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Ethiopia's egalitarian socio-economic stride


Ethiopia's egalitarian socio-economic stride

(Edelu Bayeh 11-25-15)

Ethiopia is without question one of Africa’s high achievers, with a rapidly growing economy and falling poverty rates. As a result, day after day, the number of scholars, organizations and reports attesting this fact is mounting.

Last week, the African Development Bank's special report("Development Effectivenes Review 2015") released a highly informative report on the Ethiopian economy, describing it as "Ethiopia has also continued to be a more a more egalitarian country than most in Africa" and "without question one of Africa’s high achievers, with a rapidly growing economy and falling poverty rates.".  Indeed, the report underlined that:

"Ethiopia is one of the fastest growing economies in the world, averaging 10% growth over the past decade. Even with high population growth, the country’s per capita income has tripled over the last eight years. This strong economic performance has provided the Ethiopian government with a platform for pursuing its ambitious national development agenda.

Under its national development plans, including the current Growth and Transformation Plan 2010–2015, the country’s public investments were equivalent to one-third of GDP in 2013, compared to just 22% across other low-income African countries."

As it has been said in multiple occasions before these achievements are all the more remarkable, given Ethiopia’s many development challenges. Ethiopia lacks the mineral resources that have driven growth in many other African countries.

The most important part of AfDB's report is that it shows Ethiopia’s achievements in terms of inclusive growth: social, economic, spatial, and political inclusion, and building a competitive economy. Indeed, the report sheds light into the achievements made and the efforts to address the outstanding challenges. Even though the entire report is an informative and inspiring account of the socio-economic stride, we have picked a few major points to highlight in this brief article.

Economic inclusion

Ethiopia has one of the fastest-growing economies in the world. Its average rate of 10% for the past decade, despite high population growth, Ethiopia’s GDP per capita has more than tripled over the last eight years, from $171 in 2005 to $550 in 2013. This strong economic performance has given Ethiopia an excellent platform from which to pursue its national development agenda.

Ethiopia’s national development plans have focused on delivering broad-based development, reducing poverty and achieving the Millennium Development Goals (MDGs). The main driver of growth over the last decade has been large-scale public sector investment. From 2010 to 2013, total spending on the growth-oriented pro-poor sectors of education, agriculture and food security, water and sanitation, health and roads amounted to $12.7 billion. In 2012/13 alone, the spending on these sectors accounted for over 70% of the general government spending. This allocation and spending pattern demonstrates the country’s commitment to eradicate poverty in all its dimensions.

This high rate of pro-poor investment has helped to ensure that Ethiopia’s growth has been inclusive in nature, spanning different economic sectors and benefiting both urban and rural communities. The massive boom in construction activity and a huge expansion in public sector employment have provided many jobs, particularly in Addis Ababa and the country’s major towns. At the same time, programs to improve agricultural productivity and support small and medium-sized businesses have increased incomes more broadly. According to the government, since 2011 the GTP has created about1.6 million jobs through small and medium-scale enterprises.

As a result, Ethiopia has reduced unemployment from 5% in 2005 to 4.5% in 2013. That is a remarkable result, considering that in comparable countries unemployment increased from 5.4% to 9% over the same period. Ethiopia’s middle class has expanded, increasing domestic demand for goods and services and helping to drive continued growth. It is expected that Ethiopia’s middle class will be one of the most important in Africa by 2030.

Ethiopia has also continued to be a more egalitarian country than most in Africa. Income inequality, as measured by the Gini coefficient, has risen from 30.0 in 2005 to 30.4, yet it still compares favorably to the average of 42.5 in the low-income countries in Africa.

Overall, inclusive growth in Ethiopia has had a dramatic impact on poverty levels. From 2005 to 2013, despite strong population growth, the proportion of the population living below the poverty line fell from 38.7% to 29.6%. This equates to lifting 2.5 million people out of poverty. By comparison, the poverty headcount figures for low-income countries in sub-Saharan Africa as a group fell much more slowly, from 49.1% in 2005 to 46.3% by 2013.

These achievements are all the more outstanding given Ethiopia does not have oil, which has been the engine of growth in many other African countries. However, gold is one of the country’s important products, with record exports worth $602 million in 2011/12.

Agriculture is the largest sector of the economy, providing jobs for four-fifths of the workforce and earning 70% of export revenue. Rural areas have been a major beneficiary of public sector investment, much of which has been in infrastructure to enable farmers to access inputs and markets. Last year, the agriculture sector as a whole grew by 7.1%. Since 2005, the value added from agriculture has increased from 46.7% to 48.8% of GDP.

