Ethiopia: Africa’s Economic Powerhouse?

Can Ethiopia make the leap from a high performing frontier market dependent on commodity exports to a middle income country with a sizeable industrial sector. If successful it would make it one of Africa’s biggest economies. The government hopes the answer to this question is positive and lies through adopting agricultural led industrialization as determined by its five year growth and transformation plan (GTP).

For a long time Ethiopia has been a prisoner of its past. Marxist revolutions, the Red Terror and biblical famines are now thankfully fading memories. But at the same time many problems cannot be masked by its current high growth. The country remains poor and many believe substandard governance will hold it back in the longer term.

Crossroads

Countries at a crossroad are a cliché in language of politics and economics, but it is safe to say Ethiopia is certainly at an interesting point in its development. The country has enjoyed exceptionally high Chinese style growth over the past five years, 2010 saw an eye watering 11.4 percent increase in GDP. 2014 was a much more modest 8.5 percent, even taking into account poor statistics gathering these figures have placed Ethiopia in the top 10 growth spots in the world.

This economic performance has been guided by tight monetary policy, which has kept a lid on inflation, but also through the GTP. Taking inspiration from their Socialist roots, but adapted for a free market world the government instituted this five year strategy to encourage growth via promoting high value agri-exports such a flowers and coffee alongside an industrial policy which has seen the emergence of a nascent textile and footwear manufacturing base which is now exporting to Europe.

The government have also been active in building new infrastructure such as roads, rail and dams, creating demand and employment as well as a bedrock for future development. A recent example of this is a new light railway in Addis Ababa which has been a highly visible and traffic relieving example of these efforts. Unsurprisingly to Sino-Africa watchers the rail scheme was financed by the Chinese Export – Import Bank and built by the China Railway Group.

GTP II

This policy has clearly been a success and the second iteration GTP II will come into effect next year. Like all sequels there is a danger that it will fail to live up to the original. The GTP comes at a price, any plan of this nature comes with heavy investment input and total public debt as a percentage of (a fast rising) GDP has risen from 39.4 % to 54.3% which while not unsustainable, will cause serious concern and become a red flag if it rises much further. Deficits of this nature can rise dramatically and can lead to panic spending cuts as governments realise to late they have overspent or under taxed and should have been “fixing the roof while the sun was shining”.

This scenario is not yet the case, but the government now faces a fundamental dilemma, facing falling growth, does it slow public spending to ensure its debt does not become unsustainable, or does it push full steam ahead with GTP II and hope more infrastructure spending and industrial growth stimulates the economy providing more revenue.

GTP II will seek to build on the success of the country’s efforts in power generation, while there have been big projects, like the Grand Ethiopian Renaissance Dam the country still only has 3 Giga Watts of power available – compared to South Africa’s 45 Giga Watts –  a country which still suffers rolling black outs. It is clear Ethiopia has a long way to travel before it can become an industrial power.

Darling of the Aid Community?

Fortuitously the government has also been a the beneficiary of the aid community, which has been generous with the country that many are keen to tout a development success story. Ethiopia also falls into the category of very poor and fragile, two afflictions which currently attract donor funds.

The donors of Western Europe have been chipping in with around 15 percent of Ethiopia’s budget over the past few years. If the country continues to develop economically this support could slacken and of course this would represent success as the country weans itself off aid dependency, but if it happens too soon the government will face huge and potentially destabilising pressure to cut its budget.

Ideological Shifts

Behind these changes has been the Ethiopian leadership’s long term ideological shift from socialism to market based thinking, the mass privatisation of many firms started in the 1990s and has continued until the present. But the government, like their friends in Beijing, keeps its hands on the tiller of the economy and sensitive areas like finance remain in Ethiopian hands and country remains a difficult place to do business, while foreign investment is officially welcome, the actual experience can be less agreeable.

Doing Business

The country also ranks badly on the ever growing number of indicators produced by think tanks, such competitiveness, governance, human development, while much of this can be explained by fact the country is still fundamentally very poor, many believe it could be making more effort to improve its competitiveness score – it does badly on the “Doing Business Survey” published by the World Bank, although the government would contend (like many others) that the survey does not represent reality.

Industrialisation – Horn of Africa Style?

The country has made a breakthrough – industrialisation is a successful strategy for development, albeit a dirty unpleasant one. Ethiopia latched on early to the China offshoring trend and has now developed a credible textile export market to Europe. The success of the landmark Huajian factory was rightly lauded but one textile plant does not equal an industrial revolution. But now Ethiopia is seeing this successs being replicated across the country.

In the longer term this should mean  aggressively trying to wrest market share of textile manufacturing from Asia while ensuring the institutional framework for industry is there, this means access to finance, a labour force willing to do the work and ensuring decent infrastructure, cheap energy and transportation are in place to allow factories to flourish. This is not an easy process by any means, plus the costs in terms of environmental and social costs can be enormous.

A New Tourist Destination?

The country has massive potential to develop its tourist industry, beautiful landscapes, stunning scenery and for many a fascinating history and culture, all should make it a big draw. Instead people go to Kenya and Egypt. This could change of course, travellers are always looking for new destinations. Addis Ababa is already a major air hub thanks to the success of Ethiopian airlines, which has been partly privatised and rapid growth over the past five years has seen it become the biggest airline in Africa by fleet size and it could overtake South African airlines in terms of passengers carried in the next year or so.

Permanent Revolution

Ethiopian politics remain firmly authoritarian, elections are a formality, serious opponents are imprisoned or exiled, while many of the remaining opposition parties are puppets, orchestrated by the government to create an illusion of democracy. For now the ruling party – the Ethiopian People’s Revolutionary Democratic Front (another revolutionary party who have not updated their name), remain firmly in control.

If the country does develop and a significant middle class emerges the party has a dilemma – does it loosen its grip and allow greater democratic freedom or risk unrest if the economy turns south. It is pretty clear that they will opt to keep a tight grip on the country, even at the risk of alienating their donors from the West. Of course Beijing is a much more attractive example to those in charge in Addis Abba – their model of Red Capitalism with no move towards democracy is a beacon. For more on the close relationship between China and Ethiopia click here.

Some have likened Ethiopia to Vietnam twenty years ago – a apt analogy given their similar relative population size (90 million give or take), backgrounds as socialist states and subsequent move towards the free market and industrialisation make for an interesting parallel, of course Vietnam is a lot further down the road than Ethiopia and an indication of what can be achieved.