Economic analysis and development of Ethiopia

Economics - Country Analysis

Country Overview and Current Events (News)

Ethiopia, traditionally known as Abyssinia, is a landlocked Sub-Saharan country located at the Horn of Africa in East Africa, bordering Somalia, Kenya, Eritrea, Djibouti, Sudan, and the newly-created South Sudan. It covers approximately 1,126,829km2 of land; about the size of the state of Texas, and was, until the split of Sudan, the second-largest country in Africa. Being landlocked, Ethiopia largely relies on the port of Djibouti, to which it is connected by both rail and road. Economic elements such as this, together with the country's history, population, geography and economic performance have been explored in the subsequent sections of this text.

Population: the U.S. Census Bureau, in June 2013, estimated Ethiopia's population to be 93,877,025; a figure that makes the country the second-most populous in Africa, after Nigeria (World Bank, Index Mundi). Ethiopia's population has been on a steady increase and so has the labor force, which rose steadily from 33.8 million in 2004 to 43.9 million in 2012 (Index Mundi, 2013). Despite the apparent labor force growth, Ethiopia is widely regarded a poor country, with an approximate 38.7% of its citizenry living below the poverty line, a low life expectancy of 54 years, and a dependent population of 85% the total ( 79% youth dependency and 6% elderly dependency) (Index Mundi).

Political and Historic History: save for the 1936-41 invasions by Italy, "Ethiopia has never been colonized" (Nations Online). Emperor Haile Selassie dominated the country's politics from 1930 to 1974, when he was deposed by military junta Mengistu Hailemariam (Nations Online). Hailemariam's socialist stand did not go down well with anti-socialist organizations, which organized large-scale uprisings and coup attempts against the administration. Drought and refugee crises rocked the country and Hailemariam' administration was finally overthrown by the EPRDF and anti-socialism rebel forces in 1991 (Nations Online). Meles Zenawi took over as ruler, gaining the title 'prime minister' after the adoption of the country's new constitution in 1994 - a position he held until his death in 2012 (World Bank). The new constitution effectively brought to an end Ethiopia's thirty-year-old struggle with Eritrea, and instigated the nation's first multiparty elections in 1995. Following Zenawi's death, Hailemariam Dessalegn took over as prime minister in a historically peaceful power transition (World Bank).

Democracy: Prime Minister Dessalegn and his predecessor Zenawi both belong to the Ethiopian People's revolutionary Democratic Front (EPRDF), which has been leading "an ambitious reform effort to initiate a transition to a more democratic system of governance and decentralize authority" (World Bank). The party's efforts have seen powers devolved from the central government to regions, district authorities and village authorities (the World Bank). Leaders are elected through a two-phase democratic voting process, involving parliamentary and national elections (World Bank).

Economic System: Ethiopia's economy displays characteristics of both communism and socialism. This is quite reasonable, given Prime Minister Zenawi's communist stand. There is a significant degree of government intervention in the economy, with efforts aimed at rationalizing the same currently ongoing (MSU). The recent past has seen the Ethiopian government offload a number of state-owned corporations to the private sector, and take control of others such as the crucial sugar corporations, which are considered key to the implementation of the Growth and Transformation Plan (2010-2011 through 2014-2015) (MSU).

Family Income Distribution: the extent to which a country's income distribution deviates from the ideal is measured by the Gini coefficient, where 0 represents perfect equality and 100 perfect inequalities (World Bank). In calculating the Gini index, a country's "cumulative family income is plotted against the number of families, arranged in an ascending order," to give rise to the Lorenz curve (Index Mundi). The "ratio of the area between the Lorenz curve and the 45-degree line" representing ideality, to that of the triangle "below the 45-degree line" is in basic terms the Gini Index (Index Mundi). Ethiopia's Gini Index was measured at 33.6 in 2011, down from 40 in 1995; a figure that makes the country the most equal, in terms of family income distribution, in the East African region (World Bank).

Economic Size: with $410 as its per-capita income, and which is essentially "lower than the regional average," Ethiopia could be regarded one of the poorest nations, not necessarily in the region, but across the world (World Bank). This is despite the strong broad-based growth recorded by the Ethiopian economy in the past decade (World Bank). The GDP growth during this period averaged 10.6% p.a., more than double the regional average (the World Bank). Increasing levels of public investment and private consumption have been put forward as possible reasons behind the increase (OECD 138). The latter is more significant, especially because of the increasing size of the agricultural sector as a result of technological advancement. The government expects the economy to achieve middle-income status by 2023 (the World Bank).

