26 November 2015

Africa: Ethiopia's Egalitarian Socio-Economic Stride

Photo: Tedros Adhanom Ghebreyesus
Official light rail pre-revenue testing in Addis Ababa.
analysis

Part I

Ethiopia is without question one of Africa's high achievers, with a rapidly growing economy and falling poverty rates. As a result, day after day, the number of scholars, organizations and reports attesting this fact is mounting.

Last week, the African Development Bank's special report released a highly informative report on the Ethiopian economy, describing it as "Ethiopia has also continued to be a more egalitarian country than most in Africa" and "without question one of Africa's high achievers, with a rapidly growing economy and falling poverty rates." Indeed, the report underlined that:

"Ethiopia is one of the fastest growing economies in the world, averaging 10 per cent growth over the past decade. Even with high population growth, the country's per capita income has tripled over the last eight years. This strong economic performance has provided the Ethiopian government with a platform for pursuing its ambitious national development agenda.

Under its national development plans, including the current Growth and Transformation Plan 2010-2015, the country's public investments were equivalent to one-third of GDP in 2013, compared to just 22 per cent across other low-income African countries."

As it has been said in multiple occasions before these achievements are all the more remarkable, given Ethiopia's many development challenges. Ethiopia lacks the mineral resources that have driven growth in many other African countries.

The most important part of AfDB's report is that it shows Ethiopia's achievements in terms of inclusive growth: social, economic, spatial, and political inclusion, and building a competitive economy. Indeed, the report sheds light into the achievements made and the efforts to address the outstanding challenges. Even though the entire report is an informative and inspiring account of the socio-economic stride, we have picked a few major points to highlight in this brief article.

Economic inclusion

Ethiopia has one of the fastest-growing economies in the world. Its average rate of 10 per cent for the past decade, despite high population growth, Ethiopia's GDP per capita has more than tripled over the last eight years, from $171 in 2005 to $550 in 2013. This strong economic performance has given Ethiopia an excellent platform from which to pursue its national development agenda.

Ethiopia's national development plans have focused on delivering broad-based development, reducing poverty and achieving the Millennium Development Goals (MDGs). The main driver of growth over the last decade has been large-scale public sector investment. From 2010 to 2013, total spending on the growth-oriented pro-poor sectors of education, agriculture and food security, water and sanitation, health and roads amounted to $12.7 billion. In 2012/13 alone, the spending on these sectors accounted for over 70 per cent of the general government spending. This allocation and spending pattern demonstrates the country's commitment to eradicate poverty in all its dimensions.

This high rate of pro-poor investment has helped to ensure that Ethiopia's growth has been inclusive in nature, spanning different economic sectors and benefiting both urban and rural communities. The massive boom in construction activity and a huge expansion in public sector employment have provided many jobs, particularly in Addis Ababa and the country's major towns. At the same time, programnes to improve agricultural productivity and support small and medium-sized businesses have increased incomes more broadly. According to the government, since 2011 the GTP has created about1.6 million jobs through small and medium-scale enterprises.

As a result, Ethiopia has reduced unemployment from 5 per cent in 2005 to 4.5 per cent in 2013. That is a remarkable result, considering that in comparable countries unemployment increased from 5.4 per cent to 9 per cent over the same period. Ethiopia's middle class has expanded, increasing domestic demand for goods and services and helping to drive continued growth. It is expected that Ethiopia's middle class will be one of the most important in Africa by 2030.

Ethiopia has also continued to be a more egalitarian country than most in Africa. Income inequality, as measured by the Gini coefficient, has risen from 30.0 in 2005 to 30.4, yet it still compares favourably to the average of 42.5 in the low-income countries in Africa.

Overall, inclusive growth in Ethiopia has had a dramatic impact on poverty levels. From 2005 to 2013, despite strong population growth, the proportion of the population living below the poverty line fell from 38.7 per cent to 29.6 per cent. This equates to lifting 2.5 million people out of poverty. By comparison, the poverty headcount figures for low-income countries in Sub-Saharan Africa as a group fell much more slowly, from 49.1 per cent in 2005 to 46.3 per cent by 2013.

These achievements are all the more outstanding given Ethiopia does not have oil, which has been the engine of growth in many other African countries. However, gold is one of the country's important products, with record exports worth $602 million in 2011/12.

