Belete Meshesha
Under a committed leadership and well-crafted policies of a developmental state, a double-digit annual GDP growth has been registered since 2003 under the PASDEP and GTP I. Indeed, Ethiopia has been at work for the last decade with the sole objective of attaining the middle-income status in first quarter of this century and the economic growth has been remarkably rapid and stable.
Nonetheless, doomsayers have been questioning Ethiopia’s developmental path and its achievements. However, it is becoming increasingly difficult to deny it since Ethiopia’s growth and socio-economic stride is bypassing expectations and delivering tremendous results, therefore, earning the testimony of scholars and international organizations.
The latest testimony came this week from World Bank World Bank report entitled “Ethiopia’s Great Run: The Growth Acceleration and How to Pace it”. The report explained the scale, characteristics and drivers of Ethiopia’s growth in depth.
Indeed, the report attested:
Ethiopia’s growth performance over the past decade was part of a broader and very successful development experience. From 2000 to 2011 the wellbeing of Ethiopian households improved on a number of dimensions.
In 2000, Ethiopia had one of the highest poverty rates in the world, with 55.3 percent of the population living below the international poverty line of US$1.90 2011 PPP per day and 44.2 percent of its population below the national poverty line. By 2011, 33.5 percent lived on less than the international poverty line and 29.6 percent of the population was counted as poor by national measures. Ethiopia is one of the most equal countries in the world and low levels of inequality have, by and large, been maintained throughout this period of rapid economic development.
As we all remember, this has not been the case in the past. Average growth has been 0.5 percent from 1981 to 1992.
The stride began shortly after the political and economic transition of 1991 with the downfall of the communist Derg regime and the introduction of a more market-oriented economy. From 1993-2004, there has been 4.5 percent GDP growth.
The next phase of the stride took place when the Ethiopian People’s Revolutionary Democratic Front (EPRDF) government implemented a series of structural economic reforms which paved the way for the second growth acceleration starting in 2004. Real GDP growth averaged 10.9 percent in 2004-2014. By taking into consideration population growth of 2.4 percent per year, real GDP growth per capita averaged 8.0 percent per year.
Ethiopia moved from being the 2nd poorest in the world by 2000 to the 11th poorest in 2014, according to GNI per capita, and came closer to its goal of reaching middle income status by 2025. This pace of growth is the fastest that the country has ever experienced and it exceeds what was achieved by low-income and Sub-Saharan African countries in that period.
As the World Bank report attested, the recent growth acceleration was part of a broader and very successful development experience. Poverty declined substantially from 55.3 percent in 2000 to 33.5 percent in 2011, according to the international poverty line of US$1.90. Despite rapid growth, Ethiopia remained one of the most equal countries in the world with a Gini coefficient of consumption of 0.30 in 2011. But progress went beyond monetary dimensions.
Life expectancy increased by about one year annually since 2000 and is now higher in Ethiopia than the low income and Sub-Saharan Africa averages. In fact, Ethiopia also surpassed these peer groups in several other key development indicators, including child and infant mortality. As a result, the country has attained most of the Millennium Development Goals. That said, Ethiopia faces a challenge in promoting shared prosperity as the poorest 15 percent of the population experienced a decline in well-being in 2005-11 mainly as a result of high food prices.
Nonetheless, the report noted that growth was concentrated in services and agriculture on the supply side, and, private consumption and investment on the demand side. While agriculture was the main economic sector at the beginning of the take-off, the services sector gradually took over and was complemented, in recent years, by a construction boom. Out of an average annual growth rate of 10.9 percent in 2004-14, services contributed by 5.4 percentage points followed by agriculture (3.6 percentage points) and industry with 1.7 percentage points. Private consumption contributed to most growth on the demand side with public investment becoming increasingly important.
Interestingly, the report elaborates how Ethiopia achieved the growth trajectory. It stated:
Ethiopia stands out in many ways, including in the economic strategy that paved the way to success. In brief, economic strategy focused on promoting agriculture and industrialization while delivering substantial public infrastructure investment supported by heterodox macro-financial policies. Ethiopia’s strong commitment to agricultural development is noteworthy as reflected by high government spending and the world’s biggest contingent of agricultural extension workers. While a strong push for infrastructure development at the early stage of development is far from unique, the way in which Ethiopia achieved this sets it apart.
Indeed, Ethiopia’s economic strategy was unique. Although Ethiopia gradually moved in the direction of a market-based system, it continued to intervene in most sectors of its economy thereby not adopting some of the key recommendation of the Growth Commission of ‘letting markets allocate resources efficiently’.