Diversification of the economy

By facilitating the shift of workers from low- to higher-productivity activities, including processed agricultural products and light manufacturing, Ethiopia is laying the foundation to achieve its aim of middle-income country status by 2025. The economy is increasingly linking in to global value chains and expanding its industrial sector, which currently represents 12.4% of GDP, by exporting textile and leather products and diversifying into new products for European markets. Private sector investment remains low in Ethiopia compared to other countries in East Africa, and the financial sector is relatively undeveloped as yet, with the most strategic sectors remaining in public ownership. However, given the country’s competitive production costs, including labor, the private sector could contribute much more in the future. Foreign direct investment into the country has been increasing, from $150 million in 2005 to $1.2 billion in 2012.

The Ethiopian government has been very proactive in promoting green growth at both the country and the global levels. Ethiopia’s 2011 Climate Resilient Green Economy Strategy sets out a comprehensive approach to mitigating the impacts of climate change on the country’s development. The Strategy has been a valuable guide to other countries pursuing similar aims. It is closely linked to the GTP and provides compelling evidence on the value of investing in greener growth paths. Ethiopia focuses on reducing carbon emissions in agriculture by improving crop and livestock production, protecting and re-establishing forests, promoting renewable energy generation and leapfrogging to modern and energy-efficient technologies in infrastructure development.

Spatial inclusion

Infrastructure connections are key to ensuring that the benefits of growth are shared across Ethiopia’s vast territory. The country has made major progress in expanding its road network, enabling the rural population to access inputs and markets and make use of health and education services. With more than 80% of Ethiopians living in rural areas, road development has been an important driver of poverty reduction. Since 2005, infrastructure investment rates equivalent to 3% of GDP have more than doubled the road density, from 33.2 km to 78.2 km per 1000 km2.

As a result, Ethiopia now has basic national and regional connectivity. Addis Ababa is linked to regional capitals, the ports in Djibouti and Kenya and international border crossings. Ethiopia is developing a major railway to the Djibouti port for passengers and freight, which will open the landlocked country to international markets. In addition, the substantial investment in the transport corridor connecting Addis Ababa and Nairobi will dramatically increase trade with Kenya by reducing transit costs, as well as making it cost-effective for Ethiopian businesses to use the Mombasa port, another way for the country to access international markets.

The quality of Ethiopia’s trunk road network is good, with 73% of asphalt road and 57% of gravel roads in good condition, reflecting appropriate attention to maintenance. Yet given the vast size of the country, the coverage and quality of rural roads remain poor, with only one-tenth of the rural population living within 2 km of an all-weather road. The share of paved roads has grown to 15.7%, but many communities remain isolated during the rainy season. There continues to be a strong focus on developing rural access roads under the Universal Road Access program, which has built 35 000 km of roads since its launch in 2010.

Energy as a driver of growth

Renewable energy is a key driver of growth and poverty reduction in Ethiopia. Access to electricity transforms lives by enabling people to start businesses or gain access to health and education services. The country has an abundance of hydro resources, and although almost all of Ethiopia’s electricity comes from hydropower, much of those resources remain untapped. Generation capacity has almost tripled since 2005.

This has led to dramatic benefits for the population, with 53.5% now enjoying access to electricity, compared to just 16% eight years ago and to the average of 32% in low-income countries in sub-Saharan Africa. However, even if the efforts in the energy sector have been important, they still do not meet the needs of the cities and the industries; the country’s electrification (household connection) rate is still low.

The Ethiopian government is now constructing the largest hydropower plant in Africa, the Grand Renaissance Dam. It will have an installed capacity of 6000 MW, providing energy not just for national use but also for export to neighboring countries. In addition, the government has recently completed a restructuring of the power sector, creating two holding companies for generation and transmission and allowing for multiple distribution companies. This will open up the power sector to private investors, increasing efficiency and reducing the costs of energy supply.

Improving access to water and sanitation

Ethiopia has made considerable progress in improving access to water and sanitation facilities. The government has been implementing an ambitious “Universal Access Plan” that seeks to provide 98.5% of the population access to safe water by 2015. As a result of determined efforts, the proportion of the population with access to improved water sources has increased from 38.1% in 2005, which was well below the average in low-income countries in sub-Saharan Africa, to 68.5%, which is now ahead of the comparator countries. Access in rural areas stands at 66.5%, while in urban areas it has reached 81.3%. At the current rate of investment, nearly 1.9 million Ethiopians gain access to improved water every year. However, the costs are increasing as Ethiopia deals with the challenge of variable rainfall and recurrent drought. To maintain its progress, it will need more investment and stronger delivery capacity.

