(African Business magazine)

Strong economic growth of around 10% over the past few years and impressive progress on infrastructural development are putting Ethiopia on the map for all the right reasons. An ambitious government retains a level of international support and living standards for many people are improving. Yet the economy is growing from a very low base and the per capita GDP is also very low. Although the government retains control of the key elements of the economy, there are signs that a vigorous domestic private sector is emerging. The country has made a smooth political transition following the death of the charismatic Meles Zenawi and has now set its sights on achieving middle-income status over the next two decades.

Doing it the Ethiopian way

The untimely death of Prime Minister Meles Zenawi last August caused shock waves not only in Ethiopia but around the continent, as he was a leader of exceptional vision and drive. There were fears that the country’s spectacular growth might be stymied, or worse, that a power struggle would destabilise the nation. Neither has happened.

The former Deputy Prime Minister and Foreign Minister, Hailemariam Desalegn, took power with little fuss and looks set to continue the same economic and political policies as his predecessor, pledging to continue Meles’ “legacy without any change.” As something of an outsider, however, Desalegn may have something new to offer.

As in Nigeria, the former Deputy Prime Minister secured his position as a counterbalance to Meles, who came from the politically dominant Tigray Province. Desalegn comes from the more south of the country, which generally has little influence in national politics. In addition, he is a protestant rather than an orthodox Ethiopian Christian.

Perhaps most importantly, he is not a veteran fighter of Ethiopia’s long civil war but rather a UK-educated former academic and engineer. His lack of Marxist and freedom-fighting credentials could make him the best option for the new Ethiopia but it might also make it more difficult for him to exert control over disparate elements in the government between now and the 2015 election.

Emilio Manfredi, the International Crisis Group’s Ethiopia analyst, says: “It is probable the new government will be more fragile, the security forces more influential and internal stability endangered. Now that Meles is gone, the weaknesses of the regime that he built are more likely to be exposed, and the repercussions could be felt across the region.” But this assessment, coming from a European perspective, could be unduly pessimistic. Surrounded by Somalia and the two Sudans, Ethiopia’s relative stability is one constant in a troubled region.

Nevertheless, it remains to be seen whether Desalegn will be able to tackle the country’s deep-seated political problems, including a number of secessionist movements, such as the Ogaden National Liberation Front, and also the ruling Ethiopian People’s Revolutionary Democratic Front’s (EPRDF) intolerance of opposition. It is widely claimed that the government uses anti-terrorism laws to arrest and jail political opponents, journalists and commentators merely for criticising government policy. Democracies are not created overnight and it takes time for authoritarian rule to give way to multi-party politics but it is vital for national cohesion that the new Prime Minister adopts a more conciliatory stance towards regional and political opposition.

But it should be borne in mind that Ethiopia’s Developmental State model places the state at the centre of economic and political activity and borrows more from Asian countries like China and Singapore than from the Western neoliberal approach. So far, it has worked only too well — so who can argue against it?

Meles, who had ruled since 1991, managed to turn around the economy of Africa’s second most populous state. The country has enjoyed one of the highest economic growth rates for a non-oil exporting nation in recent years. Both leaders have been committed to replicating the Asian Tiger model of economic growth in Ethiopia, allowing the state and state owned companies to drive development in the medium term, rather than privatising parastatals as recommended by the IMF.

No sale of parastatals

The IMF, the World Bank and the World Trade Organisation (WTO) have repeatedly asked Ethiopia to liberalise its banking and telecoms sectors. Indeed, the WTO made such reforms a prerequisite for membership, when Addis Ababa made its application to join the organisation in 2003. Ethiopia is one of the few countries anywhere in the world to retain state control of the telecoms sector and Hailemariam insists that the key state-owned companies, such as Ethiopian Airlines, Commercial Bank of Ethiopia and Ethiopian Telecommunications Corporation will remain in state hands. However, the rules of membership were relaxed last year and the government hopes to join by the end of 2015. The World Bank’s country director for Ethiopia, Guang Z. Chen, has called on the government to allow the private sector to play a bigger role in economic development. In June he said: “For this country to continue to grow I strongly believe industry has to take a much bigger role because there is no other country that I’m aware of, aside from these resource-rich countries, that can go to middle income status with still 50% of GDP on agriculture.”

