THE CASE FOR MUCH-NEEDED CHANGE 
IS ETHIOPIA’S ECONOMIC GROWTH SUSTAINABLE?

                                                                                    By Genet Mersha, 5 February 2008

THE SETTING: A WORLD GRIPPED BY FEAR

After several years of remarkable growth, the world economy now seems headed into a meltdown. When things go wrong, the comfort and privilege of being part of the international economic and financial system also brings unavoidable pains. This is what even an outlier such as Ethiopia, on the outer peripheries of the world economic and financial system, has begun to worry about.

This time the trouble started with the bursting of the housing bubble. It then moved to the big investment banks, followed by bond insurers and the entire credit market. As a result, the financial system is now in turmoil, the fear of its contagion sipping into the rest of the economy. Everybody is bruised; folks out there in the country say the economy is sick; there are many blames to go around and no one is spared—not even the credit rating agencies, nor the once god-like Mr Greenspan and the Federal Reserve.

The fear now is that the US economy is headed into difficult times; that is what the data seem to suggest. Consumer confidence has already plummeted. Repeated price cuts by store chains have failed to attract sufficient consumer dollars. Even in December, sales had only garnered a dismal 0.2 percent growth, according to government figures, despite Santa’s best wishes for Christmas and the New Year. In addition, reports emerged last week that the employment front is not healthy either with the first 17,000 jobs already off the January payroll, according to the latest data. There is no better indicator than this of the impending problem in the largest consumption-driven economy in the world. Hence, no wonder that fear of a looming economic disaster has become the topic of worried conversations across countries and languages.

The US remains the largest market for China and a few other racy Asian economies, and, thus, still the engine of global growth. Due to their close integration into the global economy, Europe and Asia—Ethiopia’s major trading partners—would likely be the next ones to be affected by US financial and economic troubles, from where the malaise might spread to other countries.

Early on, the Fed’s unexpected and unscheduled meeting on 22^nd January and its slashing of interest rates by 75 basis points, in a move unseen in the past twenty-five years, tells all about it: the situation is much worse than anticipated. This is confirmed again by its return a week later on 30 January with another cut in the discount rate by 50 basis points. US monetary policy has officially moved from inflation to recession. Therefore, in line with the widely shared belief that a lower interest rate environment is favourable for stocks, they are hoping to induce stocks to rise with a view to restoring confidence in the marketplace.

In the meantime, already billions of dollars, if not trillions, have flocked into US banks, in the form of investments from the so-called sovereign wealth funds of Asian and Gulf origin (government investments), the apparent purpose being helping household name US investment banks clean themselves from the horrible mortgage mess. At the same time, a long held dream of those countries such as China of becoming part owners of US assets has come true. Debate is raging now whether such high stake operations by those countries and US businesses would have serious implications to US markets and global investment practices. At least for now, officials deny that vehemently, although they urge vigil and caution.

In spite of the measures to date, nevertheless, the market is still jittery, its actions characterized by ups and downs, rapid highs and lows across countries. In the US, stocks had gone from a high of 14,198.10 on 11 October 2007, acquired in 52 weeks, to a low of 11,634.82 on 22 January 2008, wiping out billions of dollars in a few hours. On the eve of the Giants’ victory against Patriots and the long-awaited Super Tuesday of the presidential election, the Dow lost 108 points, with retailers, financials and housing stocks taking a huge beating. Obviously, fear is in abundance in the marketplace now. One reason for that is, the market has lost its ability to assess and manage risks. The situation is not any different in Europe, mostly influenced by the mammoth power of the US economy.

From developing countries’ vantage point, the concern is slightly different. The huge quantities of monies already poured into the market and the promises of yet more to come will partly be at the expense of their needs and, thus, they worry that down the road their economies would starve for capital. Furthermore, in spite of a few of its limited benefits, globalization is proving much faster in passing the curses of market failure than the benefits of growth and the great advances of the big economies.

For now, there is consensus recession is enemy number one. It is terribly destructive and must be fought back before it wipes out huge quantities of dollars, euros, yens, pounds, renminbis… especially if it is long and deep, along with growths, jobs, hopes, relations, law and order, etc., all over the world. If treated in time, nonetheless, small economies in the far corners of the world could be spared of its severe impacts, owing to their limited exposures to the US market, less than three percent of total exports in Ethiopia’s case. Unfortunately, several small economies would remain uncertain about their future. There are the unknown implications of a strong euro, the nose-diving dollar and their unpredictable consequences, not to speak of any downward trends in European and Asian economies, whose symptoms, unlike the US’s, are mixing conflicting signals of a strengthening inflation (gas, food prices and real estate) and momentum gaining recession (tumbling financials and consumption).

