Despite the liberalization program that Ethiopia embarked upon since 1992 aggregate indicators of poverty and inequality largely remained unchanged. This paper addresses why incomes and inequality largely remained stable at a time of fundamental changes in macroeconomic policy environment. We have used both data exploratory analysis as well as earning and occupational choice modelling, together with counterfactual simulation, to investigate this issue. The study showed that the absence of change in aggregate measure of poverty and inequality hides an enormous change that occurred across different income categories. This shows the importance of understanding the labour market to understand the policy propagation mechanism through which macro policy is expected to affect poverty. The study has show that although there seem to be limited change in poverty and inequality at aggregate level, there is significant change within and across categories of households. Thus different household are affected differently by the reform. The level and distribution of household incomes is found to depend on the structure of returns to labour and on the occupational choice the households made. Thus, policy effectiveness of poverty reduction policies could be achieved if we understand the workings of the labour market and how it affects both level and distribution of income across different categories of income & sector.


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