Hygiene promotion efforts have been central to promoting better sanitation. The “Universal Access Plan” adopted the challenging target of access to better sanitation facilities for 100% of the population. Households have invested in traditional latrines on a huge scale, and this has achieved remarkable results. In 2005, the proportion of the population with access to improved sanitation facilities was just 8%, compared to an average of 24.1% across low-income countries in sub-Saharan Africa. By 2013, this had increased to 76% of the population, compared to 25% in comparator countries. Together with greater access to clean water, this is making a huge difference to people’s health and their ability to work and contribute to economic development.

Boosting ICT development

Ethiopia has seen major expansion in information and communication technology (ICT) over the last few years. However, the use of mobile phones and the Internet is not yet as widespread in Ethiopia as in other comparable countries. In Ethiopia, 276 people per 1000 are mobile cellular subscribers, compared to just 5.6 in 2005. Fewer than a million people subscribe to landlines, as Ethiopia leapfrogs straight to mobile networks.

The Ethiopian government has recognized the transformative potential of ICT as a gateway to the financial system, government services and of course the wider world. It is expanding its rate of investment and, through initiatives such as the 200-hectare Ethio- ICT-Village, is trying to attract major interest from communication companies. At the same time, it is promoting and modernizing the institutional and regulatory framework. These crucial efforts should facilitate ICT uptake across the country and help introduce competition to the ICT sector—Ethiopia’s central challenge in this area.

Social inclusion

Ethiopia has made tremendous progress in reducing extreme poverty and is on track to achieve five of its MDGs, those covering poverty reduction; universal primary education; reduction in child mortality; combating HIV/AIDs, malaria and other diseases; and developing a global partnership for development. In spite of the important efforts over the past decade, however, the country is still ranked at just 173 out of 186 countries on the Human Development Index 2014, reflecting the persistence of poverty and malnutrition, inadequate health and education services and a lack of opportunities for advancement. The government has made improving human development central to its development strategies and has achieved some major breakthroughs in recent years.

From 2005 to 2013, more than 2.5 million Ethiopians have been lifted out of poverty, as Ethiopia has adopted policies to promote inclusive growth through agriculture and other labor-intensive sectors. There have been major efforts to improve the coverage of health services across the country: the number of health posts more than tripled between 2005 and 2013, while the number of health centers increased more than fivefold and the number of public hospitals increased by 40%. These measures have contributed to steady progress on a range of health indicators.

Impressive progress in the social sectors

Most notably, life expectancy has increased from 56.6 years in 2005 to 63 years in 2013, exceeding the average life expectancy of 58.2 in low-income countries in sub-Saharan Africa. There have been successes in reducing the prevalence of infectious diseases of malaria through the widespread use of insecticide-treated bed nets, and of tuberculosis through treatment.

Over the same period, the infant mortality rate has fallen from 77 to 59 deaths per 1000 live births, and there has been a steady decline in maternal mortality, from 871 to 676 deaths per 100 000 live births; however, maternal health still lags behind comparator countries. Neonatal mortality has remained at constant levels since 2005. Thus, despite some good progress, too many mothers and infants are still dying.

By devoting 28% of its public expenditure to the education sector, Ethiopia has achieved major improvements in the coverage and quality of services. Net enrolment in primary education increased from 75% of all children in 2005 to 85.7% in 2013, and the primary completion rate increased from 34% to 52.8% over the same period, although many pupils still repeat years or drop out of education. The government is working closely with regional authorities to improve the quality of education by targeting support to teaching and learning.

Nearly three-quarters of Ethiopians are under 30 years of age. Young adults are more likely to be unemployed than older adults, and one-fifth of unemployed youth are uneducated and unskilled. The rate of youth unemployment declined from 11.1% in March 1999 to 6.8% overall (but 21.6% in the urban areas) by June 2013. Because lack of education is a major barrier to securing jobs and livelihoods, the government is expanding technical and vocational training and higher education to help create competent and self-reliant citizens and transfer technological abilities that will contribute to the country’s economic and social development. This investment will ultimately contribute to improving the livelihoods of Ethiopians and to reducing poverty.

