Economic transformation of ethiopia: causes and challenges ahead essay examples

Today one of the fastest growing countries in the world is none other than the second most

populated country in the world Ethiopia. The nation has experienced sturdy and expansive
growth over the past decade, and according to the World Bank estimates the country is
averaging at 10. 9 percent per year in 2004-05 – 2012-13 as compared to the local
average of 5. 3 percent (The World Bank, “ Economic Review”). The major source of growth in
this period has been seen in the agricultural sector and services sector, while manufacturing
sector has performed moderately. These growth rates are the result of long years of investment
and transformation that have seen the country ingrain economic, social and political stability.

Prior to 2004, the country was particularly unstable, experiencing vicious contractions in several

years like 1985 and 2003 with a milder depression in 1989. The effect was a succession of
famines, the most horrible of which made headlines all over the world in 1985. Ethiopia has in
the past experienced cruel droughts more or less once in every 10 years. Drought, pooled with
underprivileged farming practices – with almost total reliance on rain fed cultivation – has
definitely contributed to off-putting economic growth in Ethiopia in the past, but government
policy restricting access to food and the extreme reliance of the entire economy on farming have
been supplementary drivers for the scarcity of Ethiopia in the past years. The existing
administration has embarked on an agenda of economic development, including privatization of
public companies and validation of government regulation. Even as the process is still
continuing, the reforms have started attracting much needed overseas investment. Many
properties owned by the administration during the preceding government have now been
privatized and is in the process of privatization.

Ethiopia has experienced strong economic growth in recent years. Ethiopia has been ruled

political upheavals. However the current ruling party Ethiopian People’s Revolutionary

Democratic Front has been in power since the year 1991. The party has formed a coalition

government now and therefore aims to introduce several reforms in the system of governance in

Ethiopia. This involves devolving the authorities and mandates first to provincial states, and

then to district establishment, or village authorities. With real GDP growth at or near in two digit
levels since 2003-04, the nation has time after time performed over and above most countries in

Africa and grown much faster than the continent’s average. This expansion reiterates the

Ethiopian government’s superior objective to attain middle income economy status by the year
2020. The strength, sustainability, and probable consequences of Ethiopia’s professed and
ambitious economic revolution depends on investment freedom, scores for which have advanced
therefore virtues more analysis. The nation has recorded enhancement in half of the 10 economic
freedoms, including trade freedom, fiscal economy has led to a growth in the past year, with an
average of 10. 9 percent per year in 2004-05 – 2012-13 compared to the regional average which
was almost half of Ethiopia’s. Most of the growth has come from the expansion of services
sector as well as the rural sector. The growth from the manufacturing sector has not been that
noteworthy. Private expenditure and public investment are reason for the growth with the latter
being a more important source in the recent years. Economic development brought with it
affirmative tendency in dropping poverty, in both urban and rural areas. Although there has been
a decrease in the deficiency faced by Ethiopians which has decreased significantly from 38. 7
percent in 2004-05 to 29. 6 percent 5 years later.

There have been several reasons for the spectacular growth that Ethiopia has witnessed. The

country is mainly dependent on agriculture. Any poor country in the world starts as an agrarian
economy where the primary occupation of the people of the country is farming or pastorals. Most
of the people in Ethiopia are pastoralists. Therefore the prime growth of the economy depends on
the growth of agriculture and allied sectors. In current years, the government has implemented a
strong growth and poverty reduction strategy, focusing on infrastructure development,
commercialization of farming, improvements in access to basic services, as well as on private
sector development, including the formation of suitable authoritarian and institutional
frameworks to support private business. Agriculture’s share of GDP has not changed much, but
the composition of rural output has altered as severely as its in general value has
augmented. This growth has been attained by increasing the area of land under cultivation. There
have been a lot of pains in the region to eliminate infrastructure bottlenecks of the nation. Over
the past 5 years, the administration and government ventures have empowered about USD 6
billion in roads, telecommunication, and energy sector. Those vast investments have led to a
major expansion in infrastructure, although from a low base. For instance, the power generation
capacity has almost doubled and the cemented road network inflated three-fold. Overall, the
heavy public investment in infrastructure and social services has created a major expansion in
domestic demand, raising overall growth. After more than two decades of civil war, the effects
of which were worsened by global clashes with Somalia, 1977 and 1998, and Eritrea,

