A Strategy to Stimulate and Balance Growth in Ethiopia

A Country Economic Memorandum (Report No. 29383-ET)

This Country Economic Memorandum is the product of a year of team research, interactions, and dialogue in Ethiopia and field trips to Amhara, Dire Dawa, Harar, Oromiya, and Tigray regions. While the CEM is a World Bank-led work, it is also the product of numerous interactions with many people and institutions in Ethiopia: the Government of Ethiopia, the private sector, NGOs, academia, bilateral and multilateral donors, and World Bank colleagues (see Storyline ). Several background papers were presented at conferences and seminars in Addis Ababa and at the Bank. Two key events were initially organized in Addis Ababa to identify and discuss some of the key themes developed in the CEM. In July, 2003, a workshop was organized jointly with the Ethiopian Research and Development Institute. In September 2003, the Country Unit organized a one-day retreat on growth strategies with the Prime Minister and his cabinet and a multisectoral Bank team led by Nicholas Stern (Sr. Vice President and Chief Economist) and Ishac Diwan (Country Director).

The macroeconomic models developed by the CEM team were also disseminated to Government officials, academics, and donors in a training seminar organized in Addis Ababa in August 2004.

 Ethiopia Country Economic Memorandum Main Report (coming soon)

 Ethiopia Country Economic Memorandum Concept Paper (PDF)

 Background Papers - Key Areas
   1.  Macroeconomics and Macro Modeling
   2.  Trade
   3.  Water
   4.  GIS Mapping

CEM Team

The task team leader of the CEM and author of the report is Karim El Aynaoui. The CEM core team includes Jalal Abdel-Latif, Pierre-Richard Agénor, Shenaz Ahmed, Omar Aloui, Seifulaziz Milas, and Senait Kassa Yifru. The report is based on several inputs prepared in the form of background papers. Contributors include Bemnet Aschenaki, Nihal Bayraktar, Befekadu Degefe, Eleni Gabre-Madhin, Rahel Kassahun, Gizaw Molla, Belay Seyoum Ketema, and Alemayehu Seyoum Taffesse. Research assistance was provided by Mesfin Girma Bezawagaw and Eskinder Tesfaye.

 

Storyline

Over the last 40 years, Ethiopia has not sustained long periods of high economic growth rates. Short lived spurts of growth are typically associated with positive shocks such as rainfall. Despite the respectable growth levels of the 1990s, per capita income today is at a level that had been reached previously in the early 1970s. GDP per capita has increased by a low 0.2 percent per year over the 1961-2003 period.

 

After a long period of economic decline, Ethiopia was able to revive growth in the last decade. A wave of reforms led to renewed confidence and translated in accelerated growth. Real GDP grew at an average 3.7 percent per year (above its long term trend) between 1993 and 2003, implying a 1 percent increase in per-capita income—compared to -0.5 percent per year over 1961-1992.

 

The development strategy has registered some notable success. The Ethiopian government set the alleviation of poverty as its primary goal. The Ethiopian government set the alleviation of poverty as its primary goal. Its development strategy—Agricultural Development Led Industrialization (ADLI)—focused on the development of smallholder agriculture as critical to transforming Ethiopia’s agrarian economy into a modern one through deeper linkages between agriculture and industry by increasing the productivity of peasant farmers and by developing the manufacturing sector so as it uses more of the country’s natural and human resources. Real non-agriculture GDP has increased by a solid 6.4 percent per year above its long-term trend during 1993-2003 with rapid expansion of the services and industrial sectors. Agricultural output grew by 1.7 percent per annum when smoothing out variations. Crop productivity has stagnated but this is still noteworthy given the dreadful environmental trap affecting large parts of the country.  The shift in macroeconomic policy in the early 1990s decisively contributed to stability, raised growth rates, reduced the country’s external indebtedness, and created new margins of maneuver for sectoral and structural policies. The Government has cut tariffs, relaxed quota constraints, simplified licensing procedures, eased foreign exchange controls, discontinued compulsory grain delivery and the forced membership of cooperatives, begun a privatization process, authorized the operation of private domestic banks, and introduced an interbank money and foreign exchange market.

 

In effect, Ethiopia’s growth potential is yet to be mobilized, mired by self-reinforcing dynamics locking the country in a low growth equilibrium. Igniting growth and setting in motion a process of structural transformation will in effect involve unlocking these self-reinforcing mechanisms. The Country Economic Memorandum advocates that this could initially and gradually be done by a coordinated change in the composition and the level of public investment and by providing targeted public goods that will create better functioning and thicker markets. These will be critical to a sustainable pattern of economic growth and will diversify the sources of growth—in agriculture, services, manufacturing, and rural and urban—away from traditional agricultural production, and create the conditions for high value added exports to expand. Accelerating growth will hinge on greater levels of public investment in infrastructure to build foundations for an enhanced market integration. A higher level of capital stock would, in turn, increase the rate of return of private investment which, in addition to a suitable investment climate, is critical to accelerate growth. The proposed short term actions could trigger a process of virtuous change based on market integration, labor productivity improvement and complementarities between public and private investments;  build confidence; and lay the ground for future long term reforms. Briefly;

 

The proposed growth strategy for Ethiopia encompasses a 3+2 agenda. First, it must build on the current strategy and address the unfinished agenda of ADLI, namely:

·  Strengthening market connectivity and rural-urban linkages,

·   Understanding farmer risks, and

·   Improving environment for private sector development.

 

At the same time, the growth strategy must become more balanced and take bold steps, namely:

·  Geographically differentiating growth strategies, and

·  Tapping high-potential areas through major investments.

 

Such a rebalancing and scaling up can be achieved within a sound overall macroeconomic framework. Scale-up of foreign aid will have an important role to play initially, as will partnership with the private sector given the financing constraints.