Ethiopia's Economy in the Modern Day (2000-Present)
How Farming grew a Nation and why export led manufacturing is so hard
This is Part 3 of my Ethiopia series.
Part 1 covered Ethiopia's journey from the Damot Kingdom to the Aksum Empire to the Solomonic Empire, and its successful avoidance of colonialism.
Part 2 delved into Italy's WWII occupation, Ethiopia's annexation of Eritrea & Eritrea’s independence, the Derg’s Communist Revolution & the Red Terror, and TPLF’s overthrow of the Derg
In this part we will discuss Ethiopia’s amazing Economic growth from one of the poorest countries of Africa to a country on track to becoming a (lower) middle income country by 2025. (Lower Middle Income Threshold: Average Annual Incomes are between $1136 to $4465 per person in 2024 USD)
The three leaders who were pivotal in propelling Ethiopia’s rapid growth were Meles Zenawi (1991-2012), Hailemariam Desalegn(2012-2018), and current Prime Minister Abiy Ahmed (2018-Present). In 2002, Ethiopia WAS THE POOREST COUNTRY IN AFRICA, with the average Ethiopian earning $120 per year ($197 if adjusted for December 2022 USD). By 2022, this figure had risen to $1,028 per person, signifying an average annual growth of 9% per year for 20 years, adjusted for inflation.
Its worth noting that since clothes, food, and shelter are cheaper in Ethiopia than America, if we adjusted for what 1 dollar can buy (which is 55 Ethiopian birr as of October 5th, 2023), the average Ethiopian makes closer to $3000 a year, adjusted for purchasing power parity.
Below, you'll see that despite being landlocked and having a population 40 times larger than Eritrea, Ethiopia now enjoys higher incomes than its former territory/coastal neighbor.
Ethiopia’s economy is unique in Africa as it isn’t a large billion dollar mining exporter (Like Democratic Republic of Congo or Zambia) nor is it a billion dollar exporting petro-state (like Angola or Nigeria). Ethiopia’s largest foreign currency earner is Ethiopia’s sublime government owned carrier, Ethiopian Airlines. #2 is travel, and #3 is the good that Ethiopians invented — coffee. Ethiopia mainly sells coffee to the European Union, UAE, and America. #4 is selling $860M amount of gold that’s mined from Kibre Mengist in the Oromo region.
Ethiopia, with over half its population under 19, faces challenges. Ethnic conflicts persist, notably in Tigray, Amhara, and Oromo regions. Disputes with Egypt over the Grand Ethiopian Renaissance Dam and security concerns with Somalia also persist.
Despite these issues, Ethiopia remains one of the world’s fastest growing economies. In 2023 it is expected to grow 6%, which is still fast by global standards. Addis Ababa, the capital of Ethiopia, has made plans to transform Ethiopia into a strong emerging market, emulating China’s transition from a Marxist-Leninist economy to a mixed market economy.
Ethiopia is privatizing government owned enterprises, but like China, it is not blindly following Western recommendations, and Ethiopia is being strategic with its privatization efforts. In another similarity to China, Ethiopia is purposely delaying its entry to the World Trade Organization like China once did. Ethiopia wants to protect its nascent industries from foreign competition, keep its tariff rates for certain agricultural and industrial goods, and liberalize at its own pace.
The government manages key businesses like the Ethiopian Airlines, Ethio Telecom, and the Commercial Bank of Ethiopia, which are all very profitable for the state. The airline recorded record earnings of $6.1B between 2022-2023, a 20% increase. The private sector, though smaller, encompasses conglomerates & large firms (2.2%), small-medium enterprises (26.4%), and micro-firms (71.4%) that span between agriculture, food, beverages, real estate, trading and manufacturing. Ethiopia is also working on creating its own stock market.
Social Spending & Economic restructuring:
Since the communist era, Ethiopia, starting with Meles has expanded universities.
Also, Meles knew that neither feudalism from the Imperial era nor communism from the Derg era boosted living standards or agricultural yields (He didn’t want anymore deadly famines). So Meles privatized some government companies, instituted anti-corruption practices, liberalized communal farms, allowed more private industry and changed foreign investment laws.
Subsequent leaders like Hailemariam and Ali allowed some privatization to encourage domestic and foreign investment.
Sought Debt Relief & Then Borrowed More:
Ethiopia requested debt relief from Russia and signed up for the IMF’s Highly Indebted Poor Countries debt reduction program. In 1999, Russia cancelled out $5B in Soviet Debt that the communist Derg amassed, cutting Ethiopia’s debt in half at the time. Then the IMF & the West cut Ethiopia’s debt again securing $3B+ in relief in 2004. By 2006, Ethiopia’s debt was at its lowest point to near $2B. This gave Ethiopia some room to not spend money on costly interest payments and invest in its people.
