Ethiopia: Leapfrogging from Command Economy to Market Oriented Development

(Solomon Dibaba : ENA) Prior to 1991,more exactly between 1974-199, Ethiopia was in a state of war economy. According to some estimates the Derge regime was expending more than 2 billion birr per day in running the war in Eretria which was going on for three decades. As stated in the World Bank report of 1999, Ethiopia’s real GDP stood at - 3.6 percent while average inflation level was 21 per cent during this period. The trade balance of the country was -6.2 per cent and the debt to GDP ratio was 63.9 percent. Apart from the bleak situation in the command economy, politically the country was in a state of balkanization, in which some 90 armed political groups were fighting to assert their rights under the totalitarian regime. The country was experiencing recurrent drought (1974, 1984) while a generation of youth were wiped out under the so called "Red Terror". The nation’s foreign policy, although it claimed of having  good relationship with the socialist block under the guise of proletarian internationalism was pursuing a policy of gun diplomacy with most of the neighboring countries while remaining at loggerheads with some of the western countries. Through a prolonged and tortuous struggle waged by the peoples of Ethiopia, the Derge regime, which usurped power from the peoples of Ethiopia during the 1974, mass upsurge collapsed on February 28, 1991 ushering a new era in the history of this country. Under the backdrop of the above situation, following the establishment of a National Charter in 1994, a constituent assembly was established commissioning a transition government and tasked with drafting a constitution followed by the issuance of multiple socio-economic and political polices based on a federal constitution that was approved in 1995. The ratification of the federal constitution paved the way for economic liberalization, which was conducted through a range of structural adjustment measures in the economy (1992), to transform planned economic structure into market economy. According to Prabhakar Reddy Tada (Economic Reforms and Structural Changes in Ethiopia since 1992,), the economic reform measures taken during the transition period and over the next decade were mainly concerned with the adjustment of price distortions, removal of restrictions on the private sector, instituting markets for factors of production, trade liberalization, and reducing the imbalance. To remove price distortions at macro and micro levels wide ranging policy measures were undertaken. The exchange rate was devalued and further allowed to adjust in a bi-weekly auction market. Parallel to the auction market imports from own sources of foreign exchange have been encouraged. Raising the rates of interest on bank deposits and virtually prices of all goods ended financial repression and services have been liberalized and markets deregulated. At present, the price control applies only to petroleum, fertilizers and rents of government owned houses. Along with this process of liberalization lies the reform of public enterprises, which provided financial and management autonomy to state owned enterprises. Likewise, the reforms included removal of subsidies and functioning of public enterprises on purely commercial basis. The major restrictions on the private sector have been lifted (local investments were restricted to a ceiling on birr half a million during the reign of the Derge) and there is no ceiling on the size of domestic private capital. Nearly all business activities are open to domestic private enterprise either on its own or in partnership with government except few areas kept for government monopoly like electricity, telecommunications etc. During this period, foreign exchange access was conducted through bi-weekly auctions. In order to stabilize the economy, the Transitional Government of Ethiopia has followed stricter fiscal discipline by reducing the expenditure on defense. In 1994, the government formulated the strategy called Agricultural Development Led Industrialization (ADLI) and placed emphasis on agriculture on account of its potentially superior growth linkages, surplus generation, market creation and provision for raw materials and foreign exchange. Later on a comprehensive and broad base development plan was implemented in 2002. This plan was known as Sustainable Development and Poverty Reduction Program (SDPRP). The objective of the plan was to realize sustainable development with poverty reduction in the country. Following SDPRP, the Plan for Accelerated and Sustainable Development to End Poverty (PASDEP) was implemented between 2005 and 2010. The last plan following the PASDEP was the GTP I with the objective of structural transformation and national food self-sufficiency. This plan was implemented between 2011 and 2015. According to National Bank of Ethiopia (NBE-2015), during the first GTP, the country has achieved an average of 10.1 percent economic growth against the planned 11.2 percent. Except 2012, the country economic growth performances were close to the low base scenario which was above or equal to ten percent. In 2012 the economic growth was only 8.6 as compared to 11.1 percent of the GTP target.  The low agricultural growth, which was only 4.9 percent, was the major reason for the less performances of economic growth in 2012. In general, the country was successful in achieving an average of double digit economic growth.  During the first four years of GTP I period, the national output, which is measured by Gross Domestic Product (GDP) has increased from USD 30 Billion in 2009/10 to USD 55 Billion to 2013/14. Just within four years the national output increased by 83 percent. On basis of the International Monetary Fund, among countries with over 10 million people, only China and India will have grown faster than Ethiopia between 2011 and 2015.   IMF forecast for 2018 economic growth is expected to stay high in 2017/18, at 8.5 percent, supported by continued recovery from droughts and export expansion as new manufacturing facilities and infrastructure come online. The Second Growth and Transformation Plan (GTP II) is expected to underpin domestic private sector development and FDI. The GTP II also envisages allocating significant resources to poverty alleviation and the social safety net, while efforts to strengthen financial inclusion are underway. According to a UNDP’s African Economic outlook Report for 2018, Ethiopia’s second national Growth and Transformation Plan (GTP 2015-2020) predicts that employment levels in large and medium enterprises will rise from 380,000 to 757,600 by 2019/20, accounting for an average annual growth of 15%. The industrial sector share of the country’s GDP is growing over the years and has reached 16.7% in 2015/16, while the same period the manufacturing sector and specifically large and medium scale manufacturing sector accounted for 5.4% and 4.4% of GDP respectively. In both GTP I and II, Ethiopia stand out in many ways, including in the economic strategy that paved the way to success. In brief, the nation’s economic strategy focused on