Ethiopia: An analysis of recent economic growth and potential challenges

05.02.2014

Ethiopia’s much vaunted recent economic growth belies the reality on the ground. Suggestions of rapid socioeconomic transformation to a middle-income economy are likely to prove fanciful, unless urgent significant national concerns are addressed

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Nestled in the turbulent Horn of Africa (HOA) region, Ethiopia is Africa’s oldest independent modern nation-state and second most populous. [1] The second poorest country in the world according to the United Nations Development Programme (UNDP) Multidimensional Poverty Index, [2] Ethiopia consistently ranks extremely low upon a variety of socioeconomic, development and human rights indicators. [3] Recently, however, Ethiopia has experienced economic growth – making it amongst ‘Africa’s best performing economies.’ [4] This development reiterates the Ethiopian government’s lofty ambitions to attain ‘middle-income status by 2020.’ [5] The validity, sustainability, and possible ramifications of Ethiopia’s purported and ambitious economic transformation in the near future – which could prove beneficial domestically and regionally – merits closer analysis.

Figure 1

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*Source: African Development Bank: African Economic Outlook [6]

To begin with, it is important that Ethiopia’s economic growth translate into broad scale development. While Ethiopia has reportedly witnessed tangible progress on the UN’s Millennium Development Goals (MDGs), [7] the International Monetary Fund (IMF) has noted that there still remains ‘a pressing need for policies to translate positive growth outcomes into stronger employment gains and further reduction in poverty and set off a dynamic, virtuous cycle of self sustaining and broad-based growth.’ Further challenges include high levels of youth and female unemployment, greater efforts being required to identify and address the needs of those in severe and chronic poverty (approximately 25 million or 27 percent of Ethiopians live in extreme poverty), and pervasive malnutrition. [8]

Ethiopia’s economic growth also arouses questions of equitable growth and redistribution. Handley et al. (2009) outline that, although essential, economic growth is not always wholly sufficient to reduce poverty or inequality. Rather, an assortment of measures must be undertaken to ensure that poorer strata of society are incorporated into national economic growth. [9] Even with Ethiopia’s past reduction of much national inequality, dramatic inequities in education and employment - and broad discrimination - along rural-urban, gender, and ethno-religious lines are starkly apparent. [10]

Another critical issue emanating from Ethiopia’s economic growth and general developmental efforts is the manner in which they have been pursued. For example, a vital component of Ethiopia’s agricultural development strategy is the ‘villagization’ program that entails the relocation of millions of people from locations reserved for industrial plantations. [11] Ethiopia is an agrarian-based society in which more than 80 percent of Ethiopians depend on agriculture and pastoralism for subsistence. Issues arising from the program have led to greater food insecurity, a destruction of livelihoods and the loss of cultural heritage. Additionally, the program, which frequently utilizes forced evictions, has been plagued by a plethora of human rights violations. A variety of human rights groups have documented beatings, killings, rapes, imprisonment, intimidation and political coercion by the government and authorities. [12]

While Ethiopia has suggested that leasing land to foreign investors is necessary to modernize farming, enhance domestic food production and generate employment, [13] it continues to struggle mightily with hunger, under-nutrition and stunting. [14] Further, a UN report has even suggested that such investment deals negatively impact local populations. [15]

Importantly, projections of Ethiopia’s forthcoming evolution into a middle-income country must address the fact that Ethiopia remains overwhelmingly dependent on foreign aid. Long unable to produce enough food for its population, the nation has been dependent on foreign food aid for decades; [16] recent World Food Programme data illustrates that the country remains one of the largest recipients of food aid in the world. [17]

Figure 2

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*Source: World Food Programme and World Bank [18]

Siyoum, Hilhorst, and Van Uffelen (2012) also note that more than 8 million Ethiopians rely on food aid. Furthermore, the authors find that Ethiopia’s food insecurity stems from government failures in addressing major structural problems including poor soil fertility, environmental degradation, population pressure, fragmented landholdings and a severe lack of income-generating opportunities outside of agriculture. [19]

In addition to its reliance on food aid, Ethiopia is highly dependent on external economic assistance. In 2011, Ethiopia was the world’s fifth largest recipient of official humanitarian aid and received $3.6 billion in total assistance, [20] the latter figure representing between 50-60 percent of its total budget. [21] Additionally, Ethiopia’s 2011 share of total official development assistance – approximately 4 percent – placed it behind only Afghanistan.

