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Under the Radar: Ethiopia’s economic growth offers opportunities and challenges

Addis Ababa is a very active city even by night. Taken near Bole MehaneAlem – Edna Mall.

Not many may know that Ethiopia was among the first countries to join the International Monetary Fund (IMF) when the latter was formed on 27 December 1945.  Nevertheless, it took another 72 years for Ethiopia to welcome its first visit from the IMF Managing Director, in this case, Christine Lagarde who in December 2017 visited Addis Ababa, Ethiopia and met with Prime Minister Hailemariam Desalegn. This followed the IMF’s  assertion that in 2017 Ethiopia’s economy surpassed Kenya’s to become East Africa’s largest economy. Lagarde’s visit served as the latest stamp of approval for Ethiopia’s bold plan to reach lower-middle income status by 2025.

Ethiopia’s growing economy

It was Ethiopia’s late President Meles Zenawi who crafted Ethiopia’s ambitious goal of becoming a lower middle-income country by 2025. Following victory in 1991, the ruling Ethiopian People’s Revolutionary Democratic Front (EPRDF) set in motion far-reaching economic reforms aiming to transform this poverty-stricken nation into a “developmental state” while maintaining an iron grip on power. Although achieving lower middle-income status by 2025 is ambitious, Ethiopia is making strides in combating poverty and improving economic conditions with the poverty rate falling from 44% in 2000 to 23.5% in 2015-16 (IMF, 2017).

Ethiopia’s government has made great strides in raising Human Development indicators, increasing female labour force participation as well as pursuing pro-poor growth policies. In the last decade Ethiopia has consistently registered double-digit GDP growth buoyed by state-led investments in infrastructure and manufacturing. According to the IMF Ethiopia’s economy will expand by 8.5% in 2017/18.

This growth will be supported by infrastructure spending and Ethiopia’s attempts to become a regional manufacturing base, in contrast to resource dependent economies in Africa such as Nigeria. The 2014 fall in commodity prices has had a negligible impact on Ethiopia’s growth trajectory and for this reason Ethiopia is becoming the new standard for a working, non-resource rich, African economy.

Ethiopia’s investment in infrastructure and manufacturing

Ethiopia is driving economic growth through the government’s laser-like focus on sectors such as manufacturing, energy and infrastructure. A notable example can be found in the Grand Ethiopian Renaissance Dam (GERD) where Ethiopia plans to leverage the Blue Nile to become Africa’s largest exporter of electricity. Although the GERD will boost the economy and meet Ethiopia and its neighbour’s energy needs the plan is facing severe pushback from Egypt which is traditionally the kingmaker when it comes to the River Nile. How Ethiopia negotiates this risk will be a key indicator of whether it achieves its goal of becoming a regional power supplier to neighbouring countries vis-à-vis Tanzania, Uganda and Sudan.

In terms of infrastructural investments, Ethiopia is fast becoming a destination of choice forChinese investors. 2018 was ushered in with the opening of the Addis Ababa–Djibouti Railway which cost $4 billion and was funded by Chinese state-owned rail and construction firms as part of China’s transformative One Belt One Road Initiative. The Addis Ababa-Djibouti Railway connects the landlocked Ethiopia to Djibouti’s port which is significant as Djibouti handles 95% of Ethiopia’s cargo. With a growing population of 105 million Ethiopia is waking up to the perils of its landlocked status and dependence on Djibouti’s ports as proven by its recently acquired stake in Somaliland’s Berbera port. The ways in which Ethiopia capitalises on its economic linkages with neighbouring states will be key to it reaching lower-middle income status by 2025.

In addition to state-led Chinese investment, private Chinese companies have also invested in Ethiopia, creating over 28,000 jobs, mainly in the manufacturing sector. It was during the 21-year reign of autocrat Meles Zenawi that Ethiopia put in motion its industrial strategy that prioritises labour intensive sectors such as manufacturing as a means to create employment opportunities for its large and mostly poor population. Ethiopia has seen some success in manufacturing due to the creation of various industrial parks and the reduction of bureaucratic red tape for businesses through the introduction of “one-stop shop” type regulatory services from the government.

Outlook

Ethiopia’s new-found economic confidence is embodied by its state-owned, national carrier Ethiopia Airlines which has grown to become one of the world’s fastest growing airlines.Ethiopia Airlines recently overtook South Africa Airways to become Africa’s largest carrier in terms of revenue and profit. Ethiopia Airlines has succeeded through its policy of establishing multiple global hubs and expanding to more than 120 destinations with regular flights to key cities such as Rio De Janeiro, London, Shanghai, Beijing and Washington DC among others.

However, Ethiopia’s most consistent economic risk factor is its historically weak private sector. Ethiopia’s policy of “state-led capitalism” has prevented the emergence of a strong private sector, especially when compared to regional peers such as Kenya where the dynamic private sector is driving growth. To put this into perspective, Ethiopia’s 105 million citizens are served by the state-owned Ethio Telecom which has a monopoly on all telecommunication and mobile services. The Ethiopian government is waking up to the need for competition in key sectors as highlighted in the second Growth and Transformation Plan (GTP II) which aims to strengthen private sector development andincrease FDI.

Despite this, the state has no shown no appetite for privatisation in key sectors such as telecoms and banking where it considers state-owned monopolies and enterprises as cash cows. Going forward, Ethiopia’s ability to reach lower-middle income status by 2025 will be characterised by its ability to reduce the power of large, state-owned enterprises (SOE’s). Other policies for the state to pursue include implementing Public-Private Partnerships (PPP’s) and economic reforms aimed at driving efficiency and stimulating competition in the economy.

Although Ethiopia has made great strides in terms of development, it is in the political sphere that Ethiopia faces the greatest risks in the medium and long term. Although Ethiopia’s “Ethnic Federalism” governance model afforded it stability during the reign of strongman Meles Zenawi, recent cracks have emerged under Prime Minister Hailemariam Desalegn. Examples include the ongoing protests of Oromo activists opposed to the government’s forceful seizure of their ancestral lands around Addis Ababa in the name of FDI. As such, Ethiopia’s ability to maintain consistent economic growth will be tied to its ability to integrate marginalised communities who need to be persuaded that they too have a stake in Ethiopia’s bold, new future.

 

This article was first published on Global Risk Insights and was written by Bashir Ali.

 

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FPA Administrator
FPA Administrator

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