Ethiopia has now enjoyed more than a decade of peace. The ruling Ethiopian People’s

Revolutionary Democratic Front likes political stability in the country and therefore
is competent of making strong decisions which will be welcome by public. It has only been a
recent event that a government is not under the threat of being over thrown by militant groups
and therefore can focus on the country’s growth.

Another reason for the rapid growth has been Public expenditure has been growing

reports the share devoted to pro poor sectors in the total increased from about 26 percent in
1999-00 to about 43. 3 percent in 2002-03 and 64 percent in 2008-09, up by 26. 7 percent per
annum since 2003. The public expenditure is concentrated in infrastructure and human capital
development. In particular, there has been a major expansion in social services through the
construction of new primary schools and health facilities. Government revenue has increased by
about 21 percent per annum on average since 2003-04, even though revenue as a percentage of

GDP has declined from about 23 percent in 2002/03 to about 12 percent in 2007-08. Tax revenue

reached about 35. 7 billion Birr in 2009/10 from about birr 11 billion in 2003-04, up by 37
percent per annum on average. At the same time, external aid volumes have increased in recent
years, reaching USD 1. 6 billion in 2008-09 from USD 0. 9 billion in 2004-05. This surge in
external aid, alongside improved domestic revenue mobilization, has enabled the Government to
increase spending on infrastructure, thereby stimulating growth.

As per the World Bank’s report, the development goals that are set by the government to

achieve a middle income economy status by 2020 include, targeting economic growth for at least
11 per cent even in the worst year and the economy should grow at least twice its size at least by
2015. It also aims to achieve a GDP per capita income of USD 698 till 2015. For food security
the government is aiming to double the agricultural produce. The ruling party has also put
provisions in place to increase the contributions from the industrial sector of the country and
their prime focus is industries like textile, cement and sugar. To able to finance its import
dependence the government is aiming to increase the amount foreign reserves that it currently
holds and also to depreciate the Ethiopian currency against dollar in the coming years.

Infrastructure is also on the radar of the Ethiopian government and it aims to increase the road

network from 49 thousand kilometers to 64. 5 kilometers by 2015. The customers of power
supply are also expected to go up from 2 million to 4 million. The government is also focusing
on achieving all the millennium development goals that it has set for the country

The tremendous growth and the lofty ambitions of the Ethiopian government have risen

several eyes and many economists have come up with several reasons which might impede the
growth of the country. The country has been involved in several political tussles and the fact that
it has been on e of the poorest countries in the world for a long time might not help to achieve
their goals easily. The paper will now discuss some of the challenges that the country might face
and give suggestions as to how Ethiopia might tackle these issues. Firstly, banks in OECD
countries typically use interest rates as an instrument for administering inflation, price stability
being their primary mandate. Ethiopian capital markets are still under developed, which makes it
tricky to utilize interest rates as a device to manage price rise. According to Deloitte’s paper on

Ethiopia’s growth miracle, even though the depreciation of the Birr has contributed to price

spikes, the main driver have been food prices. Bad yields lead to food shortages at home, which
in turn result in rise of local prices. At the same time, an augmented requirement for food
imports renders consumers to unpredictable global food prices. Besides the country’s economic
progress record, the incredible gains made in sinking poverty are drawing the attention of global
consumer commodity companies. A major issue originating from Ethiopia’s economic growth
and general developmental efforts are the manner in which they have been pursued. For instance,
a crucial component of Ethiopia’s rural development tactic is the ‘villagization’ agenda that
involves the relocation of millions of people from locations reserved for industrial plantations.

Furthermore, the country is faced with ‘an immediate need to transition from humanitarian aid to

development without a range of active and complete activities to promote effective private sector
development, particularly in agriculture. Therefore it will be very difficult to achieve the
anticipated growth rates under the growth and transformation plan. In fact, recent years have
seen a decrease in the Ethiopian annual GDP growth rate.