Far away from the stock markets, the Ethiopian economy is already struggling under the weight of its accumulated and enormously stubborn problems. One can easily imagine what it would be like, if or when recession with all its negative consequences lunges into an economy that has so far picked steam largely because of the robustness of other economies. With just a few years of high growth rates, it would be a mistake to expect Ethiopia’s economic growth to have taken deep roots as to withstand on-coming strong tides. If one looks at the direction of our country’s exports, it is possible to see their annual and at times quarterly pendulum sort of swings between Europe and Asia. It simply means most of our exports have barely succeeded in creating niche markets for some of our lifeline commodities, despite their fresh and original quality and price competitiveness.  

There is no doubt that the country’s economic performance since 2003 has been very impressive. Of late, however, even before the dreaded visit by recession, erratic or declining annual and quarterly output levels and export volumes are revealing the nature of the underlying supply constraints. This is marked by consistent departures from planned targets, according to the latest data from the Ministry of Trade and Industry. Are these pressures of the time, or consequences of the bottlenecks that threaten to chock up economic growth and sustainable development?

This paper does not pretend to be complete or exhaustive; nor is it politically motivated, as elements intolerant of criticisms would certainly try to impute even before reading it and digesting its message. Rest assured, it only makes a modest effort to sketch a picture of Ethiopia’s economic performance, based on available sources of information—both Ethiopian and international—and highlight its underlying problems thereon. In so doing, it hopes to make a small contribution to encourage others to address some of the questions in the minds of many compatriots and see what can be done to help our country. There is no denying the paper also aims at driving a message home to the authorities to see the wisdom of being part of the much-needed timely changes in the best interests of our people, our country’s future and in their own interests. Take it or leave it, no deliberate effort is made here to paint an unnecessarily negative picture more than warranted by the situation obtaining in our country today.

THE ECONOMY UNDER A RECESSION SCENARIO

Different types of scenarios could be developed to indicate the possible impact of the forthcoming difficulties in the global economy, if at all it comes to that. The following scenario is chosen not because it is more real, but simply because it is broader and shows the likely implications of a long and deep global recession:  

a. Global demand for commodities, which so far has sustained Ethiopia’s economic growth steady, may experience from mild to severe contraction. In the past several years, Europe (Germany, Italy, Netherlands and Switzerland) and Asia (China, Japan, and Saudi Arabia) have been Ethiopia’s major export destinations, accounting for over seventy-seven percent of total exports in 2006/07. Asia remains Ethiopia’s first import source market (China, Japan, and Saudi Arabia). At present, European countries have little reserves, if any, although not comparable to that of the economic giants in Asia. On top of that, a weak dollar and a strong euro are also biting into the margins of European businesses, not to speak of the havoc the subprime mess has created in the banking industry. Some small and huge concerns are already reorienting the directions of their trade, along with some major production centres. Public sentiment in Europe is not strong, while the figure may not be as high as in the US. In the circumstances, should things get worse, Europe may cut back on its imports from Ethiopia.

Owing to demand contraction, therefore, at a time especially when Ethiopian businesses have been expanding expecting to get more market access to Europe and Asia, the opposite may turn out to be true, as is the case in recessionary situations. The worst-case scenario is that, lack of market would reduce production, increase unutilized capacities in factories and other production centres. That would diminish the ability of businesses to sustain the economy, among others, by keeping employees on their payroll and pay back their bank loans in time. In turn, this would give rise to bankruptcies. This would then be followed by cutback in Ethiopian imports of vital necessities, including essentials for development.  

If this materializes, it would lead to drastic shortages of goods and services. Because of inflation, which still is in double-digits, the cost of living would escalate further from its highs ever since 2005. Government revenues would decline and that there is little it can do to help businesses, the sick and the needy, or continue its development programmes. Poverty would be on the rise. This would badly affect a great number of people, across various divides, both in urban and rural areas.

b. Aid flows are cyclical, going low in times of economic hardship or political disagreements. The fact that Ethiopia is heavily dependent on international aid for up to 35 to 40 per cent of its national budget is grave source of concern in such times. The reason for such dependence is the enormously wide resource gap that exists between Ethiopia’s low level of gross domestic savings and its huge investment needs. Hence, a substantial portion of government spending would have to come, as is the case normally, from external assistance and loans. For instance, according to the summary of consolidated government budget for 2007/08, total revenue of 34.0 billion birr is part of the planned budget, of which 10.6 billion birr, that is, 31.0 percent, is to be sourced from external grants, showing how important foreign aid is for the country (www.mofaed.org). In normal times, the extent of aid or loans not materializing leaves the national budget short by 15 to 25 percent of the planned target.

Let us try to look at this from a different angle. The budgetary requirements to achieve international targets for poverty reduction, envisioned in the UN Millennium Development Goals by 2015 (MDG), are premised on substantially increased grants and concessional credits (Source: IMF, 2007 Article IV Consultation, p. 10; IMF, Money Isn’t Everything: The Challenge of Scaling Up Aid to Achieve the Millennium Development Goals in Ethiopia, 2006). Some estimates indicate that, in order for the country to attain those targets, aid per capita would have to be scaled up, at least, from roughly $20 to $60 by 2015. Unfortunately, Ethiopia is already considered in no position to meet the international targets, even before the possible cutbacks toyed with by this scenario under recessionary conditions.

