How Ethiopia sets springboard for growth

07 Sep 2017


Since the economic reform in 1991, the government has demonstrated unprecedented commitment to public investment in economic infrastructure, education and health services. The country has also been devoted to improving agricultural productivity and enhancing private investment in both service and manufacturing sectors. In doing so, the country has substantially increased its production capacity setting up the springboard for consecutive economic growth in the years to come. But what are the major markers of this milestone move in the country's socio-economic history?

Improved agricultural productivity

Cognizant of the fact that the vast majority of the Ethiopian population resides in rural areas, mostly deriving livelihoods from agriculture, the government has long put agriculture at the center of its national policy priorities with both the Agriculture Development Led Industrialization (ALDI) strategy and Growth and Transformation Plan I and II.

Accordingly, through expanding research in effective plant breeding, beefing up irrigation and fertilizers use, adopting genetically modified crops, and making better use of agricultural technologies, the agricultural sector has shown an average growth of seven to nine percent roughly since 2005, contributing about 50 percent to the national GDP.

Over the last decade, there have been significant increases in the use of modern inputs, such as chemical fertilizers and improved seeds that technically explains part of that growth.

However, according to a report from International Food Policy Research Institute (IFPRI) there has also been significant land expansion, increased labor use, and Total Factor Productivity (TFP) growth estimated at 2.3 percent per year. The expansion in modern input use appears to have been driven by high government expenditures on the agricultural sector, including agricultural extension which is facilitated by improved road network, higher rural education levels, and favorable international and local price incentives.

Research also suggests that, agricultural output and the number of small-holder farmers rose by 9.4 percent and 3.8 percent per year, respectively. By any standard, this growth in crop output in the last decade was astonishing. The transformation of agriculture has led to higher rural wages, and this provides incentives to further innovation by introducing new technologies such as mechanization.

Besides, the factors associated with agricultural production growth include extension services in rural areas and farmer’s education. Through training and disseminating agricultural extension workers in large numbers, nation was able to bring farmers closer to agricultural technologies.

Agricultural extension efforts and farmer education programs are well underway as farmers who received extension visits and education are more likely to adopt improved agricultural technologies. Recent agricultural growth is largely explained by high government spending on extension services, roads, education as well as favorable price incentives, other factors remain the same.

The success in agriculture can be summed up in Ethiopia's effort to build up a large agricultural extension system, which makes nation to have one of the highest extension agents to farmer ratios in the world. In addition, there has been significant improvement in market access. Moreover, improved access to education led to a significant decrease in illiteracy in rural areas while high international prices of export commodities as well as improved modern input-output ratios for local crops have led to better incentives.

Other factors have also played a role in bringing about this success as well, including good weather condition, better access to micro-finance institutions in rural areas, and improved tenure security. Yet, rainfall variability and recurring drought in some parts of the country pose a major challenge to the sector. Hence, the nation is working to capitalize on irrigation to reduce reliance on rain-fed agriculture and ultimately build a climate resilient agriculture.

Intensified public infrastructural investment

For the past 10 years the federal budget has been devoted to policies that would benefit the wider public such as education, health and infrastructure development. Minister of Finance and Economic Development (MoFEC) Dr. Abirham Tekeste recently told journalists that the government intensified investment in infrastructural development of the country that results in a sizable Foreign Direct Investment (FDI) inflow and backs an imminent boost in export trade in recent years.

The results obtained so far are quite impressive in overhauling the poor infrastructure status. Starting from very poor levels of infrastructure, Ethiopia has invested heavily in energy, transport, communications, agriculture and social sectors. And the government has invested massively in infrastructure development, focusing on transport and power generation. Power generation capacity increased from 473 MW in 2002 to 4260 MW. More than 10,000 MW generation capacities will be available by 2020 once major ongoing hydro, geothermal and wind projects are completed. Hence, the country is set to quadruple its power generation capacity once the Grand Ethiopian Renaissance Dam on the Nile is finished.