Indeed, apart from market oriented reforms implemented during the 1990s, structural economic reforms have been absent from Ethiopia’s growth strategy in part because of initial economic success. Although it was inspired by the East Asian development state model and shares some common features, it is also different from these countries both in conception and outcomes. Agriculture, for instance, features much more prominently in the Ethiopian strategy than in East Asia. Critically, also, Ethiopia’s economic success thus far has not been derived from the success of numerous firms drawn from the private sector as in East Asia.
The report also highlights the “heterodox financing arrangements supported one of the highest public investment rates in the world”. It explains “even if Ethiopia generally did not follow the recommendations of the Growth and Development Commission (2008), it did deliver the recommended impressive rates of public investment with the purpose of crowding-in the private sector”.
Despite low domestic savings and taxes, Ethiopia was able to finance high public investment in a variety of orthodox and heterodox ways. The former include keeping government consumption low to finance budgetary public infrastructure investment as well as tapping external concessional and non-concessional financing. Three less conventional mechanisms stand out: First, a model of financial repression that kept interest rates low and directed the bulk of credit towards public infrastructure. Second, an overvalued exchange rate that cheapened public capital imports. Third, monetary expansion, including direct Central Bank budget financing, which earned the government seignorage revenues.
What is the secret behind Ethiopia’s impressive growth trajectory? The World Bank report sheds light into that important aspect of the story in a scientific approach. It stated:
Using a cross-country regression model, we are able to distinguish between key drivers of growth. Our approach avoids tweaked Ethiopia-specific results because we use an existing regression model originally constructed to investigate growth elsewhere. The model is estimated on 126 countries for the 1970-2010 period, including low income countries. Ethiopia’s per capita real GDP growth rate is predicted using Ethiopian values of the underlying growth determinants for three different periods: Early 2000s, Late 2000s, and Early 2010s. We distinguish between structural, external and stabilization factors. The model predicts Ethiopia’s growth rate quite accurately thereby underscoring its relevance as a useful analytical tool for our purposes.
Based on that approach, the report established that Economic growth was driven primarily by structural improvements. When measured at Purchasing Power Parity (PPP), the model predicts a real GDP per capita growth rate for Ethiopia of 4.3 percent in 2000-13 compared with an observed rate of 4.8 percent. The contribution of structural factors is estimated at 3.9 percentage points. A conducive external environment also supported the growth acceleration. Exports quadrupled in nominal terms, while volumes doubled, reflecting a substantial positive commodity price effect.
Moreover, public infrastructure investment, facilitated partly by restrained government consumption, was the key structural driver of growth. In contrast to many countries in the region, the government deliberately emphasized capital spending over consumption within the budget and this was key for supporting growth, according to the model. This shift was facilitated by declining military spending following the 1998-2000 war with Eritrea giving rise to a ‘peace dividend’. Increased openness to international trade also supported growth, as did the expansion of secondary education, though these effects were less pronounced.
Indeed, Ethiopia stands out during the 2000s for having registered very rapid infrastructure development. Compared with 124 countries over four decades, the country was among the 20 percent fastest in terms of infrastructure growth over the past decade. Although this is partly the result of starting from a very low level, these infrastructure growth rates also exceed those of fast growing regional peers with comparable income levels. As we do not know the true economic return to infrastructure investment in Ethiopia, their average returns are estimated from the country sample. Given that public investment was concentrated in providing basic infrastructure, such as energy, roads, and telecom, this growth effect seems plausible.
The report illuminates the role of structural change in Ethiopia’s growth. A modest shift in labor from agriculture to services and construction can explain up to a quarter of Ethiopia’s per capita growth in 2005-13. This result illustrates the strong potential of structural change as a driver of economic growth as discussed in the literature. Although Ethiopia has experienced high economic growth and some structural change in production away from agriculture towards services, the similar shift in employment has been much more modest. Nevertheless, agricultural employment did decline from 80 to 77 percent between 2005 and 2013 and because agricultural labor productivity is so low, this shift gave rise to static efficiency gains as relative labor shares increased in construction and services where the average value added of a worker is up to five times higher.
The growth acceleration period marked the rise of the services sector in Ethiopia. Services overtook agriculture to become the largest economic sector, the biggest contributor to economic growth, and is the second biggest employer. Within services, commerce, ‘other services’ and the public sector were the most important contributors to output and jobs. On the other hand, the Ethiopian services story is predominantly one of a rise in traditional activities, which require face-to-face interaction, rather than modern activities such as ICT or finance.