However, Ethiopia had to ramp up borrowing again to meet its infrastructure needs. Because Ethiopia’s gross domestic savings rate is low for a developing nation (For low & middle income countries, gross domestic savings rate is usually 33.5% of GDP. Ethiopia’s highest ever was 24% and as of 2022 it is 15%), Ethiopia doesn’t have enough funds to borrow internally from domestic banks & investment firms. Ethiopia depends on borrowing from foreign lenders.
By 2009, Ethiopia scaled up debt again. Investing in large scale infrastructure projects borrowing from China, Multilateral Institutions, and private investors. In 2014, Ethiopia issued its first Eurobond, raising $1B from private investors with a 10 year term, yielding investors 6.625% per year. See Ethiopia’s external debt (foreign borrowing debt) below:
Part of Ethiopia’s growth has been due to capital accumulation through government-led public infrastructure investments through foreign borrowing. Ethiopia became the 2nd largest borrower of China in Africa. China has built modern apartment buildings in Addis Ababa, a light rail system, dams for hydroelectric power, and a railway connecting Ethiopia to Djibouti’s sea for trade.
All this made Ethiopia’s gross fixed capital formulation as a percent of GDP much higher than the rest of Africa or the Middle East. (Gross fixed capital formulation means more roads, plants, offices, machinery, equipment, railways, schools, hospitals, residential, commercial, and industrial buildings). In 2015, Ethiopia invested 41% of its economic output in itself.
Trade & Port Access
Current Prime Minister Abiy sought France’s aid to build a navy to secure trade in the red sea and end piracy in the horn of Africa. As of 2023, landlocked Ethiopia has paid $1B annually to Djibouti for port access and aims for more affordable port options. Abiy is trying to make deals with Kenya’s Lamu port & Sudan’s port of Sudan, but it controversially closed a deal with Somaliland’s port of Berbera. France supports Ethiopia due to its booming economy, so French firms like Orange, Total, and Avera can invest there.
Agriculture:
Ethiopia's rapid growth in comparison to many African nations is attributed to a significant increase in agricultural productivity. This has bolstered food security, raised incomes, and reduced poverty levels.
Under Haile Selassie's Monarchist era, meaningful land reform was hindered by the Nobles' resistance to relinquishing land. During times of famine, Haile refrained from seeking international aid due to embarrassment, contributing to the military communist revolution.
In the communist Derg era, land was redistributed from landlords and the Ethiopian Church to peasants without compensation. While food yields improved slightly due to peasants having land, the communists were unable to boost farming productivity to avoid famine, even with Soviet aid. The communists tried communal family farms, co-operatives & government owned farms and the government put set government prices for all goods.
This architecture, created black markets and food shortages in some grains and gluts in others. Agriculture productivity fell in 1976- 1977, and again 1983-1985 causing already destitute Ethiopia to suffer horrific famines.
Despite government efforts, including mass re-locationing hundreds of thousands of people, starvation persisted. By 1990s, the Derg started to lift Marxist policies. See graph on food yields below, Ethiopians could barely produce 1 ton of food per hectare.
After ousting the communists, Ethiopia, despite never being colonized, faced severe farming productivity challenges.
Meles, the head of the new Tigray-led Ethiopia, was hyper focused on investing in agricultural productivity and dismantled more the Marxist farming policies.
Market-Oriented Reforms: Under the communist era, bureaucrats controlled prices of each agricultural good. State officials made decisions for the collective farms (like seed selection, planting schedules, and distribution), instead of the Ethiopian cooperative or farmer plowing the field.
Meles allowed household farms and market-based cooperatives, which allowed farmers and co-ops to set prices and make their own decisions so farmers can respond to market signals and sell products at competitive prices. The farmers now have more incentives to invest in innovations. Also household farms had a clearer understanding of the returns they’ll get for their efforts, unlike collectivize farms.Land Tenure Reforms: The government ended forced collectivization and gave smallholder farmers a license to farm. In the former collectivized system of the Derg, farmers worked in collective farms or state owned farms. The farmers did not have a personal stake in the success or failure of their plots in collective farms. Some farmers worked hard and some didn’t pull their own weight. Meles gave families their own family farm on government owned land. This gave farmers more confidence to invest in their land and use fertilizer and agricultural inputs.
Mechanization: After Meles died, Hailiemariam took over and the government and the private sector embraced modern farming to household farms like mechanized equipment, seeds, and fertilizers boosting yields. In 2014, farm operators were buying agricultural machinery, pumps for irrigation, storage facilitates, and planting equipment from China. Now there is an emerging class of smallholder farmers, farming co-ops, and private farms with motorized water pumps, small tractors, and motorized tillers.