Ethiopia has made considerable effort to improve girls’ access to education. The girls/boys ratio in primary education has improved from 84% in 2005 to 94% in 2013. At secondary level, the ratio of girls to boys reached 82% in 2013. This progress is key to promoting gender equality across Ethiopia.

One illustration of the gender disparity is that women’s literacy levels are just 47%, compared to men’s 63%. Women are less involved in public life, including in business and decision-making roles.

Unemployment is also more common among women, particularly younger women based in towns, where 23% are unemployed. Women are, however, slowly becoming more involved at the political level: women’s representation in national parliament has risen to 27.8% in 2013, from 21.4% in 2005. As a result, Ethiopia ranks 40th out of 188 countries in the Inter-Parliamentary Union international ranking.

Women’s participation in the economy has also increased during recent years. For instance, the proportion of Women Land Certificate Holders (joint with husbands and sole) increased from 19.4% in 2000 to 60% in 2011, a very important change, considering the importance of access to land in a predominantly agrarian society like Ethiopia. In terms of access to finance, nearly half of the clients (48%) of the 28 registered microfinance institutions in the country are women. In the meantime, in 2013 6.9 million women benefited from savings and credit services. At present, Ethiopia’s gender performance indicators remain low by sub-Saharan African standards, with Ethiopia ranked 118 out of 136 countries.

Ensuring food security for all

Food security remains a critical problem in Ethiopia. Many of Ethiopia’s 12.7 million smallholder farmers continue to be vulnerable to changing rainfall patterns and land degradation, exacerbated by climate change. With the growing population and land fragmentation, low yields, and poor seed production, recent cereal deficits have been 600 000 tons a year. This causes scarcity of food and high cereal prices, contributing to widespread hunger and malnutrition in affected areas, in both the sedentary mixed crop livestock areas of the highlands and the mostly pastoralist lowlands.

There have been some important achievements in reducing hunger and malnourishment in Ethiopia. The Global Hunger Index, which gives equal weight to malnourishment, proportion of underweight children and child mortality, declined from 31 in 2005 to 25.7 in 2013, compared to an index of 20 across the comparable countries.

In addition, the number of stunted children under the age of five declined from 57.8% in 2000/01 to 40% in 2013, and the number of underweight children decreased from 41% to 25% over the same period. Nevertheless, in 2013/14, 2.7 million people were dependent on emergency food aid and another 7 million were chronically food-insecure. Modernizing and investing in the agriculture sector, developing the road network to enable better access to inputs and food aid, and improving access to water and irrigation are all key elements in tackling the continuing food insecurity many Ethiopians face.

Political inclusion

Ethiopia has seen a steady increase in political stability since the crisis around the 2005 elections. National elections in 2010 were peaceful, and a smooth transition followed the death of the former Prime Minister, Meles Zenawi, in 2012. Achieving the peaceful transfer of power through the ballot box is evidence of democratic consolidation in Ethiopia.

Alongside Ethiopia’s success in promoting inclusive growth, there has been good progress in improving economic governance. The government has pursued prudent macroeconomic policies, ensuring that high-priority infrastructure spending for poverty reduction was protected whilst a tighter fiscal stance and careful monetary policy tackled the high levels of inflation caused by droughts and high cereal prices in 2011 and 2012.

Ethiopia has steadily improved its score on the AfDB’s Country Policy and Institutional Assessment, from 3.46 in 2005 to 4.01 in 2013 (on a scale of 1 to 6), which puts it on par with the average in the low-income countries in Africa.

In particular, the government has taken measures to improve its tax administration, almost doubling its tax revenues since 2008/9. Tax revenues as a proportion of GDP rose from 11.6 % in 2005 to 12.5% in 2013. Further efforts are planned, including strengthening the enforcement of tax laws, widening the tax base, reducing exemptions, and improving tax collection capacity, especially at regional level.

Reinforcing transparency and fighting corruption

On public expenditure, the Ethiopian government is tackling concerns about a lack of transparency by publishing more information about its spending at the national and regional levels. New legislation in 2008 gave citizens the right to access expenditure plans, and budget data are now regularly published on government websites. District budgets are disseminated through local newspapers and in such public places as markets, government offices, and community meetings.

Ethiopia is making progress in tackling corruption, performing better than the average low-income sub-Saharan country. The corruption perception score has improved from 2.2 in 2005 to 3.3 on a scale of 1-10, whilst comparator countries average 2.7. A commission was established in 2001 to raise awareness of corruption and to take action to prevent and investigate corrupt practices. Since then a number of senior government officials and private businesses have been successfully prosecuted. According to a recent report of the commission, petty corruption remains widespread across various government institutions, with the power, tax, investment and transport sectors having the highest corruption levels.