promoting agriculture and industrialization while delivering substantial public infrastructure investment supported by heterodox macro financial policies. Ethiopia’s strong commitment to agricultural development is noteworthy as reflected by high government spending and the world’s biggest contingent of agricultural extension workers. While a strong push for infrastructure development at the early stage of development is far from unique, the way in which Ethiopia achieved this sets it apart. Dr. Seid Nuru, Senior Researcher at Ethiopian Economic Association uttered that the major indicators of the countries` economic growth are increasing domestic products, capital accumulation and structural change. Manifestations of structural change are; varieties of products, globalized services, export trade among others. Other related indicators are industrialization, urbanization and institutional change is critical. This can bring structural change. Based on the stated indicators, in sub-Saharan Africa, no country has fully transformed through this process, according to the researcher. No African country has made structural transformation. “So we are comparing Ethiopia`s economic growth with East Asian countries like South Korea and China which they transformed their economy through structural change in a short period”. In an exclusive interview with ENA Getachew Adem, with the rank of State Minister National Planning Commission Deputy Commissioner said these policies, strategies and programs are domestically grown and contextualized to the country`s status and future aspirations. The great assets of the country are land and human resource. So the policy and strategy mainly based on these driving forces, he stated. “Gradually, the policies and strategies have been becoming more precise and focused. They are also mainly focused on reduction and ending of poverty. So all of our policies and strategies are focused on reduction and ending of poverty.” To date, Ethiopia has achieved a lot in setting the necessary background for the countries vision to become a mid level developed country by 2025. The country’s economic development strategy is unique in Africa as it launched a Climate Change Resilient Economy strategy (CRGES) in August 2012. The entire economy is designed in such a way that the energy sector (hydro power, wind farms, solar energy, and geothermal development), infrastructure development  (railway, industrial parks, electrical power grids) are not only climate change compliant but are all based on carbon free or fossil fuel free development programs. This is also witnessed by the development partners who are working with the country to meet the nation’s vision. World Bank Report for 2018 indicates that “Ethiopia’s economy experienced strong, broad-based growth averaging 10.3% a year from 2005/06 to 2015/16, compared to a regional average of 5.4%. According to official statistics, Ethiopia’s gross domestic product (GDP) is estimated to have rebounded to 10.9% in FY2017. The expansion of agriculture, construction and services accounted for most of this, with modest manufacturing growth. Private consumption and public investment explain demand-side growth, the latter assuming an increasingly important role.” One of the development partners of Ethiopia, the African Development Bank (AfDB) has been supporting Ethiopia’s efforts particularly in the areas of energy development and infrastructure. According to a recent report of the bank, in the energy sector, the bank has extended 100 million USD and 225 million USD assistance for the construction of the 280km Ethio-Djibouti and Ethio-Kenya 1000km high voltage transmission lines. Chief Transport Engineer at AfDB, Mumina Wa-Kyendo recently told ENA that “The bank is funding 1200 km road connecting Kenya and Ethiopia. We have funded the export of energy to Djibouti and Kenya by funding the construction of over 1000 km of transmission lines. We have many integration projects all over the continent.” Over the last two decades, Ethiopia’s economic progress is demonstrated through the development of infrastructure, particularly, the nations railway network. According to the Ethiopian Railway Corporation, The Ethiopian National Railway network would include Addis Ababa-Mojo-Awash-Dire Dawa-Dewole, Addis Ababa-Ijaji-Jimma-Gura Ferda-Dima including Jimma-Bedele (direct to Boma with further extension to South Sudan), Ijaji-Nekemet-Assosa-Kumruk, Awash-kombolcha-Mekele-Shire, Fenoteselam-Bahir Dar-Wereta-Weldia-Semera-Elidar, Wereta-Azezo-Metema and Adama-Indeto-Gasera lines with a total length of 4,744 kms. The 5.9 billion USD fund for the construction of the above mentioned railway networks are reportedly offered by the BRICS countries - Brazil, Russia, India, China and South Africa. The flag carrier Ethiopian Airlines is already connecting Africa with the rest of the world. During the past seventy plus years, Ethiopian has become one of the continent's leading carriers, unrivalled in Africa for efficiency and operational success. Operating at the forefront of technology, the airline has also become one of Ethiopia's major industries and a veritable institution in Africa. It commands a lion's share of the Pan-African network including the daily and double daily east-west flight across the continent. Ethiopian currently serves 100 international and 21 domestic destinations operating the newest and youngest fleet which now reached 100. Despite all these successes and efforts, the country is facing challenges in promoting the export sector. A number of reasons may be cited. Ethiopia heavily depends on agricultural products for its export earnings. For instance, according to NBE’s report for 2017, coffee accounts for some 30 percent of Ethiopia’s foreign exchange earnings. A drop in international price of coffee in 2016 has affected the amount of income the nation could have acquired. Lack of access to finance and delays in acquiring them severely affects timely export of the commodities. Besides, lack of proper coordination between exporters, providers of logistic services and standardized storage facilities had contributed to lower export earnings. Moreover, red tape in coffee export, proliferation of contraband trade, prolonged packing and marketing process, which results in unnecessary expenses, and low quality of products have resulted in low foreign exchange earnings. Lack of adequate land and infrastructural facilities were also some of the constraints identified in the sector. In lieu of summary, what are the basic characteristics of Ethiopian economy to date? Ethiopia is not engaged in globally acclaimed accelerated economic development for itself, the country is effectively contributing to regional economic integration through its energy and infrastructure development already marking the basis for the African Continental Free Trade Area (AfCFTA). With the appointment of the youngest African Prime Minister, Abiy Ahmed, the public has harbored on a nationwide optimism and sprit of unity which will in turn trigger further coordination for more successes in the economy. The nation is certainly features a bright prospect.