Government officials repeatedly declare the countries readiness to attain the 2015 targets. In a statement to the 62^nd session of the General Assembly of the United Nations on 3 October the foreign minister claimed, “More tangible perhaps, in terms of the progress we have been making to change the life situation of our people, is the advance we have registered towards achieving the Millennium Development Goals. We are set to attain universal primary health care by 2010. We are well on the way to achieving child and maternal mortality well prior to 2015.

This, however, is belied by a United Nations report, issued following the mid-term review in June 2007 of implementation of the Goals by member states. The report observed, “Sub-Saharan Africa is not on track to achieve any of the Goals. Although there have been major gains in several areas and the Goals remain achievable in most African nations, even the best governed countries on the continent have not been able to make sufficient progress in reducing extreme poverty in its many forms.” (United Nations, “Africa and the Millennium Development Goals: 2007 Update). The assessment of the British government is not any different. A recent DFID report disclosed, “Despite signs of progress, Ethiopia, remains unlikely to meet any of the Millennium Development Goal targets by 2015,” (www.dfid.gov.uk) .

c. Another area where substantial reductions are likely to occur, if recession hits, is private transfers, foreign exchange largely Ethiopian émigrés send home, estimated at an average of over a billion dollars a year, excluding transfers through unofficial channels. Ethiopia received USD 3.7 billion from 2004-2007 (USD 1.7 billion in 2006/07, USD 1.2 billion in 2005/06, and USD 810.8 million in 2004/05), according to government data (www.mofaed.org). The amount of indirect transfers, which can hardly be estimated accurately, is assumed to be in the range of USD 75 to 100 million annually, that is, money transfers through private arrangements. Comparison of data reveals that the amount of private transfers on annual basis is higher than the country’s export earnings, for instance, of USD 1.0 billion in 2005/06 and USD 1.2 billion in 2006/07. Therefore, private transfers play an equally important role in partly meeting the country’s foreign exchange needs. They also help in substantially reducing the negative impacts of the consistent deficits in the current account. It is possible that with the on-coming unfavourable economic environment, private transfers could show some reduction. In recent years, despite some increases in export earnings, the balance of payments has continued its deterioration by -1.7 billion USD in 2004/05, -2.2 billion USD in 2005/06 and -2.1 billion USD in 2006/07 (www.mofaed.org).

d. Lately, government internal and external debts have been mounting rapidly. It is possible that, if economic performance deteriorates significantly and for a long time, the country will be, first, unable to secure fresh loans and credits from abroad; secondly it will be severely constrained to amortize or service its present debts. Even if it could, the question is at what cost. This will have severe consequences on economic performance and protection of the poor or providing for schools, etc. It would also affect the future flow of funds. The government is to be credited for having raised in recent years the level of the tax revenue as a percentage of the national budget, not consistent though. If, and when, the domestic economic situation deteriorates, however, government receipts also dwindle with reduced means to meet its expenses. For the last few years, the IMF has been expressing its concerns at the level of government debts, which it thinks would definitely have strong implications to the management of the economy, especially in keeping inflation under control, keeping the value of the birr from shooting up , thereby undermining national capacity to ensure sustaining growth that the country badly needs.

e. If recession hits home, a number of projects in the pipeline may be affected, delayed, or scrapped due to the lack of funds;

f. As is the common situation in lean years in many developing countries, the maintenance and up-keep of newly constructed roads, power generating sources, communications and other equipments and infrastructures, buildings and other installed facilities would suffer neglect because of the shortage of funds. This would result in severe damages and dilapidation that in future may prove to be enormously costly to rehabilitate.

EVIDENCES OF STRAIN ON THE ECONOMY

In terms of the economy’s performance, the following are a few of the important evidences signalling weaknesses that may hamper achievement of poverty reduction and the goal of sustainable development:

●     Enormous efforts have been exerted during the last several years to improve Ethiopian agriculture, the mainstay of the country’s economy and the centrepiece of the current development strategy. However, a number of adverse factors have militated against its rehabilitation and its capacity to increase food production. The obstacles range from population explosion, land fragmentation, backward agricultural practices, and environmental degradation to government policies that are designed to serve political interests of the ruling party. From 1998/99 to 2005/06, the population density in Ethiopia has grown from 54/sq.km to 65.8/sq.km, according to CSA (2205). Furthermore, an estimated 26 million Ethiopians live in food deficit areas, where the annual food availability per household even in good years, according to one field study, is estimated to be a third of the amount in the food surplus areas and, thus, the level of poverty twice as much. Add to this picture a large number of pastoralists, at the lowest rungs of society. These are poorest of the poor, easy victims of environmental calamities and who hardly and meaningfully are visible in the overall picture.

