CONTRIBUTION OF THE LOVESTOCK SECTOR TO ETHIOPIA’S GDP

CONTRIBUTION OF THE LOVESTOCK SECTOR TO ETHIOPIA’S GDP Ayele Gelan Agricultural Economist Market Opportunities Theme International Livestock Research Institute (ILRI) February2011

CONCEPTUAL ISSUES • The economic role of the livestock sector can be classified into two • (a) Intra-sectoral activities – including wealth created due to economic activities that occurred within the livestock sector • (b) Inter-sectoral activities - linkages of the livestock sector to other industries and domestic institutions • GDP is all about wealth creation, hence it is related only to (a) • (b) is related to the recognition of the multiplier effects of the livestock sector on the wider economy

EMPIRICAL ISSUES • Ensuring the size of the livestock sector (Gross value of output) is not underestimated (or overestimated). • Any distortion related to these would affect both (a) and (b) • Due to the capital nature of livestock, the livestock sector is the only activity in the agricultural sector where it is possible to have the right estimates for intra-sectoral figures but still grossly underestimate inter-sectoral roles • The following few slides provide simple illustrations of the conceptual and empirical challenges

ONE INDUSTRY • Let’s start with a highly simplifying assumption – that Ethiopia has only one industry • Ethiopia’s system of national accounts can then be represented by a very simple matrix of 2 x 2 dimension (shown on the next slide) • The matrix representation displays information in a highly efficient and concise manner, showing key relationships between different parts of the economy • See the simple matrix on the next slide

MATRIX REPRESENTATION OF THE SYSTEM OF NATIONAL ACCOUNTS (SNA) • A = total value of intermediate, goods used to produce other goods • V = total payments for services of primary factors of production (land, labour, capital) • E = total value of goods consumed by institutions [households, government, organisation for gross fixed capital formation, net export (exports less imports)]

ENTRIES IN THE MATRIX (1) • Reading down column 1, we collect value of different inputs in the process of production (origins of goods): • Total value of intermediate goods or goods used to produce other goods = A • Total payments for using primary factors of production (land, labour, capital) = V (gross value-added or GDP at basic price) • Gross value of goods and services produced = GVO (this is now shown in the matrix) • Therefore, GVO = A + V

ENTRIES IN THE MATRIX (2) • Reading across row 1, we read the process of consumption (destinations of goods) • Total value of goods consumed (used) in the process of production = A • Total value of goods consumed by institutions [households, government, organisation for gross fixed capital formation, net export (exports less imports)] = E • Gross value of goods produced = GVO (again, this is not shown) • Therefore, GVO = A + E

ENTRIES IN THE MATRIX (3) • Note that • GVO = A + V • GVO = A + E • Therefore, V = E • This means GDP obtained using production approach (V) MUST be equal to expenditure approach (E) • The simple matrix presented here encapsulates every thing we need to know about GDP, the rest is simply disaggregating the cells in this matrix (column 1 and row 1) by the number of sectors • For our purpose, we use a 3 sector (livestock, cropping, and the other industries), see next slide

THREE INDUSTRIES Note: The first and second subscripts refer to receiving sector and paying sector, respectively. For instance, A31 denotes payment by the livestock sector for intermediate inputs (e.g. processed feed) supplied by feed processors in the manufacturing sector, here categorised under “other industries”.

ONE INDUSTRY vs THREE INDUSTRIES • At first glance, the three sector matrix looks different from the highly simplified small matrix • However, the two matrices show essentially the same information except for • Sectoral dimensions • Gross value of output (GVO) is now explicitly presented • Each account is given a number with a description (e.g. 1. Livestock) • The value-added row has become a vector with three entries, i.e., gross value-added by sectoral origin • The aggregate expenditure column has now three elements, i.e., expenditure by commodity origins

A CONCEPTUAL FRAMEWORK FOR THE TASKFORCE • I propose using the three industries matrix as a conceptual framework for the task force • Reading details of the remits of the task force (including the consultancy report which gave rise to the formation of the task force), the task force is expected to revise a range of estimates related to the livestock sector (entries shaded in red fonts in the matrix) • However, the task force name suggests that we deal only with the contribution of the livestock sector to Ethiopia’s GDP, which essentially would mean focussing on only one entry in that matrix - V1! • So, I propose that we explicitly recognise that the role of the group is to revise “the contribution of the livestock sector to the Ethiopian Economy”