Overall, state investments on railway, road networks, maritime, dry ports, airline cargo, and industrial parks among others are significantly heightening private sector investment in line with the government’s development goals. Road and railway connectivity to neighboring countries are also crucial in promoting trade and investment as they avail port alternatives to the country.

Service sector has been performing well

The services sector was one of the driving forces behind Ethiopia’s growth. In the last decade, the sector was the largest in terms of economic output and generated half of the economic growth. Moreover, the service sector is the second biggest employer next to agriculture and created about 15 percent of the employment opportunity. It has also played a crucial role in lifting millions out of absolute poverty.

In the last decade, the service sector has been the largest contributor to economic growth, according to the World Bank reports. Accordingly, the trade and hotel sub-sectors increased by 17 percent, while foreign merchandise trade increased by 13 percent. In the case of transport and communications, Ethiopian Airlines’ passenger traffic and cargo services have also increased by 13.3 and 6.8 percent respectively.

Similarly, due to substantial growth in electricity generation, power sales to industries grew significantly. A sizable amount of power has also been exported to neighboring countries.

Promising manufacturing sector

GTP I and II seek to transform the economy from a predominantly agrarian to a modern and industrialized economy. GTP I provides the medium-term strategic framework that guides the country’s efforts towards accelerating GDP growth and employment creation. It seeks to transform the country to an industrialized and middle-income economy by 2025.

Yet researchers argue that Ethiopia has some distance to go in its attempts to close the large human capital gap as compared to other low-income countries, if it is to accelerate industrialization.

Integral to the achievement of a vibrant and competitive industrial sector is a policy focused on the development of the manufacturing sector, for instance through the use of Industrial Parks (IP) to attract Foreign Direct Investment (FDI). To leverage efforts and facilitate this transformation, the government puts special focus on five sectors thought to maximize the country’s endowment and comparative advantage in the manufacturing sector: textiles and garments; leather and leather products; sugar and related products; cement; and the metal and engineering industries.

But the GTP has not been able to foster and accelerate structural transformation of the economy and the share of the manufacturing sector in GDP remained stable at a rather low level. In fact, Ethiopia’s past high growth in the past decade has been fueled by large services and agricultural sectors.

While privately owned local firms do not seem to feature prominently in Ethiopia’s industrialization process, the government continues to take some bold initiatives to accelerate growth in manufacturing and achieve the GTP targets. One such initiative is the establishment of major industrial zones

Meanwhile, in a bid to tackle the challenges in the manufacturing sector and increase the sector’s share to GDP, the government has been vastly investing in industrial parks and encouraging private investors to take part in industrial parks. Accordingly, the established IPs are already luring high profile investors to the nation. The Swedish apparel giant H and M, which is set to export at least a million pieces of apparel every month is a good example in this regard.

Similarly, to expand the sugar sector with the ambition of becoming one of the top ten sugar exporters in the world, the government has planned to build 10 sugar factories. The state owned Ethiopian Sugar Corporation owns the implementation of the project. Though its completion would enable nation to export an excess of two million tons of sugar, unfortunately the project lags behind schedule.

Economic growth averaged 10.9 percent per year for the last consecutive years surpassing the regional average of 5.4 percent. Whereas the service and agriculture sector still remains to be the backbone of the economy, together accounting for almost 90 percent of GDP, the manufacturing sector’s share to the GDP would substantially increase with ongoing efforts. The manufacturing sector has grown at an average of 10.9 percent in last decade about the same rate of expansion as real GDP.

The goal of the second GTP is to increase the GDP share of manufacturing sector 15 per cent. The agricultural products would provide the necessary inputs to the industry. Infrastructural investments are convincing private investors to step into manufacturing. These merged with the massive human capital development that the sector requires, the coming years apparently hold the best and would certainly enable the manufacturing sector to flourish.


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