NewsEast & Horn AfricaEthiopia: The end, the means

Mon,20Nov2017

Posted on Friday, 05 August 2016 14:58

Ethiopia: The end, the means

By Jacey Fortin in Addis Ababa

The Huajian shoe factory in Dukem: the government sees manufacturing as the future. Photo©Petterik Wiggers/PANOS-REAThe state-driven economic model leaves no room for dissenting voices as Ethiopia sticks to its 11.2% growth target, with manufacturing leading the way.

Repeated so often by officials, the phrase 'double-digit economic growth' has become something of a sacred slogan for the Ethiopian government. It is a statistic that makes headlines, attracts investors and impresses economists.

According to the government of Africa's second-most populous country, average annual gross domestic product (GDP) growth for the past 12 years exceeds 10%. And while economies across the continent are faltering, dragged down by a slump in the prices of the commodities that sustain them, Ethiopia holds out hope. Its economic performance has never been pegged to the price of oil, natural gas or minerals.

The protests have not stopped, and they won't stop until justice is done

The target for GDP growth this fiscal year is 11.2%. And to achieve similar rates in the years to come, officials argue, the government must stay the course in prioritising one key sector: industry.

Some scepticism surrounds those magic numbers. Civil servants and aid workers whisper that the government's accounting is flawed – that agricultural output figures, for instance, are skewed by false assumptions about the volume of crops in storage; that low-level officials are incentivised to exaggerate progress; and that this level of GDP growth suggests productivity increases that are, quite literally, incredible.

Still, many agree that the rate of expansion is impressive. Over the past decade, the International Monetary Fund (IMF) has typically projected growth of between 7% and 9% annually.

Challenges

But this will be a tough year for Ethiopia. The country is experiencing its worst drought in decades, with crop failures leaving 10.2 million people in need of emergency food aid. After the last major drought, in 2001, GDP contracted. The country has also been rocked by deadly protests across Oromia, its most populous region. Protesters have targeted investor properties, and the unrest has placed high demands on a security force known for violent crackdowns.

In Ginchi, the small town in Oromia where these protests began, students said they took to the streets after hearing rumours that the government wanted to lease some land to investors without consulting the population. The police clamped down violently, says B.H., 20, who asked only to be identified by his initials. One of his classmates, he said, was shot dead.

"The protests have not stopped, and they won't stop until justice is done," says B.H. "The families of people who died must be compensated, and those who were arrested must be released."

Despite the drought and unrest, Ethiopia has not officially revised its ambitious GDP targets for this year, although Prime Minister Hailemariam Desalegn admitted in March that growth could slow to between 7% and 10%. In April, the IMF slashed its growth projections from 8.1% to 4.5%.

But the government dismisses predictions like these. Deputy planning commissioner Abraham Tekeste, a long- serving technocrat and former state minister of finance, says: "They tend to consistently underestimate growth targets." He acknowledges, though,that the drought will make the 11.2% growth target "very difficult to achieve".

Officials say the economy grew by 10.2% last year, about a quarter of which was driven by agriculture – mostly by smallholders who benefited from expanding irrigation networks and government schemes to spread best farming practices. Improving agricultural resilience, insists Abraham, has lessened the drought's impact.

Industry contributed to just under one third of last year's economic growth, but that was mostly driven by private investments in construction. And just under half the country's growth was driven by services, consisting mostly of expansions in trade, hospitality and transport.

Although services are still contributing the most to Ethiopia's growth, the industrial sector, including construction, is picking up the most speed, having expanded by more than 20% annually over the past five years – nearly twice the rate of services.

Key to the future

The government sees manufacturing as more than just another sector; it is the key to Ethiopia's future. The government is investing heavily in infrastructure to attract manufacturers and is enacting policies to cut through red tape. Industrialisation has already been a primary focus for the past five years, but it is still hampered by power outages, a lack of skilled labour and complicated customs procedures. Manufacturing makes up only about 4% of GDP.