In conditions where agricultural productivity has hardly gathered momentum, therefore, achieving the goals of increased food production for domestic consumption and exports has now become a real challenge to the Ethiopian economy. Already in 2005, a study on the evolution of poverty incidence in Ethiopia from 1989-2004 concluded that poverty in urban areas was on the rise, while rural poverty incidence might have decreased only by an insignificant one or two percentage points (World Bank 2005). This is attributed to the inability of agriculture to keep pace with a fast growing rural population and poorly targeted government policies. Consequently, for a long time food production has remained very low in Ethiopia. Yet a further evidence of the looming problem has manifested itself in the erratic volume of agricultural exports that of late have fallen up to 15 percent below planned targets, according to recently released data by the ministry of trade and industry.

In a rare admission, the minister of agriculture and deputy prime minister in January 2008 confirmed that productivity growth in agriculture is not at the level expected. As a solution, he urged more efforts toward increasing the reach of research results from a few experimental cites and amongst a limited number of farmers to the wider population (Source: Ethiopian New Agency: 25 January 2008). Already in 2007, the World Bank observed, “Lack of productivity growth was a particular disappointment in the agricultural sector, which still accounts for 85 percent of employment, and forms the centre of the Government’s development strategy” (Source: Ethiopia: Accelerating Equitable Growth: Country Economic Memorandum, 2007).

Earlier in 2003, an Ethiopian development expert said, “The only positive thing you can mention [about agriculture-led industrialization—ADLI] is that there is greater distribution of chemical fertilisers. But, if you look at the figures, they don’t show really any dramatic changes in terms of productivity – in fact productivity per household has stagnated” (IRIN, ETHIOPIA: Interview with Dessalegn Rahmato, land tenure expert and head of the Ethiopian-based Forum for Social Studies, 14 August 2003).  

●     In 2005/06, the contributions of the services and the industry sectors to GDP stood at 40.4 and 13.5 percent respectively. While industry as a share of GDP grew from 12.8 percent in 98/99 to 13.5 percent in 2005/06, the services sector proved more erratic; during this time, it inched up from 39.3 percent to 40.4. Nonetheless, for a span of these eight years, five of which are periods of expanded economic activities and improved resource flows, the changes in the figures are negligible in various areas, reflecting a serious underlying problem in the economy. Similarly, the volume of exports of manufactured goods has remained very low, even though there still are higher demands especially for textiles, leather, meat and meat products, other processed agro produces and gold.

At present, manufacturing industries operate in almost half their capacities. This by itself is a serious wastage of resources. A recent survey indicated that enterprises face lack of working capital, experience shortage of foreign exchange, raw materials and spare parts; power outages and lack of water, including frequent breakages in machineries, 76 percent of which are eight years old and above, according to a joint survey by CSA & MOFED. At the same time, the number of enterprises complaining about the lack of demand/markets has grown from 39.9 percent in 2005/06 to 45.4 percent in 2006/07. This has to do with weakening local purchasing power.

Similarly, while entrepreneurs here and there complain about certain government policies and regulations that affect their businesses, which in the first place necessitated their now nearly monthly meetings chaired by the prime minister, reference to them has hardly had any respondents in the in the latest survey. The reasons for this silence are not disclosed in the report. However, good management practices would have required the reasons to be established clearly, whether this is another manifestation of fear of reprisals by the state, one of the fallouts of the post-2005 elections that engendered an intimidating environment, or because there are no policy problems.  

On the other hand, the 2008 report on the ease of doing business in Ethiopia, prepared by the World Bank, portrays some deterioration in the country’s performances and rankings, compared to its 2007 standing, which already was one of the least in the world. Of special interest are: (a) the overall ease of doing business in which Ethiopia is ranked 102^nd, compared to 99^th in 2007; (b) in the ease of starting business, it is ranked 106^th, compared to 103^rd; (c) in the ease of protecting investors, it is ranked 107^th, from 105^th; and, (d) in the ease of getting credit 97^th, against 94^th. Whereas Ethiopia has maintained its rankings in the ease of enforcing contracts at 77^th, closing businesses at 70^th and the ease of employing workers at 89^th, while its performance in the ease of licensing and administrative burdens in paying taxes has improved from 33^rd to 29^th and to 58^th from 60^th, respectively.

In terms of corruption, which is on the rise, there is the sense of uncertainty whether government is using it as a tool to silence political opposition, while tolerating actual culprits. In any case, according to Transparency International, corruption has increased, as demonstrated by the deterioration in the country’s ranking from 130^th in 2006 to 138^th in 2007. Corruption imposes additional taxes on honest businesses and is, therefore, enemy to increased, improved production and productivity growth. The unfortunate irony is that the partisan political environment has created conducive situation for that, comfortable nest for hired hands and political careerists. 