APPROACH • The three industries matrix provides a framework and details of separate entries that the task force will target to revise (red cells) • We will need to keep in mind the system of national accounts (SNA) approach in mind, sections related to the measurement of production, pp. 127-156. (esp. Section 6.41(a) – (f) • The key point here is this: marketed as well as non-marketed outputs need to be accounted for • This conceptual issue needs to be resolved before we set out to do the task of revising the estimates • Now let’s discuss the relevant entries in turn (dealing with the red fonts one by one), bearing in mind the key relationships in “three industry matrix” and that we must account for marketed as well as non-marketed outputs

Gross Value of Output (GVO1) • See the intersection between row 5 and column 1 • At the end of our meeting on 24th February 2011, we have agreed to separately work on gathering facts to revise the “rates and coefficients”, which were listed under (A) and (B) sections (of the spreadsheet circulated) • If we carefully gather the required data for (A) then we will be able to obtain a reasonably good estimate GVO for the livestock sector (GVO1) • Perhaps I might have missed something, but I thought we need a particular year, a base year or the year for which the system of accounts for the livestock sector will need to be revised • We do not necessarily need the base year to do the revisions of coefficients, but we definitely need a specific year to complete the revision process

Gross Domestic Product or GDP (V1) • See the intersection between row 4 and column 1 • This is the livestock sector GDP per se • It is related to value added due to activities within the livestock sector • Estimates of labour time and hence compensation for labour devoted to the livestock sector • Some estimates of capital, however rudimentary (e.g. Services of dairy cows, housing, fencing, etc) related to undertake livestock keeping • Some estimates of land rent (if possible and practical...)

Gross Domestic Product or GDP (V1)... 2 • This is the main element, which attracts most attention but surprisingly even in the consultancy report the GDP proper has not received any attention • Arriving at a specific number for each of the three bullet points above could be tricky but simply we cannot ignore it (the breakdowns must be attempted)

Gross Domestic Product or GDP (V1)... 3 • I suggest we triangulate the estimation of this figure, an extremely important figure of all elements, as follows • A brief literature review, how other countries have estimated gross value-added in livestock? • Estimate GVO1, which is more straightforward, and then the intermediate elements (A11, A21, A31) and then estimate V1 as a difference ( V1 = GVO1 – (A11+A21+A31) • Compare and adjust as necessary (this way, mistakes done at the stage of estimating the GVO can be corrected)

FEED PURCHASED FROM PROCESSORS (A31) • See the intersection between row 3 and column 1 • Intermediate inputs supplied to the livestock sectors by non-agricultural sectors • Relatively straightforward - Section B in the worksheet on rates and coefficients provides a reasonably good information to obtain this figure

IMPUTED VALUE OF CROP RESIDUE (A21) • See the intersection between row 2 and column 1 • Intermediate inputs for livestock production supplied by the cropping sector (e.g. Crop residue) • This is relevant but it is missing from the list on “rates and coefficients”, section B • We need to account for this, but mostly relying on other country experiences etc.

IMPUTED VALUE OF LIVESTOCK PRODUCTS USED IN THE LIVESTOCK SECTOR AS INTERMEDIATE INPUTS (A11) • See the intersection between row 1 and column 1 • Again, this is relevant but it is missing from the list on “rates and coefficients”, section B • For instance, total milk produced includes milk used by calves etc. • Economics of livestock production involves calculation of energy intake, milk yield, etc. • I suggest that we estimate some values for this entry

IMPUTED VALUE OF LIVESTOCK PRODUCTS USED IN THE CROPPING SECTOR AS INTERMEDIATE INPUTS (A12) • See the intersection between row 1 and column 2 • Again, this is relevant but it is missing from the list on “rates and coefficients”, section B • e.g. Imputed value of manure used to improve fertility of soil for cropping

VALUE OF LIVESTOCK PRODUCTS USED IN NON-AGRICULTURAL SECTORS AS INTERMEDIATE INPUTS (A13) • See the intersection between row 1 and column 3 • Again, this is relevant but it is missing from the list on “rates and coefficients”, section B • A range of estimates enter here • Value of live livestock (cattle, small ruminants, poultry) sold to slaughtering houses or directly to hotels • Dairy products sold to dairy processing enterprises • Value of honey sold to food processing industries • More items...?

