Ethiopia, like many of Africa’s new growing economies, began achieving high growth rates from a low base, writes William Gumede.
Thirty years ago, in 1984, Ethiopia was plunged into a terrifying famine, with hundreds of thousands starving to death and the economy in freefall.
For aboutt 10 years, the country has notched up double-digit economic growth rates. The average annual rate in the past 10 years has been 10.9 percent, according to figures from the African Development Bank.
By contrast, other sub-Saharan African economies grew 5.4 percent on average in the same period.
By the end of the 2012-13 fiscal year, Ethiopia’s economy had grown by 9.7 percent, according to the 2014 Economic Report on Africa from the UN Economic Commission for Africa. This year it will probably show bumper growth.
Ethiopia, like many of Africa’s new growing economies, began achieving high growth rates from a low base. Of course, in spite of its stellar growth, Ethiopia remains one of the poorest countries in the world.
It wants to become a middle-income country by 2025. This is defined by the World Bank as a country with a gross national income for each person of about $1 430 (about R16 500) a year. Ethiopia’s figure is low: $470 compared with $3 187 in Egypt and $7 508 in South Africa.
What is fuelling Ethiopia’s high growth rates? The large services sector and agricultural production have been significant factors. The country’s main exports include coffee, horticultural products and livestock.
Agriculture has been increasingly commercialised. Services are the largest sector because of the rapid increases in the size of the public sector, in financial intermediation, public administration and in retail business activities.
Ethiopia’s public investment has been driven mostly by the state. For example, two thirds of Ethiopia’s 8.5 percent GDP growth in 2011-12 were due to public investment, according to the World Bank.
Public investment in Ethiopia is the third highest in the world as a percentage of GDP and private investment is the sixth lowest, according to World Bank figures.
A large sum has been injected into a massive infrastructure drive that includes a multibillion-dollar plan to build a hydro-power dam on the Nile.
Ethiopia has spent more than $3.6 billion on road construction in the past 10 years. There has also been a dedicated effort to improve access to basic public services.
Remittances by Ethiopians living abroad to relatives and investment have risen considerably, contributing to the growth spurt. The World Bank estimates that Ethiopia gets about $3.5bn a year from its diaspora. It is reckoned that 14 percent of adult Ethiopians receive on average $600 in remittances from relatives – in five transfers a year on average.
About 20 percent of the national budget is from foreign aid and loans.
Ethiopia has made significant progress in slashing red tape, trying to make it easier for residents to set up businesses. To stimulate Ethiopian industry, the country has closed major sectors, including retail, transport, banking and telecoms to foreigners.
Importantly, it is one African country that has built a manufacturing industry from an almost zero base, as part of a dedicated strategy.
The country has used its large cattle stocks to produce leather products and is exporting leather shoes to the US and the EU.
Can Ethiopia sustain the growth and make it more inclusive?
Its high growth rate mimics a classical economic take-off phase. Many African countries experience such growth after decades of economic stagnation and political instability. The challenge is to make such economic take-offs sustainable.
Initial state investment-led growth reaches a point where it needs to pull in the private sector by creating a critical mass of new industries or by forging partnerships with foreign companies. Over the past 50 years, many African countries have been unable to replace initial growth with growth in the private sector.
Ethiopia’s Growth and Transformation Plan is not giving attention to this. Sadly, almost every African country has yet to learn this painful lesson from 50 years of post-independence development.
As the African Development Bank points out, Ethiopia’s economy is vulnerable to exogenous shocks because of its dependence on primary commodities and rain-fed agriculture. Any slight global changes in the prices of coffee or fuel can destabilise the economy.
Agriculture has been expanded by extending the area of cultivated land, not by increasing production.
Ethiopia is one of the few African countries that have genuinely focused on building a manufacturing base that can create a sizeable number of jobs and substantially undo poverty and inequality. However, the manufacturing sector is contributing less than 5 percent of GDP growth. Ethiopia needs a well thought-out industrial policy to diversify its economy.
Growth, as in many African countries, is benefiting only small elites. According to a survey by the consultancy New World Health, between 2007 and last year, Ethiopia had the most new dollar millionaires in Africa. Most of the beneficiaries are the elites linked to the ruling Ethiopian People’s Revolutionary Democratic Front.
The lack of genuine democracy and the crushing of critical voices is undermining the potential for higher economic growth rates.