●    A lot of important steps have been taken to eradicate illiteracy and facilitate modern education. Several lower grade schools, secondary schools and universities have been established during the last 17 years. However, the success of such wider educational opportunities has come at the expense of the quality of education. In addition, the environment in which education of the young is taking place is contributing to its further deterioration. Quite for a long time, the state on one side and the young and teachers on the other, have been heading on collision course, mainly because of political reasons. Since the last several years, school grounds have become battlefields for intolerant partisan politics and ethnic hostilities, which many consider as reflections of the overall political environment in the country.

Academic freedom has been another victim of Ethiopia’s educational system today, thereby allowing political interference and ideological objectives of the ruling party to interfere with teaching and academic quest. The recent revelation by an American law lecturer at Mekele University, Jurist Abigail Salisbury, is a damning testimony to that. As a lecturer on human rights, she was made to sign in her job contract that she would not say anything against the ruling party in the course of the performance of her duty as a lecturer. However, when the time came, she disclosed how much her university students in Mekele were under stress, not to speak of her own concerns, in dealing with certain academic topics for fear of being reported by government agents, perhaps in the classroom, and the fear of retribution later on. Anyone, please tell me, if this is consistent with freedom of thought and conscience, and if it facilitates economic growth and national development. If anyone has an affirmative response for that, I own the Brooklyn Bridge, as the saying has it, and am ready to sell it to anyone interested.

THE POLITICAL ENVRIONMENT, ITS PITFALLS & CONSEQUENCES

For a country such as Ethiopia, the start of whose economic growth is at the lowest stage of development, no amount of growth would ever be higher or sufficient for a long time to come. Nor should any more time be wasted from development. Therefore, there is no alternative to uninterrupted optimal growth, guided and induced by the right mix of policies in order to overcome abject poverty, our national attribute. However, based on current experience and contemplating about the future, I am inclined to think that Ethiopia has not yet found the right trajectory for its growth and development. In general, the economy lacks supportive political, attitudinal and institutional environment. Especially the following are threatening to affect Ethiopia’s present and future.

✧      The country’s overall political environment barely accommodates alternative views and organizations. As a result, citizens’ free and unfettered participation in political life is restricted, including by unlawful means. At the same time, the favouritism that partisan politics has created has led to domination of the majority by a tiny minority and stifled free competitions in the economy. This has denied the public trust in government and confidence in its policies. Today, the limitations set by these adverse factors have blocked the unleashing of the full potentials our country in various sectors of the economy.

While the political system portrays the image of openness with regular and seemingly multiparty elections, governance in Ethiopia is no different from single party rule of yester years under authoritarian states. Free competition for political power is discouraged through various hurdles, or squashed through illegal arrests, detentions, murders and closure of party offices under various pretexts. The ruling party is no apologetic when unleashing state apparatuses or its enormous powers of violence to undermine its opponents or to blackmail the peasantry into forcing them to become its power base. Alternative political organizations neither have permits to compete in rural areas, nor the resources to campaign anywhere in the country. Most of all, they scarcely enjoy protection from the politically malleable courts and party cadres that masquerade as judges. For instance, when the opposition succeeded in challenging the ruling party in the ballot box in the 2005 elections, the results ended up in unresolved disputes, a substantial number of people massacred and CUD opposition leaders and private media people imprisoned for almost two years on trumped up charges.

In a meeting held in mid-January 2008 between the TPLF/EPRDF and the loyal opposition parties in parliament on the subject of the forthcoming elections, the ruling party declared, “The success of our election is measured by its democratic conduct and its sanctioning by law, not by who wins and loses.” Reminiscent of the 2005 elections, however, allegations of clear violations of the law by the ruling party began to surface a long time ago, only reaching its height when the majority of opposition candidates ended up in imprisoned. Opposition parties allege that several of their candidates are still in prison and their offices in different parts of the country remain closed. When the issue was raised at the said meeting, according to The Reporter, the coordinator of the election on behalf of the ruling party retorted by saying that none of the parties had ever filed complaint about it.

The interesting thing is Prof. Beyene Petros replied by reminding the official that he had protested verbally and in writing, including asking to meet in person with the official responsible, a request, which, according to him, did not even receive acknowledgement. The professor in fact added that most worrisome was the presence now as election officials of those who were caught staffing ballot boxes in 2005 and were dismissed at the time. He informed The Reporter that those individuals were recruited again as election supervisors, despite the evidence of their dismissal in their personal records! That is the whole point why they are needed in the first place.

On his part, in an interview with one of the émigré webpages, Mr. Bulcha Demeksa said the ruling party “makes sure opposition candidates that understand and very well articulate the problems of their constituencies, candidates that have earned the respect of the society, candidates that are qualified to be elected are singled out for arrest…” Tell me if there is any better evidence than this about the prevailing repressive environment in our country that has denied citizens any room for peaceful political participation.

