Yoseph Kassaye 04/22/10
In November 2009, the Economist magazine, in its edition
entitled “The World in 2010” predicted that the Ethiopian economy would grow by
7 percentage points this year. The Magazine further ranked the country to be
the 5th fastest growing economy in the world and forecasted that the
size of GDP would soon surpass that of Kenya.
If these predictions do hold, the world will be looking at
the biggest economy in East Africa. What makes these predictions even more
perceptible is that they were made at the time when the world economy is deeply
mired in severe economic recession. Albeit the fact the country can hardly
disassociate itself from the profound negative effects of the crisis,
its resilience alone
to withstand
and maintain high growth rates proves that the economy has gained a strong
foothold.
The fact is there is a broad consensus among policy makers
and practitioners that the economy will continue its trajectory as it did in
the previous years. The strong performance exhibited over half a decade has
laid strong foundation to further witness a surge in the coming years. In the
course of sustaining this growth, therefore, not only the country’s major
development challenges could effectively be addressed, but also Ethiopia would be
among those least developed nations close to graduate to the group of Middle
Income Countries-MICs by the end of this decade.
The truth is, beyond these mere statistical forecasts, lie
important undertakings fundamental to substantiate the envisaged optimism. Since
the mid 1990s, key policy measures have been taken which enormously contributed
to enable the economy to make quick rebounds from seldom fluctuations to
sustaining high rate of growth. These policy reforms range from raising productivity of Ethiopia‘s small-holder agricultural
sector through the Agriculture Development Led Industrialization - ADLI
strategy to building a basic platform of
infrastructure and human capital investments to pursuing industrial development
through promoting developmental capitalism.
These policy measures have exerted
extraordinary leverage on the economic growth. As a result, for over the past six years, the Ethiopian
economy has achieved a growth rate averaging 11.5 percent. Remarkably, this
year, the country is expected to achieve a 10.1 per cent growth rate. This is attributed
to the good performance of the agricultural sector, which is the mainstay of
the economy, and substantial growth in services. Indeed
the economy has shifted to a substantially higher growth path than in the past,
and the sources of the surge have diversified beyond the traditional
agricultural and export sectors. The significant growth of these sectors has consequently
brought massive expansion in the national economy. While the total
size of the economy expanded by 64% over the last five years, it is estimated
that maintaining the current growth rate would further expand GDP to
reach $35 billion in 2010.
What is equally
important is that the nature of the growth itself has changed, having a more
pro-poor trajectory. According to the analysis based on the latest Household
Income Consumption Expenditure Survey (HICES), the estimated growth elasticity
of poverty has risen from -1.3 in 2000 to -1.7 in 2005, meaning that each unit
of growth is having a greater impact in terms of reducing the rate of poverty
in 2005 than in the early 2000. Given the strong economic performance, simple
arithmetic extrapolation would yield elasticity less than -2.0. This
trickledown effect, definitely, will further continue to have a significant
impact in reducing extreme poverty and hence achieving the Millennium
Development Goal (MDG)-1.
Likewise, policy measures taken to expand export have leveled the play
ground for the private sector to play a significant role in the country’s
development process. The Government places the private sector at the center of
its export development strategy. For instance, a modern and export oriented
private sector floriculture industry has now begun to emerge in Ethiopia with the
number of exporting farms reached about 67 in 2008, compared to less than five
in 2000 and accounting close to 8 Percent of the total export value. With growing engagement of the private sector, as a result, the total
merchandise exports reached over 1.8 billion USD, only in the last eight month
and 20 percent higher over the preceding fiscal year.
Availability of abundant and inexpensive labor coupled with attractive
investment incentive packages and heavy government investments in
infrastructure and telecommunications have also made Ethiopia to have
competitive advantages in different areas with tremendous business
opportunities. Accordingly,
since 2005, foreign investment flows has increased heavily and reached about
3.5 billion USD in 2008, including pre-implemented ones, with investments in the agricultural sector
accounting for 32 percent of the total Foreign Direct Investment (FDI) inflows.
With the anticipated world’s economic
recovery in sight, a dramatic increase in FDI is expected in the coming years.
It goes without saying that countries
best attract foreign investments if proper infrastructures, both physical and
human, are put in place to ease the decision of making to invest and maximize
benefits from the opportunities available. In undertaking these tasks, along
with the provision of social services, and in addition to the grants and loans obtained
from development partners, the Government has been decisive in generating
domestic resources especially through reforming its tax system. As a result,
its expenditure allotment for the implementation of massive development
projects has been increasing over the years. In 2008/09 alone, 30.5 billion
Birr (equivalent to over 3 billion USD) disbursement has been made in the form
of capital expenditure, making up 83 percent of the annual budgeted amount. As
compared to the performance of the previous fiscal year, the amount shows an
increase of 27 percent, with major disbursement made to financing the
infrastructure and agricultural development projects.
Alongside
these developments, there exists also effective use of macroeconomic policy
tools to achieve low and stable inflation and increase economic stability by
moderating the effects on growth of temporary fluctuations in global and
domestic demand. Ethiopia’s monetary policy, with the aim of maintaining price
and exchange rate stability, has not only ensured soundness of the financial
sector over the years but also created conducive environment to sustain the
growth process. Coordination of the policy instrument with prudent fiscal tool successfully
mitigated the inflationary situation ruptured a year ago due to supply side
constraints as well as rising world commodity prices. Some of this inflation
was of course imported as imports continued to surge due to escalating domestic
demand with booming economic activities. However, such inflationary symptom in
countries at infant stage of development as Ethiopia, by and large, marks the
fledgling of rapid economic transformation accompanied by firm embedment of structural
changes.
Be that as it may, much still remains to be done in tackling the various
challenges surrounding the growth process. Ethiopia is still exposed to
external and internal shocks – including oil price increases, international
economic disruptions, and unpredictable weather and rainfall. Effort to reduce
risk and vulnerability through programmatic interventions is central to
managing those portions of the risks that are within the country’s control. Efforts
to build up the level of international reserves and enhance transfers and
inward remittances to improve the external position of the country are also paramount
to sustain the growth process with solid resource base.
In a nutshell, the uphill struggle by the people and Government of
Ethiopia over the years to overcome the development bottlenecks of the country
has begun to bear fruits. The
unrelenting commitment of the Government in conjunction with the unswerving
support of the international community to continue to address the country’s
development challenges through sustaining high growth rate will further enable Ethiopia
to uphold its hard-fought development gains thereby improving the living
conditions of the people and alleviating the country’s number one enemy - Poverty.