Average Educational Attainment: approximately 60% of Ethiopia's population (aged 15 and over) is uneducated, with only less than 10% of the entire workforce having attained post-primary education (Index Mundi). Women make up approximately 60% of this uneducated percentage (Index Mundi). Ethiopia is one of the developing countries that experts believe will still have a relatively large uneducated population in 2050 (Index Mundi). High levels of illiteracy have been found to be an impediment to economic development because they translate to low levels of innovation, and make a country unable to compete in the fast-paced technology-driven world.

Primary Language and Ethnic Diversity: Whereas English is widely taught in Ethiopian schools, Amharic is the official language (Index Mundi). Ethiopia is rich in ethnic diversity, comprising "of more than eighty ethnic groups and as many languages" (Nations Online). The Oromos, Amharans and Tigrayans are the largest linguistic and ethnic groups (Index Mundi). The country's new constitution, promulgated in 1994, guarantees the different ethnic groups their political, cultural, as well as religious rights (Nations Online). More than 80% of the population belongs to the Ethiopian Orthodox and Muslim faiths, with Protestants, Catholics and traditional believers taking up the remainder (Index Mundi).

Natural Resource Endowment / Major Industries: agriculture and mining are the main industries in Ethiopia. Agriculture contributes approximately half of Ethiopia's GDP, not less than 75% of total exports, and is the largest employer in the economy (MSU). Coffee is the country's leading export and foreign exchange earner - although khat, oilseeds, pulses, and leather goods also contribute significantly to the export base (MSU). Tantalum, marble, gold and limestone are the main non-agricultural exports, with gold bringing in almost 20% of annual export proceedings (MSU). The country is also endowed with iron ore deposits, potash, and natural gas (MSU). The economy's potential has, however, yet to be fully realized, mainly because of poor governance, corruption and high illiteracy levels (MSU).

The Global Recession: with a population exceeding eighty million, Ethiopia happens to be one of Sub-Saharan Africa's fastest-growing economies. Although the country recorded a modest fall in foreign investments, remittances and exports in the years immediately following the 2007 financial crisis, current statistics, as shown and analyzed in part two of this text, indicate not only recovery, but improvements above pre-crisis levels (Index Mundi, World Bank).

Critical Issues Facing Ethiopia

HIV / AIDS: there has been a significant decrease in the number of HIV-related deaths in Ethiopia (280, 000 in 1999 to 67,000 in 2007) (Index Mundi). HIV is, however, still a fundamental concern because this figure is still substantially high, especially when compared to figures obtained from the developed world.

Poverty: 29.6% of Ethiopia's population lives below the poverty line (World Bank). This represents a 9.1 percentage point decrease from the 38.7% figure reported in 2005 (World Bank). The decrease in poverty levels can largely be attributed to the implementation of the Growth and Transformation Plan (GTP), which seeks to further bring down the said levels to 22% by 2015 (World Bank). The plan comprises of a number of MDGs (millennium development goals). The country has already achieved the MDG "for child mortality and is on track for achieving them in gender parity in education, HIV / AIDS and malaria" (World Bank).

Summary

It is undisputable that Ethiopia has a rich natural resource endowment, is strategically located, enjoys a wide range of cultural, ethnic and religious diversity, and is one of the world's oldest civilizations. Moreover, compared to other East African countries, Ethiopia is seen to display a stronger, more equitable economy, relatively steadier GDP growth, and more commitment towards the fulfillment of long-term development plans. The question then, is; why isn't Ethiopia the most developed country in the East African region? The next step in this study involves establishing the possible reasons as to why Ethiopia's economic state is not representative of the advantages and strengths it enjoys.

Part 2: Macroeconomic Analysis: Creation of Tables and Graphs of Data and Analysis of Data

I) Real GDP Growth

Table 1: Ethiopia's GDP Real Growth Rate between 2001 and 2011

Year

Real GDP Change

2001

7.3

2002

5.5

2003

-3.8

2004

11.6

2005

8.9

2006

10.6

2007

11.1

2008

11.6

2009

8.7

2010

8

2011

7.5

Source (Index Mundi)

Figure 1: Ethiopia's GDP Real Growth Rate between 2001 and 2011 Source (Index Mundi)

Ethiopia's economy is not only one of the fastest-growing among Africa's non-oil producers, but is also among the best performers in Sub-Saharan Africa (Nganwa, 2013). As figure 1 depicts, the country witnessed rapid economic growth between 2003 and 2004, with the growth rate rising from -3.8%, to an all-time high of 11.6%. It subsequently fell gradually in the years following 2007, but still sustained a higher-than-the-regional-average growth rate during this period (Nganwa 11). The country's real GDP growth rate averaged 9.8% between 2004 and 2011, significantly above the 4.5% Sub-Saharan average, the 7.5% East-African average, and "the estimate growth rate of 7% required to achieve the MDG of halving poverty by 2015" (Nganwa 11).

