World Bank report says country has achieved its turbo-paced growth its own way—in what is both a compliment and not one. But it could all go wrong
By Lee Mwiti |
Ethiopia has been in the spotlight in recent weeks for both the right and wrong reasons.
The crackdown on Oromo protests over plans to expand the capital Addis Ababa into their lands, in which up to 80 people were reportedly killed, brought fresh criticism of the Horn of Africa nation’s human rights records and democracy credential.
Also, the fact that over two million are in need of food aid, has rekindled debate about whether the Ethiopian government is telling the truth with its economic data, or massaging it to look better than it. In addition, about how the country’s new found wealth is being distributed.
Amidst though, Ethiopia’s economy riveted Africa and much of the world in 2015 – if only in the projects been inaugurated or coming online, despite the dispute over the data year is an understatement.
With a population of 94 million Ethiopia been the continent’s fastest growing country, according to the World Bank. Globally, it comes in fourth after Qatar, Turkmenistan and Azerbaijan, which are all energy producers, making it the swiftest of all non-resource economies. It also beats China, with which it shares certain outlooks, into fifth place, and could further leave it in its wake as the Asian country slows down.
The World Bank late last month released an exhaustive study into Ethiopia’s recent growth, and which captures just how such rapid expansion was possible, and if it is even sustainable.The study,Ethiopia’s Great Run: The Growth Acceleration and How to Pace It, is also notable for the resounding endorsement of its contents by Addis Ababa authorities.
Mail & Guardian Africa kept a close eye on the country’s economic record in 2015, and gleaned 15 notable highlights.
According to official data, Ethiopia between 2004-2014 chalked up 10.9% real GDP growth, and 8% on a per capita basis taking into consideration population growth, shifting it from the second poorest in the world in 2000 to the 11th poorest currently—it is the stability of this growth that is a less told story.
Because, until recently, it managed to avoid drought and conflict-fuelled volatility that had dogged earlier phases of growth, it was able to post a consistent growth that the World Bank describes as “statistically exceptional”. China’s 1977-2010 spurt is the only other instance of per capita growth exceeding 6%, and just two other countries have come even close: Taiwan and Korea.
2: Distinct phases
This growth did not come all at once, contrary to popular perception. It can be broken down into two distinct phases: following the fall of the communist Derg regime in 1991 the new government changed course with a clutch of reforms that saw growth rise from a 0.5% average over 1981-1992 to 4.5% between 1993 and 2004. The country then really took off in the resulting decade, rising to 10.9%.
3: Big agriculture
At the beginning of this later take-off, agriculture was the main growth driver. The sector is by far the the biggest employer in the country, accounting for most of its exports (think coffee for example) and has the second largest output.
As such, despite shifts, it remains an important driver of poverty reduction, and to its credit, the government has placed emphasis on the sector, and now has the world’s highest contingent of extension workers, in addition to other factors like better access to micro-finance and markets. Despite starting from a low base, the area under cultivation has been increased, as has the yield, following a Green Revolution-like push that has seen better seeds and inputs provided. There is an obvious downside—food security remains its Achilles Heel, explaining its strong position on climate change.
4: The services pie
But services have since overtaken agriculture: out of the average 10.9% growth of 2004-14, services accounted for 5.4 percentage points, ahead of agriculture with 3.6 percentage points, and industry with 1.7 percentage points. Services is now a major employer and contributor to economic growth. The scope to grow this pie is wide: the study says that this expansion of services has been predominantly “one of a rise in traditional activities, which require face-to-face interaction*, rather than modern activities such as ICT or finance”. As an example, foreigners are not allowed to participate in the country’s banking sector.