One of the major challenge any developing country faces is sustaining the high growth

rate it has achieved. It’s pretty well known economic issue that to get a spurt of growth is much
easier through a change in the policies of the government but maintain that growth in the longer
run is a huge task. Therefore Ethiopia has to make sure not only to maintain its growth levels but
also make sure that the growth is shared equitably across all the sectors. Agriculture remains the
nation’s major source of growth. But there is a swelling pressure on land and will make
sustaining higher rates of increase in the agricultural production over the medium term very
tough and therefore substantial improvements will be required in factor productivity. Hence the
government should aim to make continuous efforts towards a shift to commercialization of
agriculture, which still is not showing stupendous growth rates. The structure of production in
agriculture is mostly subsistence based and therefore it should be transformed into more
commercially oriented production style. For this government should also open up their barriers
against international trade. Exports of the agricultural produce and imports from other countries
can have a major impact on style of cultivation practices and the increase in competition will
lead to adoption of more modern techniques of farming. He fruits of the structural change can
enhance the position of Ethiopia’s economy in the longer run and therefore help it achieve its
development goal of becoming a middle income country by world’s standards. With the prime
focus on agriculture there is a need for the country’s administration to have a sharp focus on a
providing a launching pad for other sectors of the economy as well. Ethiopia’s industrial sector is
still relatively much smaller than other middle income countries and is highly dependent on
imports from other countries. This makes the nation pretty vulnerable to foreign exchange
shortages. The government therefore needs to indulge in a process of diversification in industrial
sector which would sustain the growth rate. This will require more private investment in
industries with export orientation and also in industries which will substitute imports. To achieve
this there is a need for government to finance strengthening of the industrial infrastructure.

Ethiopian government has taken several steps in this direction which includes a stronger focus on

industrialization to support transformation of the economy and receiving capacity building
support to be able to re design its industrial policy from Japan’s government. But further efforts
need to be paid so as to be able to make Ethiopia industrial sector self sufficient and competent.

Transition of Ethiopia to a lower middle income economy status would necessitate an annual

growth rate of roughly around 20 percent. Even if we disregard its recent descending economic
tendency or the depressing effects of rising prices, that rate of annual growth rate is highly
unlikely to achieve.

Apart from these market oriented and infrastructure problems, Ethiopia has also been

actively involved in conflicts and political tensions over a long period of time. In this country,
one of the ethnic groups is dominant over all the other groups. This has been the reason of
creating conflicts and tensions between these several ethnic groups. In addition to there have
been constant conflicts with neighboring countries as well. As per the Global Humanitarian

Assistance, in the years from 2002 to 2011, Ethiopia has been involved in some conflict or the

other, also prior to 2000, Ethiopia was involved in a very costly was against one of
its neighboring country Eritrea, which had huge economic implications on both the countries.

Ethiopia has not abided by the orders of the international committee over the Eritrea – Ethiopia

dispute, which has led to unnecessary conflict and tension in the region. Recently Ethiopia
has been in a disagreement with Egypt over the construction of Ethiopia’s renaissance dam, thus
contributing to its already long list of political tensions. These political tensions and conflicts
pose a major danger to the current economic ambitions of the current government. A political
upheaval right now would send the country back by many years on the development scale. There
is an immediate need for decentralization of power and to address of the issues of all the ethnic
and impoverished groups in the country to be able to tone down the discontentment amongst
people. For Ethiopia’s economic well being, it should also try and maintain peaceful relation
with neighboring countries.

