Ethiopia violence jeopardizes impressive growth record

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ohBORN FROM The most extraordinary growth records over the past two decades have been found, perhaps surprisingly, in the Horn of Africa. Real GDP per person in Ethiopia, Africa’s second most populous country, grew at an average annual rate of 9.3% from 1999 to 2019, 0.4 percentage point slower than China’s growth rate . Now a yearlong war between the Ethiopian government and the forces led by the Popular Front for the Liberation of Tigray (TPLF) threatens to spill over into the capital, causing humanitarian catastrophe and erasing those economic gains.

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From the late 1990s, a thriving Chinese economy provided the impetus for a boom in the rest of the developing world. As China got richer, part of its industry moved overseas, allowing poorer countries like Bangladesh and Vietnam to follow in its wake. In the 2010s, some optimists hoped that this sequential industrialization process could eventually shift to Africa. More than any other country there, Ethiopia has exemplified this potential.

Three decades ago, its economy was among the least developed in the world. Then, in 1991, the forces led by the TPLF overthrown the Marxist regime which had things in the long run. Although the TPLF– dominated government remained authoritarian, it started to liberalize the economy and to orient the investments towards the infrastructures. Ethiopia GDP per person has more than sevenfold since 1995, faster than other sub-Saharan economies and the emerging world as a whole (see chart). The share of Ethiopians living in extreme poverty fell from half the population to less than a quarter in the 2010s.

Ethiopia’s success was primarily due to increased productivity in agriculture, which increased incomes and helped the construction and service sectors to develop. While employment in industry grew rapidly from the late 1990s to the 2010s, most workers in the manufacturing sector worked in small businesses, making food and beverage products and other goods for markets. local. Coffee and cut flowers remain major exports.

Yet over the past decade, manufacturing for export has gained a foothold. In industrial parks scattered across the country, factories have sprung up, many of which are engaged in the manufacture of textiles and clothing which often represent the first rung of the industrialization ladder. Clothing giants love H&M and Primark began sourcing products from factories in Ethiopia, and the value of apparel exports more than six-fold from 2009 to 2019. Foreign direct investment nearly quadrupled from 2011 to 2017, largely from China. The vast majority of direct investment – around 80% – has gone to the manufacturing sector.

But economic development depends more on sustained growth over long periods than on bursts of growth. Fighting in Tigray, one of Ethiopia’s most important industrial centers, has slowed down or destroyed many factories. Others are increasingly excluded from markets. On November 2, President Joe Biden suspended Ethiopia’s duty-free access to America, citing “gross violations of internationally recognized human rights”, mainly by the forces of Prime Minister Abiy Ahmed. Plans to privatize more of the economy are faltering as foreign investors lose their appetites.

A swift and diplomatic resolution to the crisis could allow Ethiopia to salvage some of its economic miracle. Still, the road ahead would be difficult. Even before the advance of the Tigrayan forces, the government faced unmanageable foreign debts of nearly 30% of the GDP: a heavy burden for a poor country confronted with covid-19, and which collects less than 7% of GDP in tax.

The destruction of capital cannot be easily undone either. Foreign investors can be difficult to attract. China enjoyed good relations with the TPLF when the group ruled the country, and could be expected to provide support if the TPLF wins. But he’s facing a downturn at home; and because China’s spending in Ethiopia has favored manufacturing, rather than the production of commodities needed by Chinese industry, it can process its investments there with less urgency.

A protracted conflict, on the other hand, would nullify most or all of the country’s past economic gains. Whatever happens next, Ethiopia’s case already demonstrates that a state’s ability to maintain order is the most important, and often the most elusive, condition for development.

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This article appeared in the Finance & Economics section of the print edition under the title “Lost Promise”

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