But to hear officials tell it, this is only the starting point. Arkebe Oqubay, the prime ministerial adviser who leads Ethiopia's industrialisation drive, says the administration will spend roughly $1bn annually to get five top-of-the-line government-owned industrial parks up and running.

Ethiopia cannot get by on its own, and so the national debt is growing, with total external debt totalling nearly $20bn at the end of last fiscal year. About $6.8bn came from concessional lenders like the World Bank, but China's share has lately been rising and could soon surpass that of the multilateral lenders. Officials across the board wave away concerns over rising debt, emphasising that these loans only fund bankable investments – and that Ethiopia's debt-to-GDP ratio is below that of many rich countries.

Ethiopia's approach is turning it into a model for the continent, says Carlos Lopes, the executive secretary of the United Nations Economic Commission for Africa. He adds that Ethiopia was a major influence when the organisation began emphasising industrialisation about four years ago.

"We had pushback from the Bretton Woods institutions, and particularly the World Bank, insisting that we should be talking about diversification of the economy and not so much about industrialisation. Implicit was the notion that the market should be let go," Lopes explains. "Our view is much more forceful. It's to promote industrial policy as the key policy for African countries [...]. Now, four years later, the World Bank is talking about industrialisation all the time."

South korean model

Ethiopia finds its inspiration in the East and seeks to take advantage of rising labour costs there. It seeks to emulate countries like South Korea, which rose from poverty in the 1960s to become a global manufacturing hub. Ha-Joon Chang, a South Korean economist at Cambridge University, acknowledges that Ethiopia still has a long way to go but says the country can succeed if it stays the course.

Unlike South Korea, Ethiopia is relying heavily on its state-owned enterprises at the expense of private-sector dynamism. But Chang does not see that as a liability: "Countries like Taiwan, Singapore and increasingly China have made up for the lack of large domestic firms by actively using state-owned enterprises and transnational corporations," he says. "What is important is that the country is in control of its destiny through its ability to set the parameters for the operation of productive enterprises, not who owns the enterprises."

The Ethiopian government sup- ports financial repression, which successful Asian industrialisers used in order to channel money from savings towards particular sectors of the economy. The United States-based Brookings Institution's John Page explains the risks of such a policy: "Yes, you can use that money to subsidise industry, but only if you have set clear performance targets for the recipients of that money. It's worth looking at countries in Latin America where companies got the subsidy but weren't set proper targets."

Strict adherence to a state-driven growth model has left no room for dissenting voices. The political space is closed, and the ruling Ethiopian Peoples' Revolutionary Democratic Front (EPRDF) and its allies won all parliamentary seats in 2015's national election. Many citizens say they fear the security agencies, which are powerful and secretive.

Security crackdown

As Ethiopia modernises, farmers who make up most of the population are being displaced from their land – and often offered little or no compensation. In November 2015, unrest erupted when members of the Oromo ethnic group, Ethiopia's largest, began protesting against their political marginalisation. Security forces have cracked down, and activists say hundreds of people have died.

T., a 21-year-old university student in the city of Adama who requested anonymity, says he once joined a peaceful demonstration that was shut down by security agents within minutes. Economic growth, he argues, does not justify this kind of treatment. "The EPRDF has been ruling for 25 years, but it has never addressed our concerns," he argues. "Our future is dark if the government continues like this."

Some officials dismiss the demonstrations as isolated incidents. Others claim the movement has been hijacked by instigators, terrorists and puppets of Ethiopia's rival, Eritrea. No matter what the excuse, it is clear that the unrest is an uncomfortable subject for a country that prizes its stability as a key
draw for foreign investors.

In response to critics, officials say the state is pouring investments into initiatives that will create jobs. They emphasise how much spending – about a quarter of the budget, according to deputy planning commissioner Abraham – goes toward education. They point out that Ethiopia's record for inclusive growth is much better than that of other African countries. And they fall back on one more key slogan, one that officials deploy regularly as they lay the foundations to turn Ethiopia into a pioneer of African manufacturing: 'We are on the right track.' ●



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