VALUE OF LIVESTOCK PRODUCTS SOLD TO INSTITUTIONS FOR FINAL CONSUMPTION OR GROSS FIXED CAPITAL FORMATION (E1) • See intersection between row 1 and column 4 • Sales to final demand constitute • Domestic institutions • Exports of livestock products (including live animals) (e.g. Middle East) • If the production approach estimates (down the column is correct) and intermediate demands (A11, A12, A13), then E1 can be obtained as a difference, i.e. E1 = GVO1- (A11+ A12+ A13) • This is followed by allocating E1 to the individual final demand components

SALES TO DOMESTIC INSTITUTIONS • Livestock products sold (including on farm consumption) to households or slaughtering houses • Livestock sales to government for final consumption, e.g. where direct slaughtering takes place (instead of taking from slaughter houses) • Gross fixed capital formation or change in inventory, e.g., the difference between the number of each type of livestock at the beginning of the year and at the end of the year

HIDES AND SKINS ?! • The farmer may... • (a) Sell live animal to traders who ultimately sell to slaughter houses located in towns or cities (A13) • (b) Slaughter animals on farm for own consumption (E1) • (c) Sell animals to another household in rural areas (E1) • (d) Sell animals to traders who ultimately sell to house holds located in towns or cities (E1) (e.g. during holidays)

HIDES AND SKINS ?!.... 2 • Case (a) is unambiguous – in international standard industrial classification slaughtering is classified in the 10th division of manufacturing (as A13) • This sub-division sells the by-product to tanneries, leather, or sales to exporters, etc. • This is a clear case where the livestock industry will be out of the picture as soon as the sale takes place and the live animal changes hand

HIDES AND SKINS ?!.... 3 • Even in all other cases, (b) - (d), it is extremely difficult, both conceptually and empirically, to attribute hides and skins to the livestock sector • The livestock sector is a primary activity, so post-processing livestock products cannot be classified as primary • Hides and skins are partially processed products

HIDES AND SKINS ?!.... 4 • So, hides and skins inevitably and legitimately belong to manufacturing, by virtue of being partially processed in the: • Formal sector, when animals are slaughtered in known abattoirs • Informal sector, when households and their compounds are used as some temporary slaughter houses • In the later case, the household sector would act as producers of outputs, which are sold to tanneries, leather industries, and exporters pretty much like abattoirs • So, we can safely leave aside pursuing hides and skins because this represents interactions within the manufacturing sector

OXEN DRAFT POWER (V2) • See intersection between row 4 and column 2 • The Value added vector (V1, V2, V3) can be divided into payment for services of primary factors used in the process of production • This include • Compensation for labour (own or employed) • Property rents (buildings, land) • Non-livestock capital (rents of machineries or interest payments) • Livestock capital • These do not uniformly appear under all sectors

LIVESTOCK CAPITAL • oxen draft power (part of V2) • Relevant to only the cropping sector • This is NOT livestock sector GDP • It remains as part of crop sector GDP • The estimation is simply to recognise the services of the livestock sector to other sectors in the economy (inter-sectoral linkage effect) • Dairy cows (part of V1) • Much is talked about oxen draft power (inter-sectoral) • Cows also provide the similar capital value, as oxen (intra-sectoral effect – within the livestock sector) • Oxen are used to produce crops, cows are used to produce milk • These two capital services need to be explicitly estimated

CONCLUDING REMARKS • The three industry matrix is intended to provide a conceptual framework that will hopefully guide the estimation of the livestock sector accounts consistent with Ethiopia’s system of national accounts • These slides are prepared to establish a ground work, an essential pre-requisite, conceptual clarity, for successfully complete the task of empirical estimates • It should be noted that the task is not just estimating livestock sector GDP per se but also other related accounts • Perhaps it may not be possible to accurately estimate all entries but I believe it is possible to pull together initial estimates, upon which improvements will be made in the future

CONTRIBUTION OF THE LOVESTOCK SECTOR TO ETHIOPIA’S GDP