5: Trickled down
Has this super-charged growth trickled down? This tends to be a very contentious issue. As a result of the spurt, poverty (those living on less than $1.90 a day) fell from 55.3% in 2000 to 33.5% in 2011. Interestingly for such rapid growth, the country in that period remained one of the most equal countries, with a Gini coefficient of consumption of 0.30 in 2011. For comparison, The Seychelles, one of Africa’s most prosperous countries, had a coefficient of 94.8. (The Gini index measures the income distribution of a country’s residents—zero represents perfect equality and 1 – or 100% – represents perfect inequality). Life expectancy has increased by one year annually since 2000, while child and infant mortality have also fallen. As a result the country attained most of the Millennium Development Goals (MDGs). “The recent growth acceleration was part of a broader and very successful development experience,” the bank says. The challenge is that the poorest 15% became poorer in 2005-11 due to high food prices.
6: The ‘Ethiopian Way’
This development experience has not followed the usual path. The World Bank’s Commission on Growth Development in 2008 highlighted some trodden paths for high-growth economies, which Ethiopia essentially chucked out of the window. The Bank concedes that despite this, “it did deliver the recommended impressive rates of public investment with the purpose of crowding-in the private sector”. It describes this as accomplished through orthodox ways, including keeping government consumption low and borrowing both domestically and externally on concessional terms.
But it also notes three non-orthodox ways: financial repression that kept interest rates low with the bulk of credit going towards public infrastructure, overvaluing its exchange rate thus making public imports cheap, and monetary expansion, where the central bank directly financed the budget, helping it raise money. The bank terms this approach “The Ethiopian Way”.
7: Infrastructure boom
The result of this has been one of the highest public investment rates in the world, even if from a low starting base (it has the third largest infrastructure deficit in Africa). The launch of its light rail system in September, sub-Saharan Africa’s first, was one visible return of the policy. The government deliberately emphasizes capital spending over consumption in its budgets, and with the resulting “peace dividend” with the decline in military spending following its 1998-2000 war with rival Eritrea, accelerated this shift towards infrastructure, giving it solid economic returns.
8: Getting it right
“The Ethiopian Way” might raise eyebrows among more conventional economists, but there is more experience of it at work. When credit to the private sector falls, the exchange rate rises, and inflation also goes up, tending to have a negative macro-financial growth. Ethiopia experienced all three in its rise, but surprisingly, the negative effect was small, at 0.44 percentage points, the study notes.
Essentially, this resilience on non-orthodox policy informed the high economic growth on the back of infrastructure investment. “Ethiopia’s experience supports the impression that ‘getting infrastructure right’ at the early stage of development can go a long way in supporting growth,” the study notes.
9: More FDI
However, it sometimes also means growth does not follow the script. The government envisioned a shift where workers move out of agriculture and into manufacturing. But for Ethiopia, economic activity has moved from agriculture into construction and services, by-passing the all-important phase that is industrialization. This has seen the government move to attract more foreign direct investment into light manufacturing, including in industrial parks.
10: Demographic dividend
The country has also reaped a “demographic dividend”—its economic ascension came at the same time as a rise in the share of the working-age population, adding millions to its labor ranks. The study attributes up to 13% of per capita growth between 2005-2013 to this effect, which it will continue to reap from, but notes that a decline in fertility and an increase in skills will give it even more benefits.
11: China but…
Inevitable comparisons are drawn with China and the East Asian economies, given the long spell of double-digit growth. The study says that for Ethiopia to match up, it will need to increase productivity, both structurally and in specific areas such as agriculture, invest more in technology and manage urbanization, and attract even more FDI. Recent protests over the expansion of its capital have highlighted the risks inherent, as the growth has come into conflict with tradition.
So what could hurt the growth? A slowdown in world trade for starters, a lack of diversification and the small financial sector are among the red flags. By using a range of models, the study suggests a likely range of GDP growth between 4.5% and 10.5% over the next ten years, depending on the policies adopted.
Three key reforms are suggested: supporting private investment through credit markets where they have been crowded out, identifying more sustainable ways of financing infrastructure such as raising tax revenues and involving the private sector more, and structural reforms such as financial and trade or services liberalization. The possible gains are immense—for example matching China’s transportation services would see productivity gains of 4.2%. In other words Ethiopia is possibly the one country that seemingly most in control of its destiny in its march towards being a middle income country by 2025.
Source: Mail & Guardian Africa
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