Guess what? In 2017, Ethiopia will be the fastest-growing economy, projects the World Bank. And this is not just a blip. Between 2003-04 and 2014-15, the Ethiopian GDP increased 10.8 per cent annually, double the African average.
What transformed Ethiopia from a famine-stricken country to the world’s fastest economy? A peace dividend, improved infrastructure, a switch to market economy, globalisation, a few sound policies (including better management of food) and a little bit of luck.
A longer food pipe
Vagaries of weather continue to disrupt agriculture, causing occasional food shortages. But the era of starvation deaths has ended. Improved food management, better functioning markets and globalisation have all helped. Last year, Ethiopia experienced the worst drought since the one in 1984, which killed at least 600,000 and shrank the Ethiopian economy by 14 per cent.
In 2016, the economy experienced food shortages. But Ethiopians did not starve, while GDP — hold your breath — grew 8.2 per cent. What was different this time? Civil war and ethnic war with Eritrea are distant memories. In the 1984 drought, when it was embroiled in a civil war, the Marxist government of Mengistu Haile Mariam blocked trade and even bombed markets to ensure that rebel-controlled areas did not receive food supplies, and redirected food aid to his soldiers.
What also helped this time was the road infrastructure that China has built throughout the length and breadth of the country. This makes it easier to transport grain, something essential in a drought year to contain prices and deaths.
How much difference efficient markets make was clear even in the 1980s. A 1987 Oxfam study showed that when roads were cleared of army checkpoints and markets were held at night to minimise bombing risks, production increased and food prices fell. Food aid made little difference because it was often directed to the militia.
In a visit to Ethiopia earlier this month, I asked Indian businessmen who have invested in Ethiopia what attracted them there.
Their answer: cheap labour, inexpensive electricity and a non-corrupt, business-friendly government determined to attract foreign investment. One Indian business manager, who recently moved from Nigeria to Ethiopia, said, “I have not had a single car stolen since I arrived in Ethiopia nine months ago.” In Nigeria, he added, local mafia stealing your car and other household durables is normal.
Most of the discussion in this column on the ease of doing businesses is relative. In 2016, the Transparency International ranked Ethiopia 108th of 176 countries in its corruption perception index, which may be low by African standards, but is still quite high. But the businessmen say corruption is low at the top, and that makes a big difference.
Many global clothing brands urgedthe Ethiopian government that if it built textile parks that facilitated manufacturing for exports, they would invest. That’s exactly what happened. International brands like H&M, PVH and Vanity Femme asked their suppliers (mostly in Asia) to shift production to Ethiopia to reap cost advantages and diversify political and business risk. As a least-developed country, Ethiopia also enjoys tariff-free exports to the EU and the US, thanks to the Everything But Arms (EBA) initiative of the EU and the US and the Africa Growth Opportunity Act that are designed to assist poor African countries.
Logis-ticks wrong boxes
Ethiopia has disadvantages, too, as an exporter. Being a landlocked country, its logistics costs are very high. One businessman said the problem was exacerbated by a monopoly in the transport sector. Certain amenities taken for granted in many parts of the world continue to be luxuries in Ethiopia.
I personally found it took an entire day with the help of a driver and an English-speaking guide to purchase a SIM card for my phone. Most of the shops authorised to provide a SIM card either did not have it or said their internet was down.
Much of the recent growth is driven by public investment in infrastructure that has increased public debt from 40 per cent to 50 per cent of GDP. By World Bank estimates, the public investment rate in Ethiopia is the third highest in the world, and private investment rate the sixth lowest. The trend clearly cannot go on.
Private investment has to pick up for the economy to sustain economic growth in the long run. That is why the government is so anxious to attract massive foreign investment. This is now approaching a few billions of dollars a year.
Many of the Indian businesses have been attracted to sectors (like steel) that enjoy high import protection in Ethiopia. That may be profitable in the short run, but needs to go if the economy is to continue to enjoy growth in the long term. Foreign agri-businesses are welcomed for export production, but forbidden to produce crops that compete with domestic farmers.
So, even as we cheer the end of starvation deaths and the coming of a high-growth economy, we must be careful about the costs of protectionism and a control economy.
(The writer is Professor, Social Policy, Columbia University, US)
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