Rapid recovery and big transformation plans
A centralized economic system that discouraged private sector growth and a prolonged civil war were the main causes of Ethiopia’s dismal growth in the 1980s and 1990s. But growth has been impressive since 2000, powered not by the extraction of natural resources and higher commodity prices, but largely by government attention to economic transformation, a change in policy direction toward welcoming the private sector, support to agriculture and export promotion, rapid expansion in public investment that likely attracted private investment and capital inflows, and debt relief.
Agriculture remains important, but its contribution to output fell from 58% in 1980–81 to 46% in 2010–12. The share of services rose from 31% to 43%. Industry’s share in GDP was 10.5% in 2010–12 and manufacturing’s about 3.6%, about 90% of which is low technology. Wholesale and retail trade, real estate and renting, and other business support activities have dominated Ethiopia’s services sector since the economic policy reforms of the 1990s. The top exports are primary products, and the five largest constitute almost three-quarters of export revenues. Manufacturing value added per worker has increased since the 1990s, particularly in textiles. Policy reforms of the 1990s—reducing tariffs, eliminating export taxes, providing new investment incentives, and improving global market access—have encouraged restructuring in textiles and in light manufacturing, especially in leather and leather products (shoes). Overall export growth is estimated at about 10% a year between 2000 and 2011 by volume.
To speed economic transformation, Ethiopia launched a five-year Growth and Transformation Plan for 2010–15, aiming to build implementation capacity, including a Civil Service Reform Program as one of its pillars. The Plan aims to establish mechanisms to maximize the benefits of foreign aid in the areas of agriculture, food security, social services (education, health), and physical infrastructure (roads, water, power). The government is addressing weakness in tax administration, especially in registration, collection, assessment, audit, and enforcement. It is targeting an increase in taxes from 8% of GDP in 2010 to 16% by 2015 and in the tax financing of spending from 53% to 87%.
Implementing the Growth and Transformation Plan requires coordination among public agencies, development partners, and civil society organizations. The executive bodies are expected to establish strong networks with regional and local executive bodies to ensure that information flows smoothly at the national level. The National Strategy for the Development of Statistics for 2010–14 aims to strengthen statistical capacity and tackle both human and infrastructure gaps.
The Ethiopian Chamber of Commerce and Sectoral Associations, the Ministry of Trade, and the Ethiopian Investment Agency each have an agenda to foster public-private collaboration. The ministry has a public-private sector forum on trade and related issues. The investment agency has initiated several joint public-private meetings to promote public-private investment partnerships as part of its five-year investment plan, with the Ethiopian Chamber of Commerce acting as a bridge between the public and private sectors.
Recent public-private dialogues reveal optimism about the prospects for economic transformation. But they also uncover some concerns. For example, shoe manufacturers are concerned about the weak links in the value chain between leather and shoe manufacturing. Tanneries prefer to sell semiprocessed leather in export markets rather than leather to local shoemakers, creating a shortage of raw materials and leading to escalating prices of hides and skins for manufacturers. The depth and consistency of government support to the private sector needs to increase. Uncertain government policy drives investors away from higher risk investments in manufacturing and into low-risk ventures in services. Many regulations are inconsistently enforced.
Ethiopia’s ambitious Growth and Transformation Plan envisions maintaining real GDP growth of 11% and building an economy with modern, productive, and technologically enhanced agricultural and industrial sectors. Key export products slated for attention are flowers, coffee, meat, oilseeds, pulses, and horticultural products in the agricultural sector and sugar, textiles and garments, and leather and leather products in the industrial sector. The plan also sets ambitious targets for infrastructure and social development. Other key sectors are pharmaceuticals and medical supplies and basic metals and engineering products.
Going forward, Ethiopia can focus first on processing resources for which it has a comparative advantage and then gradually stepping up to higher value products and increasing its participation in regional free-trade areas and in preferential trade agreements, such as the Common Market for Eastern and Southern Africa.
Ethiopia’s most promising products for export or import substitution are coffee, flowers, leather and leather products, textiles and garments, metal and engineering products (mainly for import substitution), and pharmaceuticals and medical supplies. Other products with clear potential advantage include oilseeds, live animals, meat and meat products, assembly plants, and electronics.
Ethiopia’s growth with depth
- Transformation—17th of 21. Overall transformation remains limited, with the country improving only marginally from its 18th place in 2000 (1999–2001) to 17th in 2010 (2009–11).
- Growth. Real GDP grew 1.9% a year in 1981–90, 3.5% in 1991–2000, and 7.3% in 2001–10, while real GDP per capita grew –1.0% a year, 0.8%, and 5.3%.
- Diversification—15th. Ethiopia improved its rank on diversification from 17th in 2000 to 15th in 2010. It progressed on export commodity diversification, as the share of the top five commodity exports fell from around 90% in earlier decades to 77% in the 2000s. But the share of manufacturing and services in exports fell from 54% of GDP in the 1980s to 49% in the 2000s, which is still high. The bulk comes from services, including from the operations of Ethiopian Airways, tourism, and real estate.
- Export competitiveness—13th. Ethiopia improved its export competitiveness rank from 14th in 2000 to 13th in 2010 as the share of exports in GDP almost doubled from 7% to 13% and as its relative export intensity of production (the export-to-GDP ratio relative to that of the world) rose from an average of 0.34 in the 1980s to 0.46 in the 2000s. The export volume (value) index increased from 2000 to 2011 by 112% (438%), reflecting rising export competitiveness especially of coffee, oilseeds, chat, flowers, and leather and leather products.
- Productivity—20th. Productivity of workers in manufacturing rose from $4,469 in 2000 (in 2005 US$) to $5,876 in 2010. Similarly, cereal yields rose from 1,146 kilograms per hectare to 1,699 over the period, reflecting in part the government’s fertilizer and technology push since 2000. Even so, Ethiopia fell one notch on the productivity ranking from 19th to 20th.
- Technology—12th. The share of medium and high technology in exports jumped from 0.25% in 2000 to 3.91% in 2010, while that in production stayed between 14% and 15% over the period. Ethiopia ranked 12th in 2010, a two-step improvement from that in 2000.
- Human well-being—20th. Despite recent improvements, the levels of GDP per capita and of formal employment in Ethiopia remain very low. GDP per capita shrank from $600 (PPP 2005 US$) in 1981 to and average of $531 in 1999–2001, before rising to an average of $921 in 2009–11.