In the last two decades, the government tried its level best to reform the economy through opening the space to the private sector to play pivotal role in the nation's development endeavor. In line with this, to pull foreign investment, it introduced laws by improving the previous one which hampered private sector activities, constructed infrastructure such as roads, telephone lines, airports, piped water, energy plants and of course industrial parks.
Attracted by the new developments, foreign investors particularly from China, Turkey and India came here and invested their money, technology and skills by taking shades in the industry parks and created job opportunities for thousands. These countries, not only in trade and business, they have also good diplomatic relation with Ethiopia.
The coming to power of the current government led by Prime Minister Abiy Ahmed (PhD) in 2018 further strengthened the endeavor. It exerted much effort to revive the economy through the introduction of home grown economic reform. As a result, according to the Ministry of Planning and Development, the economy registered a remarkable growth and over a six-fold increase in per capita GDP to about USD 6 billion in 2022. This has been accompanied by a significant poverty reduction from 44.2% 2000 to 23.5% in 2022 and improvements in access to education, health, and infrastructure.
The primary objective of the reform is to sustain the economic growth through creating an economic environment supportive of higher private investment and structural transformation. It encompasses three key pillars at the macro-financial, structural, and Sectorial levels. Macro-financial reforms aim to reduce the risks associated with public debt, lower external vulnerabilities, arrest inflation, and enhance growth, investment, and exports.
Recently, the Ethiopian Investment Commission (EIC) announced that Foreign Direct Investment (FDI) inflow has increased by 12% during the Fiscal Year compared to the previous similar period.
According to Officials from Ethiopian Investment Commission, members from the Industrial Parks Development Corporation and other pertinent officials visited companies operating in Eastern Industry Zone.
153 companies operating in the Eastern Industry Zone were visited by various stakeholders. The visited companies include three Chinese companies which are Linde Ethiopia Garment, Huajian Aluminum and Diyuan Ceramics.
Over 3,300 Chinese projects are engaging in Ethiopia in various spheres by investing more than 8.5 billion USD. Those Chinese companies have created more than 325,000 permanent and temporary jobs in addition to their contribution in import substitution, skill and technology transfer and in trade ties.
Commissioner at the Ethiopian Investment Commission, Zeleke Temesgen (PhD) affirmed that various reform activities have been undertaken to make Ethiopia favorable for domestic and foreign direct investment.
The Commissioner said that an environment conducive for business activities has been developed to make Ethiopia a preferred destination for FDI.
In order to increase the flow of foreign direct investment, remarkable achievements have also been registered in terms of availing vital infrastructures in the industrial parks built by the federal and state governments as well as Chinese investors, he added.
The Commissioner further underscored that the recent macroeconomic reform which is being implemented by the government is playing its crucial role for the FDI inflow in the country.
Understanding its immense contribution to supporting the national economy, the country has made remarkable achievements in attracting and retaining FDI, especially in recent years.
In doing so, the country secured 3.9 billion USD in foreign direct investment in the 2023/24 concluded budget year, which jumped 14% comparing to the same period last year.
As mentioned above, the government aspired side by side with achieving economic growth, exerted its energy to transform the economy that means to transcend the economy from agriculture led to industry led one. The viable sector that accelerates economic transformation is manufacturing. Because it creates job opportunities for millions, boost export, support import substitution, link with agriculture, inspire innovation and facilitates the emerging of self- sustain private economy.
Economists agree that in the past decades, the nation achieved double digit economic growth but the growth achieved very little in transforming the economy. The rural labor migrated to the urban centers mostly engaged as daily laborer in the construction and other informal sectors. Though the flourishing of manufacturing witnessed, most of them are import dependent because they are not linked with other sector domestically.
Still around 80% of the labor force is engaged in the subsistence farming which utilizes less input resulted less output. The sector is vulnerable to climate shake and when sever condition occurs crop failure is common which again leave farmers to survive by foreign handouts. According to the Ministry of Agriculture, almost half of the farmers' plot size is less than one hectare and the growing population further fragment the land size. Hence, attaining agriculture productivity and economic growth in such a way is unrealistic.
Therefore, shifting the stranded rural labor to none farming sector such as manufacturing and service is a priority matter to transform the economy. Expanding the manufacturing sector without absorbing local and foreign investment is unthinkable. It has a great importance by transferring technologies and establishing marketing and procuring network for efficient production and sales internationally.
According to the World Bank recent report, Foreign Direct Investment affects Ethiopian economic growth positively or directly. Therefore, it can be generally viewed as an engine for domestic country economic growth. Foreign direct investment plays an important role in economic growth.
It has a great importance and viewed as an engine for domestic economic growth. During the Derg era when the command economy was the order of the day, the role of FDI on Economic growth was negligible. But after the EPRDF government came to power, the government encouraged foreign investors and as a result the share of FDI on GDP has increased. Accordingly, foreign direct investment and economic growth are positively linked.
The growth of international production is driven by economic and technological forces. It is also driven by the ongoing liberalization of FDI and trade policies. In this context, globalization offers an unprecedented opportunity for developing countries to achieve faster economic growth through trade and investment.
In 1970's, international trade grew rapidly than FDI and thus international trade was by far greater than other international economic activities. This situation changed dramatically in the middle of 1980's when world FDI started to increase sharply. In this period, the world FDI increased its importance by transferring technologies and establishing marketing and procuring network for efficient production and sales internationally through FDI.
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Foreign investors are benefited from utilizing their assets and resources efficiently, while foreign receipts are benefited from acquiring technologies and getting involved in international production and trade networks. While global FDI flows increased by 25%, from 2020 to 2022, developing countries as a group showed an increase of 22% at constant price.
FDI flows to less developing countries increased by almost 5% of GDP. However, FDI provides much needed resource to developing countries, such as capital, technology, managerial skill, entrepreneurial ability, brands and access to markets. These are essential for developing countries to industrialize, develop and create jobs- tackling the poverty situation in their countries.
FDI flows to developing countries started to pitch up in the mid 1990's largely as a result of progressive liberalization of FDI Policies in most of these countries. Then the bulk of FDI in Least Developing Countries represent 1.3% of total FDI while 30.7% goes to developing countries as whole.
In Ethiopia, the gap between domestic investment and saving has remained wide due to the low level of income and domestic savings. FDI as a source of capital and other business know how, therefore, it is essential to finance growth and development. According to World Bank, among sub Saharan African countries, Ethiopia has liberalized its economic policies the most.
None tariff barriers have been eliminated and tariffs have been reduced progressively on a wide range of commodities. The country also enhanced the role of private sector through lifting investment restrictions such as licensing and investment capital ceiling.
