In a continent where missed opportunities for growth are commonplace, Ethiopia has been somewhat of an exception. The economy of country expanded in excess of 10% from 2004 to 2009. It was the fastest growing nation in Africa during 2007 and 2008, that was not dependent on oil. By 2012 the growth rate had moderated to 7% and has remained there ever since, but it is still an impressive record.
As Africa’s second most populous nation after Nigeria and the fastest growing big economy on the continent, it would seem that Ethiopia’s future will be bright. It is increasingly going to depend on which direction the government of the country, long in power is going to take. The question remains; will the country’s leadership elites, allow private investment to transform and help modernize the economy of the country?
The main priority of the ruling elites has been industrialization. However, the objective is often complicated by many regulations and restrictions that deter investors from projects around the country. The government wants to manage the economy, but increasingly it is getting in the way of allowing a true market economy to develop.
Isolationism is the end result of a government policy with respect to the restriction on the flow of investment money and information. Although many in the leadership are aware that further reforms are necessary for growth to continue in the short term and for long term stability, there is great controversy on how to proceed. The outcome is a lack of progress in the entire initiative of modernization.
In spite of the impressive achievement in GDP (Gross Domestic Product) over the last decade the economy faces serious structural problems. Agricultural productivity which is primarily subsistence, remains low and is constantly under threat of drought. This is ironic in a nation that houses 14 major rivers that flow from the highland areas.
Ethiopia contains the largest water reserves on the continent and is often referred to as the water tower of Eastern Africa. Yet there are few irrigation systems in place with only about 1.5% of the total being used for that purpose.
Since agriculture provides the majority of income for 80% of a population of some 90 million inhabitants, this sector alone is in desperate need of investment regardless of the source. Agriculture provides some 41% of the GDP and 80% of the country’s exports. Many of the other sectors of the economy depend on agriculture, which would include marketing, processing and transporting of the commodities produced. The principal crops grown are beans, cereals, coffee, oilseeds, potatoes, sugarcane and vegetables.
The country is the 2nd largest producer of corn (maize) in Africa. Ethiopia produces more coffee than any other country on the continent, so it is not surprising that coffee remains the largest foreign exchange earner. Ethiopia is the 10th largest producer of livestock in the world. Other commodity exports include khat, gold and leather products. Recent developments in the floriculture industry might allow Ethiopia to become one of the top exporters of flowers and plants.
It will not be easy to make the investments necessary in a nation that has a nominal GDP of $51 billion USD (United States Dollar) and a per capita of a mere $570 USD. This is among some of the lowest rates globally. The government has focused its energies more on industrial development than on agriculture. There has been investments made internally and from abroad (particularly China), in constructing roads, railways, dams and power stations.
These investments in infrastructure will help move the country forward, but they are too limited in order to keep up with the present population growth of Ethiopia. A big impediment in encouraging more outside investment, is the insistence on the government to maintain control of so much of the economy.
Telecommunications is a perfect example. This sector of the economy is a state monopoly. The elites inside the country insists that this is the only way to guarantee that services will be extended to rural areas. In reality it stifles private investment and since the government does not itself have the resources to expand, much of the country remains outside the grid.
Another barrier to increasing the flow of money from abroad is the attitude of the government concerning private property. The present constitution of Ethiopia defines the privilege of owning land to exist only for the state and the people. Private citizens can lease land up to 99 years, but they are unable to gain full title to property. Therefore, no mortgages or sales of land are possible. Renting of land is how business is conducted. It is available for up to 20 years. The government insists this ensures that land will be used most productively in this manner, but corruption and bribery is rampant.
Despite rapid growth Ethiopia has gone through some difficult transitions. From 2008 to 2011 the country experienced an inflation rate of 40% and a problem with the balance of payments in trade. This was the result of a loose monetary policy and a large civil service wage increase. Food prices were surging which was creating major hardship among the populace. It soon forced the government to implement both tight fiscal and monetary policies. Inflation has now dropped to single digits.
Part of the impasse in economic and financial reforms is the lack of leadership. The civil wars that occurred after the overthrow of Haile Selassie in 1974 and continued until 1991 have made the ruling elite cautious, when it comes to changes in society. Meles Zenawi was able to remake the country and bring the stability, that allowed the present economic expansion following the end of the civil wars. By sheer force of will, he was able to force reforms when deemed necessary. Since he was not a fan of the private sector, the development of Ethiopia would follow a different path.
The death of Zenawi in 2012 it was felt, would lead to a new direction for the country. That has failed to materialize. The major leadership decisions are done more on a collective basis now. The old guard has remarkable influence on the present set of government leaders. This situation is unlikely to change dramatically until at least another decade. This will allow a new generation to consolidate power and move the country forward once again.
A major benefactor of the country both politically and economically has been China. The country has made rather large investments and has typically approved the state control of much of the economy. However, the Chinese themselves are beginning to lose patience in a system that seems unable to make the simplest of reforms to help development.
A case in point is hydro-power. Ethiopia not only has the resources to supply the entire country with as much electricity as needed, but could be exporting the surplus in large amounts. Yet despite the potential of this resource, only about 1% has been developed to date.
The Chinese are now pressing for reforms as well. They fully understand the danger of not providing sufficient jobs for a growing population. This is especially a problem with a population that is increasingly better educated and more knowledgeable, despite the general poverty and lack of development.
Sanitation is a major issue that is largely ignored even in major cities. The capital of Addis Abba itself, has over 50% of the population living in slums. Matters are even worse in rural areas. The youth of the country are becoming increasingly frustrated.
The recent election on May 24th was mostly uneventful, because it contained a predetermined outcome. That is the powerful elites through the ruling party would continue as it has since 1995. The freedom of the press will continue to be curtailed and those who oppose the government will be dealt with harshly. More reasonable reformers are forced into exile. This will lead to more forceful actions by those disputants who remain in the future.
With a GDP in PPP (purchasing power parity) of just $132 billion USD which is $1,455 per capita the government is going to find it increasingly more difficult to provide jobs for a growing young population. Much will depend on the developments in the export markets.
Coffee which is referred to as the black gold of Ethiopia is becoming more popular internationally. A recent deal with the American giant coffee company Starbucks, provides evidence of this. Specialized leather products are another bright spot in the slowing growing private sector export market. Taytu has become the first luxury designer label in the country.
The country does have oil and mineral resources in some of the less populated areas of the country. Unfortunately, political instability there will continue to handicap faster exploitation of these resources.
Much of the future will depend on the development of energy resources. In Ethiopia that will be as aforementioned, water power. It has become known as the country’s white oil.
The Grand Ethiopian Renaissance Dam project which was commenced in 2011, provides the beginning of this opportunity. When completed, it will provide additional electricity needed for development inside the country and allow the surplus to be exported, for much needed foreign exchange. This one project will help increase the production of electricity inside the country by more than four times going from 4 gigawatts in 2011, to a projected 17 gigawatts by 2020.
Investors need to consider Ethiopia as a long term venture, if at all. There is a great deal of potential in the ongoing development of the country. However, until there is the political will to allow the free flow of investment, it will be difficult to conduct business operations inside the country. A company or group of investors who have the foresight to look beyond the next few years, could greatly benefit from the reforms that must come. For now, much of what is possible remains in the hands of the politicians of the country.