According to Finland’s Country Strategy for Development Cooperation in Ethiopia, published by the Finnish Ministry of Foreign Affairs, Ethiopia’s dependency challenges include the fact that its ‘...humanitarian support programmes are fragmented,’ [22] an outcome likely influenced by the expansive network of foreign development, religious, and charity organizations (2000-4000 in total). [23] The Finnish report also notes that ‘a large proportion of the Ethiopian people have limited coping mechanisms at their disposal.’ Furthermore, the country is faced with ‘an immediate need [to"> transition from humanitarian aid to development [and">...without a range of dynamic and comprehensive activities to promote effective private sector development, particularly in agriculture, it will be very difficult to achieve the anticipated growth rates under the [growth and transformation plan">.’ [24]

In fact, recent years have seen Ethiopia’s vaunted annual GDP growth rate decrease. [25] Utilizing World Bank data, which reports Ethiopia’s 2012 GNI per capita as $380 (current US$), [26] Ethiopia’s transition to lower middle-income status (between $1,036 - $4,085) [27] would require an annual growth rate of approximately 20 percent. This would appear to be highly unlikely, even if overlooking its recent descending economic trend or the negative effects of inflation.

These issues may be exacerbated by an array of financial risks. According to the IMF, Ethiopia faces growing external debt, [28"> even though it was the beneficiary of debt cancellation in 2005 via the Heavily Indebted Poor Countries (HIPC) and Multilateral Debt Relief Initiatives (MDRI) programs. [29"> Additionally, it is has experienced a worsening of its foreign exchange shortage, and a lack of sufficient financing for its growth and transformation plan. [30">

Beyond the aforementioned developmental challenges, issues of aid dependency and financial risks, domestic governance and external geopolitical factors represent critical concerns for Ethiopia. A multicultural, ethnically-diverse country with a state-structure built along institutionalized ethnic entrenchment in a nominal federal arrangement dominated by a single minority group; rising tensions with a resilient, large and historically repressed Islamic constituency; and troubled ties with neighbours are both challenges and possible impediments to Ethiopia’s projected economic growth unless adequately addressed.

Currently, political oppression, ethnic discrimination, extrajudicial executions, torture and other abuses in detention, [31"> in addition to economic factors, have led hundreds of thousands of Ethiopians to flee the country. Many fall prey to human smugglers and traffickers who engage in a variety of the most depraved forms of abuse or exploitation. [32">

Additionally, Ethiopia has been at the forefront of a variety of conflicts. The separatist Ogaden National Liberation Front (ONLF) continues to wage an insurgency against the central government, [33"> while terrorism - largely arising from Ethiopia’s policies and interventions in neighbouring regions - has been a constant threat. According to Global Humanitarian Assistance, in each of the years from 2002-2011 Ethiopia was engaged in some form of active conflict. [34"> Prior, the 1998-2000 period saw Ethiopia wage a costly war against Eritrea. Since then, Ethiopia has failed to abide by its obligations as ruled by the international Eritrea-Ethiopia Boundary Commission, [35"> and instead continues to occupy sovereign Eritrean territories - thus posing an unnecessary problem to both countries and the surrounding region. [36"> Ethiopia’s recent tension with Egypt regarding the construction of Ethiopia’s Renaissance Dam is an additional dimension that complicates an already tenuous regional political landscape. [37">

Last, a potential crisis within or outright collapse of the Ethiopian state calls into question any projections of Ethiopia’s impending transition to middle-income status. Since 2006, Ethiopia has experienced a downward trend in the Fund for Peace (FFP) Failed States Index, while for 2013 it received amongst the lowest rankings. [38"> This outcome is buttressed by Marshall and Cole’s (2011) State Fragility Index and Matrix which classifies Ethiopia as one of the eight ‘most fragile’ states in the world. State fragility is reported as an aggregate score of an array of governance categories including state effectiveness, legitimacy, security, armed conflict and other socio-economic and political factors. [39"> Finally, the National Intelligence Council’s Global Trends 2030: Alternative Worlds (2012) suggests that Ethiopia is among the top 15 ‘high risk’ nations slated for state failure by 2030. [40">

Figure 3

cc PZ *Source: Center for Systemic Peace [41">

In conclusion, Ethiopia’s recent economic growth and developmental progress are respectable achievements, particularly within a region long plagued by a variety of ailments. However, suggestions of Ethiopia’s socioeconomic transformation may prove fanciful if they fail to consider and address a variety of significant concerns.

* Fikrejesus Amahazion is a PhD candidate focusing on Political Economy, Development and Human Rights.

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Ethiopia: An analysis of recent economic growth and potential challenges