According to the World Bank’s Overview, in the past 20 years, there has been noteworthy

advancement in key human development indicators such as primary school enrollments have
quadrupled, child mortality has been cut in half, and the number of people with access to clean
water has more than doubled. These mentioned gains and the continuous fight against the
diseases like malaria and HIV give an impression of proper well being in Ethiopia. But
because of the country’s starting point which is considerably low it is very important that the
government has constant focus on improving its HDI. About 15 million in the country do have
any food security and are mostly dependant on foreign aid for food. Illiteracy is also one of the
major reasons because of which the country reels in poverty. The leaders in the country have not
been very attentive towards educating its people and have not made major contributions to the
development of education programmes. Ethiopia has a literacy rate of just around 42 percent
which is much worse in comparison to its neighboring counties like Eritrea. Also the country is
the second most populated country in the region Because of tremendous poverty and hunger,
most of the children do not go to school and many o f them are strained into child labor,
trafficking and prostitution. Some children are traded in the major cities across the country.

There are many economies I the world like India and some countries in Africa, which may have

made rapid progress economically but still lag behind when it comes to having an equitable
growth and fighting poverty. Therefore Ethiopian leader have to keep focus on making sure that
the growth improves the level of well being of people of different strata of the country. This can
be done by improving the delivery method of social services in the country and increasing
accessibility to health and education services.

Another aspect is the importance of coffee for a country like Ethiopia. Coffee is

exported at a rate of USD 400 million a year by Ethiopia. In international markets, the price of
coffee has been declining which has affected the Ethiopian economy and the value of its exports
has gone down. Ethiopia like most of its neighboring countries endures a lot because of constant
natural disasters like droughts and random flooding. Since Ethiopia is a country whose
population is highly dependent on farming and crop cultivation, these erratic floods and droughts
sends the economy in a downward spiral. The people suffer from high poverty and under
nourishment during this period because their income is largely dependent on gains from farming.

The government of Ethiopia needs to undertake several measures to support its population of

farmers. Every economy in the world has progressed from an agrarian economy to industrial
economy. Like India, Ethiopia should probably have a procurement policy so as to maintain
buffer stock and provide the farmers with a minimum support price and at times of need, the
government should provide the buffer to people at subsidized rates.

Poor governance is also one of the challenges that Ethiopia faces. Like many of the African

countries, Ethiopia also has a high rating on the corruption index. Also the current leaders in the
country is very inexperienced. The country is in dire need of investors so as to support its
economic progress but the political instability and lack of faith in the current government has
been prime reason why investors are reluctant to invest in Ethiopia. The government needs to
sustain this economic growth that it has experienced in the current years and maintain a stable
democratic government at the centre to attract investors. There is also a need to have strict
regulations under place to fight corruption in the country. Pro investor policies need to
implemented by the government, so as to get investment in the Ethiopian projects which would
help in financing of major economic projects in the country to improve its infrastructure.

In conclusion, the government of Ethiopia has made several right steps in order to improve

the status of the country and make it one of the fastest growing countries in the region. But at the
same time the country is suffering from high levels of poverty and scores very low on the human
development index. There are several challenges that have to be faced to be able to maintain the
growth and to be able to achieve a stable macroeconomic environment. Humanitarian efforts by
the Ethiopian government will also determine the direction in which the country progresses in
the future. According to the World Bank, the establishment of good governance and nation
building will help the government of Ethiopia improve public service performance management
and responsiveness. It will also improve the freedom for civilian participation in the growth
process. The country has had a past full of political tensions and internal conflicts and therefore
the country’s administration will have to maintain peace in the region and have strict democratic
laws in place to be able to achieve the middle income status by 2020.

Works Cited

” Ethiopia Overview.” The World Bank. The World Bank, 1 Sept. 2014. Web. 2 Dec. 2014.
Amahazion, Fikrejesus. ” Ethiopia: An Analysis of Recent Economic Growth and Potential
Challenges.” AllAfrica. com. AllAfrica Global Media, 5 Feb. 2014. Web. 2 Dec. 2014.
” Ethiopia A Growth Miracle.” Deloitte. Deloitte & Touche., 1 Jan. 2014. Web. 2 Dec. 2014.
racle_july2014. pdf>.
” Ethiopia’s Economic Growth Performance: Current Situation and Challenges.” The African
Development Bank Group. The African Development Bank, 17 Sept. 2010. Web. 2 Dec.
2014. Brief_Ethiopias Economic growth. pdf>.