Ethiopia’s growth acceleration was also supported by positive demographic effects. The economic take-off coincided with a marked increase in the share of the working-age population giving a positive boost to labor supply. Up to thirteen percent of per capita growth in 2005-13 can be attributed to this ‘demographic dividend’ effect. A continued rise in the working age population will support potential economic growth in the coming decades, but to fully reap these benefits, Ethiopia must accelerate the ongoing fertility decline and equip workers with marketable skills to be attractive to prospective employers. Both the manufacturing and services sectors would play an important role in absorbing this additional labor.
An important component of the report is that its explanation of Ethiopia’s agricultural growth and its contribution to poverty decline. Ethiopia’s agricultural sector has recorded remarkable rapid growth in the last decade and was the major driver of poverty reduction. The sector is, by far, the biggest employer in Ethiopia, accounts for most merchandise exports and is the second largest in terms of output. The sector also contributed to most of the employment growth over the period of analysis. Although some labor shifted out of agriculture, substantial shifts are likely to take a long time.
Critically, agricultural growth was an important driver of poverty reduction in Ethiopia: Each percent of agricultural growth reduced poverty by 0.9 percent compared to 0.55 percent for each percent of overall GDP growth.
19. Agricultural output increases were driven by strong yield growth and increases in area cultivated. Yield growth averaged about 7 percent per year while area cultivated increased by 2.7 percent annually. A decomposition of yield growth reveals the importance of increased input use as well as productivity growth. As in the Green Revolution, increased adoption of improved seeds and fertilizer played a major role in sustaining higher yields. While starting from a low base, these inputs more than doubled over the last decade. Total factor productivity growth averaged 2.3 percent per year.
The factors associated with agricultural production growth include extension services, remoteness and farmer’s education. A regression model was used to identify the likelihood of adopting modern technology. Farmers that received extension visits, less remote households and more educated farmers were more likely to adopt improved agricultural technologies.
The report underlines that the agricultural growth is largely explained by high government spending on extension services, roads, education as well as favorable price incentives.
• First, Ethiopia has built up a large agricultural extension system, with one of the highest extension agent to farmer ratios in the world.
• Second, there has been a significant improvement in access to markets.
• Third, improved access to education led to a significant decrease in illiteracy in rural areas.
• Fourth, high international prices of export products as well as improving modern input – output ratios for local crops have led to better incentives.
• Other factors played a role as well, including good weather, better access to micro-finance institutions in rural areas, and improved tenure security.
The report further highlights what should we expect in terms of Ethiopia’s growth rate over the next decade. In that regard, it notes, following a decade-long spell of double digit growth on the back of a strategy and performance that seemingly emulates the East Asian developmental states, including China, one might assume that such high growth rates can be sustained in the future on the back of the same strategy that worked so well in the past. The second part of this report takes a deeper look at this issue on the basis of available international and country-specific evidence.
Highlighting the exceptional nature of the past decade performance, the reports notes that, by drawing upon the objective statistical experience of growth accelerations elsewhere. According to Pritchett and Summers (2014), cross-country experiences of per capita GDP growth since the 1950s has been an average of 2 percent per year with a standard deviation of 2 percent. Episodes of per capita growth of above 6 percent tend to be extremely short-lived with a median duration of nine years. China’s experience from 1977 to 2010 is the only instance of a sustained episode of per capita growth exceeding 6 percent and only two other countries come close (Taiwan and Korea). In other words, these country experiences are statistically exceptional.
In general, the World Bank underlined that
the average household in Ethiopia has better health, education and living standards today than in 2000. Life expectancy increased by about one year per year that passed since 2000 and is now higher in Ethiopia than the low income and regional.
Substantial progress was made towards the attainment of the Millennium Development Goals (MDG), particularly on extreme poverty, undernourishment, gender parity in primary education, infant and child mortality, maternal mortality, HIV/AIDS, malaria and water access, though progress is lagging in primary enrolment and sanitation.
Women are now having fewer births—the total fertility rate fell from 7.0 children per women in 1995 to 4.1 in 2014. At the same time, the prevalence of stunted children was reduced from 58 percent in 2000 to 40 percent in 2014. The share of population without education was also reduced considerably from 70 percent to less than 50 percent. Finally, the number of households with improved living standards measured by electricity, piped water and water in residence doubled from 2000 to 2011.