After Meles, What’s Next For The Ethiopian Economy?

Courtesy of The Financial Times, a look at Ethiopia in light of the passing of Prime Minister Zenawi:

The Ethiopian prime minister Meles Zenawi, whose death was announced on Tuesday following prolonged ill health, won’t be mourned by the dissidents that he repressed or their supporters.

But he will be missed by those who value his role in creating political stability and in promoting growth in an impoverished country.

While Ethiopia remains one of the world’s poorest countries (ranked 174 out of 187 on the UN’s Human Development Index) real growth in GDP has averaged 11 per cent over the past 6 years, well above the sub-Saharan Africa average.

With low integration into world financial markets shielding it from the 2008 crisis, Ethiopia has been one of Africa’s most rapidly expanding economies, despite a lack of minerals or hydro-carbons which have boosted many of Africa’s other fastest growing economies.

Meles came to power in 1991 as leader of the Ethiopian People’s Revolutionary Democratic Front, following time spent as a rebel in the Tigrayan People’s Liberation Front fighting the military dictatorship which ruled Ethiopia during the 1970s and 1980s.

During the 1990s he transformed the economy. As Richard Dowden, director of the Royal African Society explained to beyondbrics:

Considering Meles came in with the country totally bankrupt, they accepted that there was no way you could rebuild the economy on socialist lines, which might have been his instinctive position. So part of the deal struck with the US was that it would be free market.

Although the economy is insular compared to its east African peers and the state remains its key actor, Ethiopia was selectively opened to foreign investment, building ties to the west while also attracting FDI from major emerging markets such as India, Turkey and China – Meles cited the latter as his development model.

This investment has been directed towards a huge modernisation programme for Ethiopia’s infrastructure and public amenities. Alongside an expansion of the road network, built by the Chinese, 2,395km of railway are planned. This investment has added 0.6 per cent to annual GDP growth, according to the World Bank.

Energy has been a particular focus. The government’s five-year Growth and Transformation plan unveiled in 2010 targets an increase of electricity production from 2,000MW to 10,000MW. A series of huge dams – the $4.8bn Grand Renaissance dam on the Blue Nile is the largest hydro-electric project in Africa – will make Ethiopia a regional electricity exporter if completed.

Agriculture is the backbone of the Ethiopian economy, accounting for 42 per cent of GDP, 80 per cent of employment and 85 per cent of export earnings in 2011 according to the African Development Bank. It has been a major focus of state economic support and with production increasing by an average of 8 per cent a year over the past five it has been an engine of growth.

The state owns all Ethiopia’s land, and has given foreign investors cheap access to millions of acres in order to encourage large-scale commercial production. Flowers and meat have supplemented coffee as export earners. The country has also developed a small manufacturing base in sugar, textiles, leather products and cement. Oil prospectors are scouring the south of the country.

However, severe problems were already apparent before Meles’s death, with inflation chief among them. It has persistently been above 20 per cent this year.

As Mike Jennings, a development policy specialist from the School of Oriental and African Studies told tells beyondbrics:

For your average Ethiopian inflation has been a problem which high economic growth hasn’t always compensated for. GDP doesn’t always trickle down. Ethiopia is an economic success story at the macro level for someone from the outside looking in, but not always from the inside.

The government’s authoritarian approach to the political spehere has spilled over into the economic sphere as well, with both commercial agriculture and hydro-electricity programmes criticised by international human rights NGOs for their accompanying evictions and environmental impacts.

Investors braving it in Ethiopia have also not always recieved an easy ride, Dowden says, ”investors have been lured in on a free market basis, but once they’re in the have often been squeezed by the government. Meles often handled this on a very personal basis.”

Without him, it’s unclear which direction policy will go, such was the centralisation of authority with the prime minister. Ethiopia still receives nearly $4bn in aid annually, giving donors a degree of leverage over his successor. As Jennings explains:

Long term I’d expect the successor to continue with the same policy framework as Meles – not least because Ethiopia relies so heavily on donors and they will push for that. By overlooking the democracy and human rights issues, they have made it clear that what they really want is a stable economy and supporter of US foreign policy efforts in the region.

Overcoming Ethiopia’s infrastructure deficit will, according to the World Bank, require annual investment of $5.1bn – 40 per cent of GDP – for the next decade, with the power sector alone taking $3.3bn of that. Should FDI and aid be diverted in the event of a disruptive succession struggle, Ethiopia’s progress could come rapidly undone.

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