Business man working in Addis Ababa (PICHA Stock via Getty Images)
Jobless growth in Ethiopia: Can tradable services drive inclusive transformation?
Ethiopia has achieved rapid growth, but without the expected pattern of structural transformation – workers moved out of agriculture into low-productivity services, while manufacturing delivered productivity gains without creating jobs. This growth was largely driven by within-sector improvements rather than labour reallocation, raising the question: can tradable services, alongside labour-intensive industry, drive inclusive transformation in industrialising economies?
For decades, structural transformation has been understood as the movement of labour from agriculture to manufacturing, and later into services. This was the path taken by advanced economies and east Asia’s success stories, where manufacturing was considered the engine of transformation, combining productivity growth, large-scale job creation, and export diversification.
The classic model of industrialisation is under strain
Yet this model is under increasing pressure. Many developing countries are experiencing ‘premature deindustrialisation’, with manufacturing peaking at earlier stages and lower income levels than in the past. Automation has reduced the labour absorption capacity of factories.
Environmental concerns and stricter global standards have raised entry barriers. Meanwhile, services, once considered to be non-tradable and low-productivity, have become more prominent in many developing economies.
Our recent study of Ethiopia provides a compelling test case. Since the early 2000s, the country has pursued an ambitious manufacturing-led development strategy, investing in industrial parks, infrastructure, and incentives for investors. The critical question is whether this approach has delivered the expected transformation, or whether alternative pathways are now more viable.
Productivity without structural transformation: Strong growth, weak job creation
Between 2000 and 2022, Ethiopia’s economy grew at an annual rate of 8.9% – among the fastest in the world. Agriculture’s share of employment fell by 13 percentage points, releasing millions of workers. Yet manufacturing’s employment share actually declined from 5.2% to 3.1%, even as output expanded. The sector experienced jobless growth: productivity rose, but employment elasticity was close to zero – new production did not translate into more jobs.
Most workers instead moved into informal services such as petty trade and personal services. While these activities provide jobs, they do not result in the productivity gains necessary for sustained transformation, suggesting a horizontal shift rather than an upward leap in the pattern of structural change.
Figure 1: Where did workers go? Change in sectoral employment share in Ethiopia, 2000-2022
Notes: This figure depicts how Ethiopia’s workforce has shifted across various sectors over time. Employment in agriculture declined sharply. However, most workers moved into services, while the manufacturing sector’s employment share fell, indicating that growth in this sector did not translate into job creation.
While Ethiopia’s labour productivity nearly tripled during this period – a striking achievement – over 96% of these gains came from within-sector improvements, rather than structural changes. Between 2015 and 2022, the reallocation effect even turned negative, dragging down overall growth. This pattern reflects a structurally shallow transformation: output is rising, but workers are not consistently finding better opportunities across sectors.
Ethiopia’s uneven transformation: Skills are rising, but opportunities are limited
Ethiopia has invested heavily in education, and the skill level of its workforce has improved significantly. Yet this progress has not translated into better jobs. High-skill, high-productivity service subsectors such as finance, information and communication technology (ICT), and public administration remain small and capital-intensive, and are not creating enough jobs for the large numbers of new graduates entering the labour market.
Meanwhile, most workers remain clustered in low- and medium-skill activities (such as agriculture, informal services, and small-scale manufacturing) where productivity is low, and job quality is poor. The result is a growing mismatch between rising skills and limited employment opportunities.
Figure 2: Skill intensity, labour productivity, and employment share across sectors
Notes: This figure compares the relative skill intensity, labour productivity, and employment share across sectors, revealing that high-productivity and high-skill sectors (such as finance) employ relatively few workers, while most workers remain concentrated in low-skill, low-productivity activities.
Contrary to traditional assumptions, services can be tradable, and in Ethiopia, they already outperform manufacturing when it comes to exports. However, this success is narrowly based. Service exports are dominated by air transport (Ethiopian Airlines) and tourism, while tradable services such as ICT, logistics, and business services remain underdeveloped.
Manufacturing exports, meanwhile, account for less than 5% of total exports, leaving the economy heavily reliant on primary commodities such as coffee and oilseeds. This narrow export base makes the Ethiopian economy vulnerable to shocks and limits the potential productivity gains that more active engagement in global value chains could deliver.
Building a hybrid growth model to navigate Ethiopia’s dual economy
Taken together, the evidence reveals stark dualism with no sign of convergence. Services have absorbed most of the labour force, but mainly in informal and low-productivity segments. Manufacturing shows stronger productivity growth but remains too small to generate jobs at scale.
High-productivity service sectors tend to be domestically oriented and capital-intensive, whereas tradable sectors in both goods and services lack diversity and depth. As a result, Ethiopia’s transformation falls short of the inclusive, export-driven models seen in Asian countries.
Ethiopia’s experience shows that neither manufacturing nor services alone can deliver inclusive transformation. What is needed is a hybrid strategy that strengthens labour-intensive industries, modernises tradable services, and raises productivity in the informal economy. The goal is not just more growth, but growth that creates jobs, broadens opportunities, and builds resilience, which would require:
- Reviving labour-intensive manufacturing: Prioritise garments, leather, and agro-processing by fixing supply chain bottlenecks, logistics, standards, and finance.
- Diversifying tradable services: Build on aviation to expand ICT, tourism, logistics, and outsourcing.
- Upgrading informal services: Provide small entrepreneurs with tailored finance, training, and digital tools.
- Aligning skills with demand: Link education and vocational systems to real opportunities in medium- and high-skill sectors.
- Investing in digital infrastructure: Broadband and digital literacy are cross-cutting and can enable growth across sectors.
What can industrialising economies learn from Ethiopia’s experience?
Ethiopia’s story reflects broader trends across developing countries. The classic industrialisation path is harder to follow when services are absorbing a growing share of labour. But as Ethiopia illustrates, not all services are transformative. Only tradable, skill-intensive, globally connected services can complement manufacturing to drive inclusive growth. Three global lessons emerge from this debate:
1. Manufacturing’s promise is not guaranteed: Output growth will not deliver transformation unless it can create jobs and strong linkages.
2. Services can transform – but only selectively: Informal services often trap workers in low-productivity activities, but tradable services can offer new opportunities.
3. Productivity without inclusion falls short: Transformation must also deliver better jobs for the majority and ensure rising averages
For late industrialisers, the real challenge is not choosing between manufacturing and services, but designing models that pragmatically combine labour-intensive industry, modern tradable services, and upgrading productivity in the informal economy.
Ethiopia’s experience offers both an opportunity and a warning: rapid growth is possible, but without deeper structural transformation, it risks exclusion.