added HDI Human Development Index HIPC Heavily Indebted Poor Country Initiative IFDC International Fertilizer Development Center IFPRI International Food Policy Research Institute IMF International Monetary Fund LFS Labor Force Survey LIC Low Income Country LMIC Lower Middle Income Country M2 Broad Money Aggregate MDG Millennium Development Goals MDRI Multilateral Debt Relief Initiative MOA Ministry of Agriculture MOFED Ministry of Finance and Economic Development NASA National Aeronautics and Space Administration NBE National Bank of Ethiopia (˜e Central Bank) OLS Ordinary Least Squared PASDEP Plan for Accelerated and Sustained Development to End Poverty PIM Public Investment Management Polity2 Governance variable PPP Purchasing Power Parity PPP Public Private Partnership

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