The Rise of an African Lion: Ethiopia and Chinese Investment

Ethiopia is having a moment in the sun. The country is enjoying a sweet spot of economic growth, foreign donor approval and the emergence of a manufacturing base. Economic success has been topped off by a new liberalising government which recently appointed the country’s first female President a former diplomat Sahle-Work Zewde.

China’s Role in Ethiopia

Could some of this success be due to a certain foreign investor? Chinese investment in Ethiopia have soared over the last decade, (averaging 10% a year over the last decade). Ethiopia’s state led national development plan owes much to Chinese economic policy. In addition China has backed a number of major infrastructure projects. The crown jewel of their cooperation is a new rail line between Addis Ababa to Djibouti. Other projects include a light rail system in the capital, the construction of the African Union HQ (also in Addis Ababa) and the Tekeze Arch Dam.

The new railway gives Ethiopia a vitally important route to the Indian Ocean and the transportation of goods to the coast. This should prove a major boon for a country which has ramped up its textile manufacturing base, exporting footwear and clothing to Europe and beyond.

In many cases these factories have been driven by Chinese investment – many industrialists are looking beyond China as costs increase and now the spectre of a trade war with the US could make non Chinese countries even more attractive as export bases. The result is a multitude of new factories and industrial parks like Hawassa which are signals that African manufacturing could become a major force.

What is less clear is whether China will allow Ethiopian textile exports into China potentially undermining domestic producers. Ethiopia has had more luck selling coffee and raw hides to China. However Ethiopia doesn’t just want to be a commodity exporter and so its government is trying to pride open the Chinese market for its manufacturers.

Political Change in Ethiopia

Ethiopia has experienced positive political change this year, a new government has ended an internet black out, concluded a peace agreement with neighbouring Eritrea, freed political prisoners and ended the country’s state of emergency.

The government is liberalising its economy allowing foreign investors to buy stakes in the crown jewel of the corporate sector – Ethiopian Airlines, which has an excellent continent wide reputation. The other giant state owned firm now up for grabs is Ethio-telecom – with 100 million people many of which are still to start using the internet. This means the Ethiopian market has massive potential and mobile phone providers are particularly eager at the prospect of taking a bite from this particular telecom flavoured pie.

What Next For Ethiopia?

But its not all positive, the new government faces risks that the economic boom will run out of steam and while allowing the private sector a greater role will cheer western observers like the IMF. There are are no guarantees that this “reform” will help Ethiopia. In fact many will point to the fact that the existing state driven model has produced strong growth over the past decade or so.

Doubts are creeping in about the Ethiopian economy among Chinese investors and Western observers. Rising debt levels, a lack of foreign exchange along with political change has left many Chinese investors are worried they have overextended and have risked too much in Ethiopia.

The South China Morning Post recently published an article criticising the Addis Ababa – Djibouti railway, saying planning had been inadequate and too much money had been wasted. The article added to the chorus of criticism faced by Belt and Road initiative as many complain about the poor standards around many of the projects.

What happens next in Ethiopia is hugely important. Can a new government maintain sustainable growth in the face of increasing headwinds and will Chinese investors hold their nerve and continue to back what could become one day the continent’s second biggest economy.

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