The 2003 slump in GDP growth was due to the aggravation of the country's difficult food situation by the 2002/03 drought, "which has been described as the worst since 1998/99" (OECD 135). The fall in the country's real GDP in that year only compounded the pervasive poverty situation; the number of people in need of food assistance rose from the normal 5 million to an all-time new level of 12.6 million (OECD 135). Real GDP growth averaged 11% between 2006 and 2008, and then began to fall, as the economy grappled with the effects of the 2007 financial crisis (Index Mundi). The high GDP growth between 2005 and 2008 can be attributed to the effective economic policies and strong donor support instigated after the 2002/03 drought, to prevent reoccurrence (OECD 135).

i) Inflation

Table 2: Ethiopia's Inflation Rate between 2001 and 2012

Year

Inflation Rate

2001

6.8

2003

17.8

2004

2.4

2005

11.6

2006

13

2007

17.2

2008

44.4

2009

8.5

2010

7

2011

33.2

2012

22.8

Source (Index Mundi)

Figure 2: Trends in Ethiopia's Inflation Rates between 2001 and 2011

Source (Index Mundi)

The decline in public debt between2007 and 2010 can be attributed to two major factors. First, the United States, which is Ethiopia's largest bilateral donor, was facing revenue shortages occasioned by the 2008 financial crisis, and the Ethiopian government had to, as a result, put in place fiscal flexibility concerns for addressing its revenue shortfalls. Through these flexibility attempts, the government was able to cut down on recurrent spending, without having to compromise development spending (Nganwa 4). Foreign borrowing was substituted with domestic borrowing, because the low inflation during the period resulted in low interest rates, and, thereby, favored the domestic bond market. The appreciation of the Ethiopian Birr during the period is another possible explanation (Nganwa 4).

v) International Trade Measures

Table 6: Ethiopia's Current Account Balances (2004-2011)

Year

2004

2005

2007

2008

2009

2010

2011

Current Account Balance

(464.4)

(844)

(826.8)

(2000)

(1996)

(1905)

(1656)

(Source: Index Mundi)

Figure 6: Ethiopia's Current Account Balance (2004 to 2011)

Ethiopia, like many other developing nations, has had a streak of negative current account balances, because its main export commodity is agricultural produce, which is significantly low-valued compared to the high-cost petroleum and machinery inputs it is forced to import from the world market. The balance of payments (bop) was, for a developing country such as Ethiopia, relatively favorable prior to 2008. The worsening of the bop in 2008 could be attributed to the post-poll violence that rocked Kenya, a neighbor that the landlocked Ethiopia relies on to a significant extent, at the beginning of that year. This is because, due to the instability in Kenya, Ethiopia could hardly get its exports, a bulk of which is perishable agricultural produce, to the export market. Export revenue fell, but imports remained relatively constant, resulting in the worsening of the bop. The situation remained fairly constant after 2008, as the country grappled with reduced transfers from abroad, and declining global demand occasioned by the 2008 financial crisis. There has, however, been notable improvement in the bop in the last couple of years, a trend that can be taken to symbolize economic recovery.

Critical Issues Facing Ethiopia

Poverty: according to the Ethiopia Household Income and Consumption Expenditure (HICE), the proportion of poor Ethiopians fell significantly from 38.7% to 29.6%, and the poor gap index, from 8.3% to 7.8%, between 2004 and 2011 (Nganwa 6). Despite this decline in the intensity of poverty, the severity of poverty has increased from 2.7% in 2004 to 3.1% in 201, implying that a poor person was worse off in 2011 than they were in 2004 (Nganwa 6). Experts believe that programs should be designed as to reach the chronically poor (Nganwa 6). Afar, Somali and Tigray are the poorest regions (Nganwa 6).

Vulnerability and Humanitarian Situation: Ethiopia is prone to frequent floods and drought, the most recent being the failure of two consecutive rainy seasons in October/December 2010 and March/May 2011, which gave rise to inter-communal conflicts over water and pasture (Nganwa 7). Such shocks, when coupled with poor sanitation, chronic poverty, over-reliance on agriculture, and the ever increasing population of refugees from the war-torn nations of Somalia and South Sudan "increase vulnerability during humanitarian crises" (Nganwa 7).