Government expenditure is rather unusual. Addis Ababa is spending far beyond its means. The national budget is now 79.1% funded by domestic income, with the remainder made up by aid and foreign loans. However, a large proportion of this spending is on infrastructural projects that should increase the country’s long-term growth prospects.

The government also hopes to oversee the construction of 5,000 km of railway lines and a light rail system in Addis Ababa by 2020. Total investment now accounts for 25.5% of GDP, but relatively little of that is private sector investment. State-backed energy and transport projects alone accounted for 19% of GDP last year.

In this sense, the government is following a policy that many economists would recommend, although it is trying to do so at top speed. It remains to be seen whether this is feasible. In addition, all this expenditure has helped to fuel inflation. While many African governments have managed to bring price rises under control in recent years, inflation stood at a frightening 36.3% last February. Although it fell to 12.9% by the end of the year, the IMF regards inflation as the biggest threat to the Ethiopian economy.

Another economic weakness is the lack of access to credit for private firms, even by African standards. Chen said: “Making credit available for the private sector is certainly one area the government can do more on. The trend that worries us is that while the public investment as a share of GDP is increasing, the private investment as a share of GDP is decreasing.”

A thriving private sector is surely required if the government’s ambition of turning Ethiopia into a middle-ranking economy by 2025 is to stand any chance of being achieved. According to World Bank figures, Ethiopians had a per capita gross national income of $370 in 2011, which is very low by international standards. GDP stood at just $33bn last year but has grown by about 10% a year over the past three years and the government expects it to sustain this level in the short term.

Power exports

The centrepiece of the government’s development strategy is its plan to turn Ethiopia into the second-biggest power producer in Africa, after South Africa, and the continent’s biggest power exporter. The dam construction programme is discussed in more depth elsewhere, but it is worth pointing out how Addis Ababa believes that this focus on just a single strand of infrastructure will drive economic growth. Firstly and most obviously, the government aims to produce sufficient electricity to supply new manufacturing and industrial enterprises, while also enabling rural electrification. Secondly, the new dams are creating vast reservoirs that can provide water for irrigation to boost agricultural yields in many areas. Thirdly, much of the electricity produced will be exported to neighbouring states.

Funding has already been secured to construct the new Eastern Electricity Highway Project, a $1.3bn transmission line between Ethiopia and Kenya. The World Bank’s International Development Association will finance equity in the project for the two governments involved: $441m for Nairobi and $243m for Addis Ababa. Another $231m has been agreed with the African Development Bank and $273m with Agence Franñaise de Développement (AFD).

Construction work should begin later this year, with first electricity due in 2016. Makhtar Diop, World Bank vice-president for the Africa region, said: “This landmark transformational project will change the fundamentals of the power sector in East Africa. It will expand access and lower the cost of electricity supply to homes and businesses across Kenya and help to reduce thermal power emissions in Kenya, a clear benefit to the region’s environment. Only one in three Africans has access to electricity in their communities so boosting power sharing between countries is an essential step toward addressing Africa’s needs.”

Other lines to Sudan, Djibouti and even Egypt have been planned. Electricity is expected to overtake coffee as the biggest export earner by 2020, although the revenues may be used to repay the debts on dam and transmission line construction.

A thriving private sector is surely required if the government’s ambition of turning Ethiopia into a middle ranking economy by 2025 is to stand any chance of being achieved.

79.1%

The national budget is now 79.1% funded by domestic income, with the remainder made up by aid and foreign loans. However, a large proportion of this spending is on infrastructural projects that should increase the country’s long term growth prospects.

$1.3bn

Funding has been secured to construct the new Eastern Electricity Highway Project, a $1.3bn transmission line between Ethiopia and Kenya. Construction work should begin later this year, with first electricity due in 2016.

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* Originally published on African Business, Aug/Sep2013, Issue 400, titled “Tomorrow is a new country”.