✧    The absence of rule of law is undermining business confidence, cultural and intellectual development, thereby affecting economic growth and national development. Fear and a sense of insecurity pervade the entire country. The government remains deeply unpopular. Power is strictly in the hands of a few individuals who rode into power on the back of the TPLF and in the name of Tigrians, without surely representing their interests in any way. This is another story of Ethiopia’s aspirations that are now constantly fed empty hopes and vacuous claims of success by a few power-crazed individuals, assisted by a handful of handpicked loyal ethnic parties fronting for them as junior partners in government.

✧      Today, the content, evolution and direction of the country’s institutions is designed merely to cater to the partisan political interests of the ruling party. Certainly, by all measures, the institutions they gave rise have failed to meet the tests of accountability, provision of essential and unbiased public services and the need to ensure an all-round fair play by all actors in society. The state, government institutions and political parties have been fused into an inseparable entity. This dangerous situation has created a unified state and government, the imprimatur of whose leaders is conceived in political deceit and force, never the rule of law, not once, not even in their recent utterances on the Kenyan tragedy.

Such an environment has sanctioned a system of governance without accountability, including the various institutions and a civil service system that have become mere tools of the ruling party. The lack of independence of civil servants and institutions from the control of a ruling political party has created, therefore, conditions where the short-term interests of a corrupt political party and its co-travellers have acquired the capacity to over-ride the long-term interests of the country and its citizens. Today, this has fostered conflicts, lack of vision and diminishing commitment to the interests of the nation and the Ethiopian people without any difference. This frigid and corrupt environment has stifled independent thinking in the country, which is not favourable to economic growth and national development.

✧     Politics in today’s Ethiopia has become not only unproductive, but also increasingly counter-productive, filled with danger and rife with violence, every passing day witnessing the level of intensified repression. Certainly, the regime has succeeded in silencing opposition within the country, at least, on the surface. With respect to the émigré community, the ruling party’s source of major headache, the regime is still fighting in every possible way, including spending annually hundreds and thousands of dollars to get its émigré opponents overlooked, not heard and not taken seriously in their adopted countries. It is wasted resources, as it has scarcely silenced the so-called “vocal diaspora”, to borrow its kinked terminology, nor improved its image of a country under the grips of under the grips of brute authoritarianism.

In addition, the ruling party spends much of its energy in trying to set up agenda for its opponents with a view to getting them rattled and miss their objectives. A case in point is Sebhat Nega’s interview in June 2007 on Ethiopia’s sovereignty that has made ballistics out of everyone. The regime also engages in barrages of lies and fabrications the express aim of which is to foster splits among the ranks of its opponents. Thus, at the moment both antagonistic sides in Ethiopian politics happen to be engaged in the game of out beating the other side by any means, which the government has taken the upper hand. Unfortunately, its temporary victory has only reduced politics and opposition to what they ought not to be. Not only has this denied the country of the opportunity of benefiting from the resources and experiences of all its citizens, but has also damaged the image of the country. Either way, Ethiopia is paying for all lost opportunities: international respect and acceptability, increased international aid, improved market access, trust and confidence of citizens in government.

IS IT ALL GLOOM & DOOM?

The simple answer is a big no, at least, not in every aspect! In spite of actual and policy-induced obstacles, the Ethiopian economy during the last five years has shown signs of life. Although GDP growth rates and high per capita incomes do not necessarily reflect improvements in people’s wellbeing, the Ethiopian economy, according to the available data, has grown significantly from fiscal year 2002/03 onwards. What makes interesting the current growth levels is that, for the first time in thirty-five years, it has created a sense of the much-needed reassurance of what is possible in our country. Ethiopia’s real GDP per capita growth has reached the level of the early 1970s in 2006 (Source: IDA, ETHIOPIA: Protecting the Most Vulnerable, March 2007). While this long journey and the achievements thereon are not much of a comfort by themselves, still they stand out both as a measure and evidence of the possibilities along the future path of our country.

Please keep in mind the contributions of the international economic environment as well. Since the mid-1990s, it has been fabulous and favourable for economic growth in developing countries. The World Bank attributes that to strong global demand for exports, ample global liquidity, low international interest rates because of which there has been a rich flow of funds into developing countries more than any time before. In that connection, the Bank identified 14 African countries that have had average growth rates of 5 to 6 percent from the mid-1990s onwards. Missing from that list until 2003 is Ethiopia, which had been embroiled in its domestic problems and conflicts. Therefore, from the mid-1990s until 2003, our country had missed the best periods of growth opportunities, which in economic terms is a bundle lot.

