Economic Growth and Development in Ethiopia
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This is a revision presentation on aspects of growth and development in the fast-growing country of Ethiopia. There are many ways in which the Ethiopian economy can be applied to different areas of the A level economics course.
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Economic Growth and Development in Ethiopia
- 1. Ethiopia—An Agrarian Economy in Transition
- 2. Selection of Key Themes for Ethiopia • Developmental state via 5 year plans • Rapid industrialisation strategy • Key role of logistics infrastructure in growth • Building tourism around Ethiopian Airlines • Fragile state / political unrest / emergency rule • Overcoming a low trade to GDP ratio • Problems of unsustainable current account deficit • Does aid / debt relief / FDI enhance development? • Can Ethiopia become a middle income country?
- 3. Share of global regions in gross domestic product (adjusted for purchasing power) in 2016. Source: IMF World Outlook 58.06% 41.94% 16.71% 8.04% 7.6% 6.72% 3.09% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% Emerging market and developing economies Advanced economies EU Latin America / Caribbean Middle East, North Africa, Afghanistan, and Pakistan Middle East and North Africa Africa Sub- Sahara ShareinglobalGDP
- 4. Growth and Development Economic Growth • A sustained rise in a country’s productive capacity • An increase in real value of GDP / GNI per capita • Increases in the productivity of factors of production Economic Development • Progress in expanding economic freedoms • Sustained improvement in economic and social opportunities • Growth in personal and national capabilities / resilience
- 5. • Professor Paul Collier has identified four development traps - they are 1. Conflict 2. Reliance on natural resources 3. Being landlocked with bad neighbours 4. Bad governance
- 6. Ethiopia’s National Development Plan • Ethiopia’s economic policy is guided by the second phase of the Growth and Transformation Plan (2015/16 - 2020/21). • Aim to be a global light-manufacturing hub • Building a climate resilient green economy • Aim to become a net exporter of energy • Ultimate goal is to push Ethiopia into middle- income status by 2025
- 7. Investment as % of GDP Solow Model LRAS Productivity Capacity Competitiveness
- 8. Ethiopia Real Economic Growth Rate (%) 10.57% 11.39% 8.7% 9.94% 10.32% 10.2% 6.49% 7.5% 7.51% 7.51% 7.41% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 2010 2011 2012 2013 2014 2015 2016* 2017* 2018* 2019* 2020* GDPgrowthcomparedtopreviousyear The GTP targets annual GDP growth of 11%
- 9. Progress in lifting per capita incomes Problems in measuring per capita GDP / GNI
- 11. Development Context HDI ranking Country Human Development Index (HDI) Life expectancy at birth Expected years of schooling Mean years of schooling Gross national income (GNI) per capita GNI per capita rank minus HDI rank 185 Burkina Faso 0.402 59.0 7.7 1.4 1,537 -8 187 Niger 0.353 61.9 5.4 1.7 889 1 186 Chad 0.396 51.9 7.3 2.3 1,991 -19 175 Mali 0.442 58.5 8.4 2.3 2,218 -9 183 Guinea 0.414 59.2 8.8 2.6 1,058 4 174 Ethiopia 0.448 64.6 8.4 2.6 1,523 5 Alternatives to basic HDI as development indicator
- 12. Share of GDP by sector for Ethiopia 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 ShareinGDP Agriculture Industry Services
- 13. Ethiopian Exports Export led growth Aggregate demand Export multipliers
- 14. Ethiopian Imports Imports and aggregate supply in short & long run
- 16. Ethiopia: Key export markets in 2015 14.3% 11.7% 9.5% 8.8% 5.9% 5.7% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% Switzerland China United States Netherlands Saudi Arabia Germany Shareintotalexport