Creation of a Market Exchange: In 2008, Meles made the modern electronic Ethiopian Commodity Exchange (ECX). The ECX is a private firm, first led by economist Eleni Zaude Gabre-Madhin. Ethiopia now has a more sophisticated agricultural market where there’s a trading floor and farmers trade spot contracts in coffee, sesame, maize and wheat. The ECX outperforms the traditional marketplaces, farming trade associations or government commodity procurement systems that many African countries still use. The ECX provides warehouse delivery centers, transparent prices, large scale of volume for transactions, reduces middlemen who take portions of a farmers’ income, efficiency, speed, and risk management with futures and options contract. Farmers now know global trading prices and farmers can now use future prices to inform their planting decisions.
Here’s what some farmers have said the ECX has done for them:
“The most important thing about the ECX is that farmers get their money right away. Before that, they had to wait to get their money – sometimes for up to three or six months. There was no security or guarantee.
Before the ECX, farmers had to bring their coffee from the rural areas all the way to the Addis Ababa, where auctions would take place.
Once producers arrived, there was a seven-day period during which the coffee could stay on their truck to be auctioned off. If it didn’t sell, farmers had to rent a warehouse to store it and a hotel room to live in until it would sell. In some cases, this could take up to eight months. “
However, the ECX is not a perfect system, there’s still many reforms and educational issues to make this a better system for Ethiopia.
Ethiopia’s agricultural progress, with its higher yields, has been instrumental in driving economic growth, given that farming accounts for the majority of Ethiopia’s workforce and 80% of exports. However, challenges persist including food insecurity, malnutrition concerns, limited mechanization, and hunger issues in conflict regions in Tigray.
Ethiopia’s food yields went from “worst than most of Africa” to “way better than most of Africa”. Not even more higher income African economies or fast growing nations like Ghana, Nigeria, Ivory Coast, Rwanda, or Kenya has yields as good as Ethiopia. Additionally, Ethiopia leads in cereal yields among North African countries except Egypt.
While significant strides have been made, challenges exist with Ethiopian farming — climate change, soil degradation, and poor access to electricity in rural areas remain. Land rights are still not fully privatized, land tenure can still be improved for pastoralists, private investment is still low, and droughts still occur. There’s still more room to get yields to graduate from “Low Income Food Deficit Country” and irrigation can still improve to reduce rainfall dependency and end vulnerability to droughts. The Minister of Agriculture has a 10 year plan that by 2030, irrigated land will increase, agricultural mechanization will expand, and support farmers to increase access to cultivable land.
Manufacturing:
Ethiopia's manufacturing sector is relatively small, contributing only 4% to its GDP, and primarily caters to the domestic market. Ethiopia makes processed foods, beverages, clothes, footwear and chemical products. Ethiopia’s manufacturing output as a proportion of economic output shrunk down to the same as it was in 1994 - 4%. Ethiopia is one of the countries that has experienced “pre-mature deindustrialization”, your manufacturing proportion decreases before you become rich. This is concerning as manufacturing is typically a significant source of employment in economic development.
According to this Harvard paper studying manufacturing in Ethiopia, Ethiopia’s manufacturing sector is divided between two types of firms. Big productive firms that are highly automated but don’t hire many people, and small unproductive firms that hire a relative number of people but has relatively poor productivity growth. To the “Just copy East Asia!” economists this shouldn’t be happening. Normally, factories that hire tons of people find ways to be more productive by moving their workers into higher value activities that make the country richer.
The country has been trying to promote a China style export-led development for years, but the biggest export is still coffee. Ethiopia is both in the US African Growth and Opportunity Act and the EU’s Everything but Arms initiative to get preferential, tariff-free, access to American and European markets. But, Ethiopia still doesn’t even export $1B dollars of manufacturing goods. In the 2000s, Ethiopia only sold around ~$50M of manufactured exports (mainly gas turbines and compasses). As of 2021, Ethiopia’s biggest manufacturing exports are selling ~$360M of textiles & garments to America and Italy and $140M in aerospace parts to Singapore and Europe. To put in perspective, other developing nations like Bangladesh & Vietnam exports went from selling a few billion in clothes to now selling $51B in clothes and shoes and $300B machines, clothes, and metal products. Why is Bangladesh and Vietnam exporting orders of magnitude more than Ethiopia? . The proximity to major investors like Japan, China, Singapore, and South Korea has played a significant role in their success. But let’s also talk about what’s been working and not working in Ethiopia:
The good:
Training: Ethiopia has invested in manufacturing education with vocational schools like Ethiopia’s Technical and Vocational Education and Training School to advance the capacity of small firms just like Vietnam & Bangladesh.
Industrial Parks & Foreign Direct Investment: Starting in the 2000s, Ethiopia rolled out an industrial park strategy to strategically set up Ethiopia for foreign investment in textiles just like Vietnam and Bangladesh so firms can take advantage of cheap Ethiopian labor.