On relations with the outside world, one can say that the TPLF would not have found easy acceptance because of its political and economic programmes alone. The fact that it came to the scene after overthrowing a much-hated junta had facilitated its acceptance into wide-open arms, although IMF was not one of its pink-eyed admirers. For instance, despite all the praises and support from the US, initially the IMF and the government could not find common ground, with the Fund exerting a lot of pressure to ensure that structural adjustment reforms took place, as it is a requirement and a stamp of approval for a developing country to receive international assistance and debt cancellation. As a result, at policy level the first five years had also been a period of misgivings, predominantly characterized by a lot of back and forth and frictions between the IMF and the TPLF/EPRDF government. At the time, Mr. Meles characterized the milieu as “mutually suspicious beginnings” (Source: Harold Marcus, A Breakfast Meeting with Prime Minister Meles, 20 October 1995).

The table below shows the evolution of country’s annualized level of GDP growth in billions of birr from 1997/98 to 2006/07. One could see that growth picks up from 2003 onwards, increasing by no less than 10 billion birr annually and 12 billion in 2006/07.

Annual GDP growth amount (‘000 in birr)

	97/98	98/99	99/00	00/01	01/02	02/03	03/04	04/05	05/06	06/07
GDP^*	59,748.2	62,832.6	72,181.1	66,648.3	73,274.4	71,690.9	81,421.1	91,044.1	100,928.8	112,134.4

Source:  Ministry of Finance and Economic Development. (Source: www.mofaed.gov.)            * At constant market prices

In a carefully considered observation of the economy’s vigour, Paul Ackroyd in Addis Ababa, Country Representative of the United Kingdom’s Department for International Development (DFID) says, “We’re beginning to see some changes in the structure of the Ethiopian economy.” He further adds, “The fact is that we have three years of around 10 per cent growth, that we see some new commercial operations – particularly in horticulture—opening up. There is a lot of building around Addis Ababa. There is something significant going on, changing the face of Ethiopia. How deep-seated it is, how sustainable it is, remains to be seen.”(Source: www.go.worldbank.org).

Bear in mind that at present Ethiopia’s population has reached the 81.2 million signposts, growing at an average rate of 2.3 percent annually, according to UNFPA’s 2007 estimate. Of this, about eighty-one percent live below the poverty line of $2 a day. Therefore, it is a given the majority of the newborns are borne to poor families. This means that the size of the population would increase by two million more poor children on a yearly basis. The inescapable fact is that the country must provide opportunities for their feeding, schooling and basic health services and jobs, if Ethiopia is to be a strong, united and a healthy nation. This by itself is sufficiently compelling to see the need for real consideration to the question of what should be done today to remove all the obstacles on the path of accelerated economic growth, not tomorrow. Ethiopia needs more, quality strategic growth and an all-embracing development, if the country is to continue without serious danger to its existence.

Suffice it to say, by the year 2015, the international target date to reduce world poverty by half, the Ethiopian population is estimated to reach the 96 million mark. Whether Ethiopia’s economic growth would keep pace with that rapid population growth rate, for half of them to live above the poverty line depends on a number of factors.

With calculated optimism, I would like to believe that, given its endowments, Ethiopia could become a huge economic powerhouse within the sub-region and a big production centre and a market with improved purchasing power in the not too distant future. I base my assumption on the country’s natural endowments, the industriousness and honesty of its people, their sense of culture and long history, and a strong state that for centuries has kept our country together and by overcoming all sorts of dangers to its existence, etc. until its sovereignty is injured only under the watch of the present generation. Although, today as in the past, the state seems to prefer reliance on its negative attributes, violence, as will be discussed later in my conclusion, a strong state is a vital asset for national ownership of development. This is one of the principal deficits in a large number of African countries whose institutions were ravaged by colonialism. In Ethiopia’s case, although a great advantage to have, the state has, nonetheless, became a liability that has undervalued even the other positive attributes the country has had.

To make good use of these endowments, therefore, the country, a priori, must resolve the outstanding problems of lack of genuine democracy, prevalent disrespect for human rights and fundamental freedoms, that of peace and security, the absence of which is slowly tearing the country apart. It has made the country incapable of using its natural resources, especially its well-educated and experienced manpower that is compelled to flee the country in greater numbers. When these negative factors are removed, Ethiopia would be able to devote its undivided attention and resources for its national development and with the full backing and support of all its citizens.

If that happens, it is good for Ethiopia. I do not mean it in any arrogant sense, but what is good for Ethiopia is also good for the region. Undemocratic, unstable, inward looking and insecure Ethiopia could be a threat to itself as well as to its neighbours by the mere fact of its inability to carry its own burden. At the same time, look back into our history. Anyone could see, Ethiopia is an island surrounded by forces that of necessity have become inimical to Ethiopia’s interests; that is the only way they could promote their own interests. Unfortunately, today’s Ethiopian leaders have illegally handed over its natural outlet to the outside world, thereby making it dependent on the very forces and their friends from afar that would like to see Ethiopia choke up. Recall also that our strategic resources that we have been unable to utilize, despite enormous efforts of a poor country for such a long, long time, are located in outlying regions in the east and south east, in the north, and in the west, where there are continuing political, security problems, and hostile foreign interests.