- 17. Importance of Trade • Successful trade provides for emerging nations: 1. A source of foreign currency to help a nation’s balance of payments (trade surplus countries build up US$ reserves) 2. An important way of financing imports of essential imports of capital equipment / technologies and energy supplies 3. An injection of demand into the circular flow of income and spending + creating positive export multiplier effects 4. Increased employment in export industries and related industries and rising per capita incomes and strong HDI scores 5. Falling prices for consumers helps to increase real incomes e.g. by opening up monopoly suppliers of energy to new competition The share of least-developed countries (LDCs) in world exports increased from 0.5 per cent of total trade in 1995 to 1.1 per cent in 2014 (Source: WTO) Comparative advantage / gains from trade debate
- 18. Low Trade Openness HDI rank Country Exports and imports 165 Sudan 19.0 45 Argentina 22.9 79 Brazil 27.4 147 Pakistan 28.1 10 United States 28.1 152 Nigeria 30.9 111 Egypt 34.9 17 Japan 36.8 178 Guinea-Bissau 36.8 174 Ethiopia 37.2 179 Eritrea 37.5 95 Colombia 39.0 188 Central African Republic 39.5 184 Burundi 40.0 Note: Ethiopia is NOT a member of the World Trade Organisation Micro and macro effects of open traded markets
- 20. China’s One Belt One Road Initiative
- 21. Terms of Trade for Ethiopia 0.0 20.0 40.0 60.0 80.0 100.0 120.0 140.0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Terms of Trade Index, 2013 =100 Terms of Trade Export Prices Import Prices
- 22. Current account -6.6 -12.6 -11.7 -4.2 -6.7 -6.7 -1.4 -2.5 -6.9 -5.9 -7.9 -12.0 -10.7 -14.0 -12.0 -10.0 -8.0 -6.0 -4.0 -2.0 0.0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Current Account (% of GDP) Causes and consequences of a current a/c deficit
- 23. Current Account (% of GDP) Data expressed as a % of GDP is a better measure of scale
- 24. Remittance Inflows 0.6 0.2 0.4 0.5 1.3 1.4 1.1 1.8 1.4 0.8 1.2 1.6 1.4 1.3 1.2 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Remittance Inflows (Per cent of GDP, annual, source: World Bank) Remittances and GNI / Exchange Rate / Savings
- 25. Birr has depreciated in nominal terms Ethiopia follows managed floating currency – this involves a policy of a gradual depreciation of the birr against the US dollar at a constant rate.
- 26. Real and nominal exchange rate together
- 27. Infrastructure Gaps Primary Export Dependency Macroeconomic Instability Conflict and Corruption Human Capital Weaknesses Savings and Currency Gaps Natural Capital Depletion Inequality of Income & Wealth Lack of Competition in Markets
- 28. Overcoming the land lock trap The full length of the railway is 752.7 km, with a designed speed of 120 km per hour. With a total investment of $4 billion, constructed by China Railway Group and China Civil Engineering Construction Corporation.
- 29. Infrastructure and Growth • Seen as crucial to industrialisation process • Completion of Addis Ababa -Djibouti railway line • Addis Ababa Light Rail system started in 2015 • Industrial parks - Hawassa & Bole-Lemi Phase II • Grand Ethiopia Renaissance Dam which at 6,000 MWs will be the largest in Africa • Renewable energy projects • Investment in power transmission lines to neighbouring countries (Sudan and Kenya) • East African Fiber-Optic Cables LRAS Multiplier Competitiveness
- 30. Overseas Aid Types of Aid Aid effectiveness Aid dependency
- 31. External Debt Debt relief Debt servicing Bond issuance
- 32. Inflation Rate in Ethiopia -20.0 -10.0 0.0 10.0 20.0 30.0 40.0 50.0 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Inflation, annual % change in consumer prices, source: IMF Does high inflation impede growth and development?