China has built industrial parks in Ethiopia in 2013 and 2016. The first one is called “Eastern Industrial Park” built by Jiangsu Yongyuan Investment Co to make clothes, food processing, building materials, and electric machines. There’s also the “Bole Lemi Industrial Park” which is right next to the international airport. This was funded by the World Bank to make textiles. There’s also the Kilinto and Hawassa industrial parks. Ethiopia has removed tariffs on machine imports, provides 10 year tax exemptions, provides rent discounts, and subsidizes electricity and water to entice companies.
Overall American, Saudi Arabian, Chinese, Turkish, Indian, European, and Sri Lankan investors have deployed capital and set up shop there. Some noteworthy brands include French firm Decathlon, Swedish H&M, and Chinese Huajian. In these parks, Ethiopian women are also turning yarn into fabric for Calvin Klein or Tommy Hilfiger brands. Also, Ethiopia has been subsidizing their government owned manufacturing enterprises.
The bad:
Wages are too low: Ethiopians make roughly 23 euros a month, roughly $300 a year. According to trading economics, a living wage in Ethiopia is closer to 5100 Birr a month or $1100 a year. Unlike Bangladesh, where people are tolerant of long hours and low pay, Ethiopians have more pride and protest, strike, and resign. This leads to high-turnover and lower productivity gains. This is hurting Ethiopia’s “Made in Ethiopia” Initiative. The factory managers have apparently poorly trained the Ethiopian women and have numerous cultural clashes.
Too High Exchange Rate: Export led manufacturing hasn’t come into fruition mainly due to their overvaluing exchange rate with the birr. Ethiopia still imports a lot of food & energy, so the government artificially makes the exchange rate strong to buy food and energy relatively affordably. But to have export led growth, you need a lower exchange rate to undercut firms from other countries. Ethiopia has a lot of exchange controls which make its currency overvalued so Ethiopia isn’t making billions of foreign currency from selling toys or clothes.
If you calculate the Real Effective Exchange Rate of the Ethiopian birr compared to the Bangladeshi Taka , or Vietnamese dong, you’ll find out that Ethiopia’s currency is relatively overvalued compared to the two currencies. This means that Bangladesh and Vietnam both have a competitive edge over Ethiopia for exporting goods by offering cheaper prices.
Other Issues:
Ethiopian firms still have complaints about quality of equipment, shortage of foreign currency, access to credit, and electricity shortages. From the 2017, Ethiopian Industry survey, here are what medium and small firms complained about:
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To compete with other developing countries like Bangladesh and Vietnam, Ethiopia should boost foreign exchange revenues, streamline processes, and invest in higher-quality equipment.
Another, yet drastic solution to help Ethiopia undercut Bangladesh and Vietnam on price would be “economic sterilization” — (in a simple example) which means the Ethiopian central bank would have to sell Ethiopian bonds to get Ethiopian birr, then exchange birr for dollars, and then use the U.S. dollars to buy U.S. treasury bonds. Entire papers of Western economists monitored China for doing this. The effect of this policy would weaken the Ethiopian birr and strengthen the U.S. dollar to keep the Ethiopian birr currency undervalued to make FDI more attractive (since foreign investors can deploy capital more cheaply with a weaker currency in Ethiopia) and exports from Ethiopia cheaper.
Until Ethiopia becomes more secure in food & energy, it will be difficult for Ethiopia to implement a policy to purposely make food more expensive for poor Ethiopians in order to export more clothes and toys.
Financing Issues
As a result of all those billions of borrowing just to export half a billion of manufactured goods, Ethiopia is having debt & foreign currency issues. On December 26th, 2023, Ethiopia officially had a sovereign default.
Conclusion
Ethiopia has managed to raise incomes, boost economic growth, and reduce poverty by boosting agricultural output and government investment funded by multilaterals and China. As a result, Ethiopia is one of the fastest economies on Earth. If Ethiopia can refine its export manufacturing strategy, Ethiopia can catch up to other developing nations like Bangladesh or Vietnam. Ethiopia needs to maintain stable relations with its neighbors, obtain affordable port access, and end internal conflicts. But that’s easier said than done.
This is a great read. I like that fact that Ethiopia is not blindly following any outsider’s prescription, but actively seek the pragmatic solutions that work for now, and here. It’s also surprising for a major country like this, it has no direct land access. Do you think the tension with coastal neighbours will fuel armed conflicts in the future?
Not floating the currency is probably having a significant impact on manufacturing. The official exchange rate is half the black market rate. This means goods manufactured in Ethiopia are sold for 2x what they should be and manufacturing supplies imported into Ethiopia cost 2x what they should.
The difference goes into subsidizing imports, which then compete with Ethiopian manufacturers in the domestic market.