Another area where Ethiopia has done very well is in generating reliable and timely statistics that help improve the policy-making process and the dialogue with civil society. The National Strategy for the Development of Statistics has led to increases in the number of agricultural, business and household surveys over the last few years (see Figure 1.6). To promote transparency, the micro data from these surveys are available to the public, with mapping and data visualization tools to provide a friendlier user interface. The Central Statistical Agency is leading on this work and is setting up branch offices in the regions to bring statisticians and data closer to the users.

Building a competitive economy

To sustain the remarkable growth of the last decade, Ethiopia’s GTP sets out the government’s strategy for the structural transformation of the economy. The plan has as its central focus expanding the manufacturing and processing sectors, to facilitate more private sector activity and improve efficiency so that products can be competitive in local, regional and international markets.

In 2013, Ethiopia’s manufacturing sector grew by 18.5%. There is a strong potential for Ethiopia to rapidly transform its economy, link into global value chains and become the African manufacturer of the future. Because of the opportunities to expand into large-scale cotton production—an estimated 3 million hectares are available for cotton farming in Ethiopia—a particular area for potential development is the textiles and garment industries. Ethiopia could be very competitive in this area: wages are considerably lower than those of qualified Chinese manufacturers, and geographically the country is well positioned—it is estimated that shipping from Ethiopia takes about one-third the time required to ship from far Eastern destinations.

The leather industry is also very promising, as the country has the largest cattle population in Africa; this would be an attractive sector for foreign investors, especially shoemakers. The furniture industry, drawing on sound forestry management, has a big potential; and Ethiopia’s land and lakes also provide resources for a significant increase in agro-processing activities.

An improved business environment will enable more people to become entrepreneurs, to start up and grow their businesses. This will create a more dynamic and thriving private sector in which products are traded and jobs are created. Some improvements to the business context have been made. In particular, the time required for business start-up fell by more than half, from 34 days in 2005 to 15 days in 2013, compared to an average of 25 days for the comparator countries. However, the cost of business start-up has increased from 65% of income per capita in 2005 to 100%. Overall, in 2014 the Doing Business survey ranks Ethiopia as 125th out of 189 countries, a deterioration from its ranking of 102nd of 178 in 2008.

Barriers to international trade increase operational costs and reduce competitiveness, thus discouraging entrepreneurship and private sector investment. The cost of trading across borders has increased somewhat to $2180 in 2013 from $2037 in 2005, although this is a lower increase than the average in comparable countries. The time to export has been reduced from 47 days in 2005 to 44 days, but this remains well behind the 31.8–day average across comparable countries. On the positive side, there has been an improvement in the logistic performance index from 2.3 in 2005 to 2.6, on a 5-point scale. These factors are critical to the competitiveness of business.

Overall, Ethiopia has seen an increase in competitiveness, with its position on the global competitive index rising from 3.3 in 2005 to 3.5. The specific indices for the quality of institutions, size of market and labor market efficiency have improved, whilst those for technological readiness, education and training, and financial market development have fallen back and remain very poor. Overall, Ethiopia’s score on the index is higher on health and primary education and the macroeconomic environment than on the effectiveness of institutions and infrastructure.

In conclusion the AfDB report underlined that Ethiopia has achieved outstanding successes in last decade. High growth has led to declining unemployment and a steady fall in the poverty headcount. This growth has been with a strongly pro-poor focus. The road density has more than doubled, and access to electricity and clean water has increased dramatically and Access to basic education has increased. Notably, life expectancy is well above the African average and infant mortality has fallen.

Indeed, this does not mean everything is rosy. Despite these successes, Ethiopia remains a poor country with some serious challenges to meet. Food security remains a challenge, particularly with the variable rainfall created by climate change, and agricultural productivity needs the introduction of modernized farming practices. Ethiopia also needs to undertake additional measures to create many of the conditions for a competitive private sector. Tackling the three challenges of access to finance, bureaucracy and inflation will be important to facilitate business development in Ethiopia.

Nonetheless, it is indisputable that Ethiopia has made tremendous stride and the growth has been equitable. As the AfDB report attested:

Ethiopia has also continued to be a more egalitarian country than most in Africa. Income inequality, as measured by the Gini coefficient, has risen from 30.0 in 2005 to 30.4, yet it still compares favorably to the average of 42.5 in the low-income countries in Africa.

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