- 33. Countries with lowest urbanization in 2015 8.4% 12.1% 13% 14.3% 16.1% 16.3% 18.4% 18.5% 18.6% 18.7% 18.8% 19.1% 19.5% 20.7% 21.3% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% Trinidad and Tobago Burundi Papua New Guinea Liechtenstein Uganda Malawi Sri Lanka Saint Lucia Nepal Niger South Sudan Samoa Ethiopia Cambodia Swaziland Degree of urbanization
- 34. Sustaining long term development Developing the renewable energy sector Investment in commercial farming Getting domestic businesses to scale Building human capital Raising tax revenues for public goods
- 35. Significance of Labour-Intensive Manufactured Exports
- 36. Evaluating strategy of labour intensive light manufacturing Formal employment for younger workers Cutting extreme poverty Expand the tax base Gains Footloose capital / FDI Low complexity / value added Threats from robotics Risks
- 37. Agricultural Potential for SSA
- 38. Risks to Growth for Ethiopia External demand shocks Dependence on hydro-energy Withdraw of aid donor support Risk of a protectionist US Vulnerable to climate change and droughts
- 39. Fragile States as Barrier to Growth
- 40. Ethiopia—An Agrarian Economy in Transition
Editor's Notes
- In 2000, Ethiopia was the poorest country on the globe in per capita GDP – a mere $124 in current prices
- Ethiopia’s ruling party, Ethiopian People’s Revolutionary Democratic Front (EPRDF), which has been in power since 1991 asserted its grip in the country’s politics by clinching 500 out of the 547 available seats in the May 2015 parliamentary elections Ethiopia faces terrorist threats, primarily from the Al-Shabaab insurgents
- Over the past decade, Ethiopia has been one of the fastest growing economies in the world with growth averaging 10.9%. Despite recently facing the worst drought in fifty years, Ethiopia has remarkably been able to maintain positive growth
- GDP per capita is very low and Ethiopia ranks 174/187 on the UN’s Human Development Index. However, progress has been achieved in the last decade, particularly regarding the poverty rate (30% in 2011 from 60% in 1995) A Gini index of 30 percent, is low by international and Sub-Saharan Africa (SSA) standards. Institutions are weak as per the governance indicators from the World Bank.
- Sixth lowest mean years of schooling of all countries covered by the HDI
- Agriculture accounts for over 40% of GDP, 75% of employment and more than 80% of exports. Hence, the economy is susceptible to volatility on global commodity markets and to weather patterns Ethiopia’s agriculture sector, however, faces many threats. These include soil degradation due to overuse, drought, high tax rates, low subsidies, and poor infrastructure.
- Rain-fed agriculture (accounting for almost 50% of GDP) remains Ethiopia’s main source of employment and export earnings, which results in vulnerability to weather shocks. The country is also exposed to commodity prices, particularly for coffee, oilseeds and gold (22%, 16% and 14% of exports respectively).
- What factors contribute to low trade openness for Ethiopia? What are some of the consequences of a low trade to GDP ratio?
- The current account deficit is structurally high, given low- value exports and large capital imports (45% of imports) for infrastructure development. Major power generation projects are under way and should boost exports when completed. China is Ethiopia’s main trading partner (17% of exports, 19% of imports).
- Managed depreciation against the US dollar – central bank wants to avoid excessive deprecation – reasons?
- In addition, the completion of the Addis Ababa -Djibouti railway line, significantly eases trade logistics related constraints. The commencement of new industrial parks (Hawassa and Bole-Lemi Phase II) and the increasing capacity in power generation with the completion of transmission lines to neighboring countries (Sudan and Kenya) are also expected to improve the export performance and stimulate growth in the short- to medium-term According to the World Bank, only an estimated 12% of the population has access to electricity, and only 2% of the rural population fall under this category.
- The government benefits from large foreign-aid inflows, at 9% of government revenues in 2014, although the share is declining Aid is supported by Ethiopia’s geopolitical importance as a key Western ally in the unstable, terrorism-prone Horn of Africa.
- Ethiopia and debt relief Much lending is now concessional Attempt to issue Euro bonds
- Ethiopia, are still overwhelmingly rural with only 20% of their population urbanized. But this will change rapidly as economies develop Urbanization has a strong correlation with the rate of real GDP growth, because productivity in cities is more than double that in the countryside: Africa’s urban GDP per person was $8,200 in 2015, compared with $3,300 in rural areas.
- unit labor costs for the manufacture of polo shirts are $0.14 per unit, less than half the level in China and Vietnam
- Little agreement on what a fragile state is but generally agreed characteristics: weak state legitimacy, weak state capacity, weak resilience to shocks all inter-related Economies are facing shocks all the time external, e.g. commodity prices internal e.g. natural disasters Some shocks are entirely man-made e.g. corruption scandals How governments respond to shocks is a key issue shocks have been linked to conflict Institutions are likely to be important in mediating this
- In 2000, Ethiopia was the poorest country on the globe in per capita GDP – a mere $124 in current prices