Agriculture is the largest sector of the economy, providing jobs for four-fifths of the workforce and earning 70 per cent of export revenue. Rural areas have been a major beneficiary of public sector investment, much of which has been in infrastructure to enable farmers to access inputs and markets. Last year, the agriculture sector as a whole grew by 7.1 per cent. Since 2005, the value added from agriculture has increased from 46.7 per cent to 48.8 per cent of GDP.

Diversification of the economy

By facilitating the shift of workers from low-to higher-productivity activities, including processed agricultural products and light manufacturing, Ethiopia is laying the foundation to achieve its aim of middle-income country status by 2025. The economy is increasingly linking in to global value chains and expanding its industrial sector, which currently represents 12.4 per cent of GDP, by exporting textile and leather products and diversifying into new products for European markets. Private sector investment remains low in Ethiopia compared to other countries in East Africa, and the financial sector is relatively undeveloped as yet, with the most strategic sectors remaining in public ownership. However, given the country's competitive production costs, including labour, the private sector could contribute much more in the future. Foreign direct investment into the country has been increasing, from $150 million in 2005 to $1.2 billion in 2012.

The Ethiopian government has been very proactive in promoting green growth at both the country and the global levels. Ethiopia's 2011 Climate Resilient Green Economy Strategy sets out a comprehensive approach to mitigating the impacts of climate change on the country's development. The Strategy has been a valuable guide to other countries pursuing similar aims. It is closely linked to the GTP and provides compelling evidence on the value of investing in greener growth paths. Ethiopia focuses on reducing carbon emissions in agriculture by improving crop and livestock production, protecting and re-establishing forests, promoting renewable energy generation and leapfrogging to modern and energy-efficient technologies in infrastructure development.

Spatial inclusion

Infrastructure connections are key to ensuring that the benefits of growth are shared across Ethiopia's vast territory. The country has made major progress in expanding its road network, enabling the rural population to access inputs and markets and make use of health and education services. With more than 80 per cent of Ethiopians living in rural areas, road development has been an important driver of poverty reduction. Since 2005, infrastructure investment rates equivalent to 3 per cent of GDP have more than doubled the road density, from 33.2-kms to 78.2-kms per 1000 km2.

As a result, Ethiopia now has basic national and regional connectivity. Addis Ababa is linked to regional capitals, the ports in Djibouti and Kenya and international border crossings. Ethiopia is developing a major railway to the Djibouti Port for passengers and freight, which will open the landlocked country to international markets. In addition, the substantial investment in the transport corridor connecting Addis Ababa and Nairobi will dramatically increase trade with Kenya by reducing transit costs, as well as making it cost-effective for Ethiopian businesses to use the Mombasa Port, another way for the country to access international markets.

The quality of Ethiopia's trunk road network is good, with 73 per cent of asphalt road and 57 per cent of gravel roads in good condition, reflecting appropriate attention to maintenance. Yet given the vast size of the country, the coverage and quality of rural roads remain poor, with only one-tenth of the rural population living within 2 km of an all-weather road. The share of paved roads has grown to 15.7 per cent, but many communities remain isolated during the rainy season. There continues to be a strong focus on developing rural access roads under the Universal Road Access programme, which has built 35,000-kms of roads since its launch in 2010.

Energy as a driver of growth

Renewable energy is a key driver of growth and poverty reduction in Ethiopia. Access to electricity transforms lives by enabling people to start businesses or gain access to health and education services. The country has an abundance of hydro resources, and although almost all of Ethiopia's electricity comes from hydro-power, much of those resources remain untapped. Generation capacity has almost tripled since 2005.

This has led to dramatic benefits for the population, with 53.5 per cent now enjoying access to electricity, compared to just 16 per cent eight years ago and to the average of 32 per cent in low-income countries in Sub-Saharan Africa. However, even if the efforts in the energy sector have been important, they still do not meet the needs of the cities and the industries; the country's electrification (household connection) rate is still low.

The Ethiopian government is now constructing the largest hydro-power plant in Africa, the Grand Ethiopian Renaissance Dam. It will have an installed capacity of 6000 MW, providing energy not just for national use but also for export to neighbouring countries. In addition, the government has recently completed a restructuring of the power sector, creating two holding companies for generation and transmission and allowing for multiple distribution companies. This will open up the power sector to private investors, increasing efficiency and reducing the costs of energy supply.

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