Still, there are possibilities for Ethiopia to emerge out of the shadows of its shattered image with a determined, responsible and visionary leadership that sees the attainment of its own interests and future within the framework of a democratic and united Ethiopia.  In order to do that, it must reverse Ethiopia’s self-induced weakening. First, it needs to ensure the country’s stability from within. Among the factors emaciating the country today are the question of democracy, respect for human rights and fundamental freedoms, at least, as a minimum even in line with what is provided by the country’s constitution and the international conventions it has voluntarily signed and ratified. Second, create and facilitate genuine conditions for the development of functional institutions that would ensure improved governance by law and one that enjoys national consensus, not the convenience of a ruling party.

Once these are put in place, I am optimistic Ethiopia would be able to focus on its economic growth and national development, moving far away from the collusion course between those called upon to govern and the people at large in a manner that today’s politics have fostered. Development is a process, not a slingshot. The separation of state and government should come in time and with experience. However, its recognition must be anchored in law and reflected in the behaviour and performance of national institutions, as that is the basic ingredient for the state and government to learn and know how to respect the rights of citizens. Failing to do that, not only would fail individual citizens, but also would improve the chances of those who wish Ethiopia ill in attaining their long-standing objectives.

ACHIEVEMENTS OF THE ECONOMY TO DATE

(a)        Agriculture & rural development

In a country where economic diversification is limited, agriculture remains the predominant source of livelihood for 85 percent of Ethiopians and 47 percent of GDP. Ethiopian agriculture is characterized by smallholder agriculture ranging up to some eight million peasant farms, “which are cultivated by draught animal power and support various combinations of annual staple and cash crop, perennial staple and cash crops and animal production enterprises”(Source: Central Statistics Agency’s (CSA), Agricultural Sample Enumeration In-depth Analysis, 2005). With 16.4 million hectares of suitable land for producing annual and perennial crops, agriculture generates 88 percent of export earnings and 73 percent of the raw material requirements for agro-based domestic industries, according to the World Bank.

The main development objective of the country revolves around efforts to eradicate poverty. Consequently, policies are geared toward that objective with consecutive five-year plans (Plan for Accelerated and Sustainable Development to End Poverty— PASDEP) as its vehicle. The Agricultural Development-led Industrialization (ADLI) policy aims at food self-sufficiency supposedly by inducing increased food production, raw materials for industries, and as sources of foreign exchange. The policy bears in mind its huge implications to the lives of vast numbers of unemployed and underemployed people in the rural areas. Consequently, the government’s pro-poor strategies focus on: (a) education, (b) health, (c) agriculture and food security, (d) road, and (e) water and sanitation. So far so good!

Although agricultural production has improved, as compared to the past, its achievements remain unsatisfactory. Yes, where there is peace and good weather, some areas have been more productive, including by expanding into fresh lands. Even then, yield per hectare has remained much less than what is possible. The main problem is that Ethiopian agriculture is subsistence and its production rain-fed, because of which productivity has been very low. In spite of massive expenditures during the last 17 years, the government has barely succeeded in enhancing productivity. As a result, there is no visible sign of agricultural rehabilitation or structural transformation, which occurs when incomes improve and people begin to move into rural manufacturing or processing or other forms of production. At this stage, there is no clear evidence of that. Rural transformation is not needle in haystack. Higher production means higher income for peasants. In 17 years of massive investment in agriculture and rural development, the rural people would have seen signs of expanding economic activities, instead of the current trickling trend of exodus from low production and restless areas to urban centres.

What stories do the available figures tell? In 2006/07, Ethiopia produced 149.6 million quintals of grain crops (pulses, oilseeds, vegetables, root crops, fruit crops) on an area of 10.6 million hectares. Compared to 2005/06, this represents an increase of 11.7 percent. At the same time, according to CSA, 4.1 million quintals of fertilizers were used in 2006/07 on 11.8 million hectares. Compared to 2005/06 when 3.9 million quintals of fertilizers were applied on 5 million hectares, the 2006/07 figures represent an increase by 5.3 percent, while at the same time land under crops had expanded by 4.4 percent. Therefore, when the expansion of land under crops and the amount of fertilizers are factored in, there is little observable productivity growth to be translated in to improved yield per hectare.

Agricultural production is subject to variations because of a number of factors. However, the swing in its level of production is striking in the case of Ethiopian agriculture. From 1986-2005 production has been erratic, even marked by declines, at times, from 56.3 percent to 47.3 percent, according to the World Bank. Trend change began to be noted from 2005/06 onwards, notably from 46.6 percent in 2005 to 47.3 in 2006. At the same time, coffee, the major foreign exchange earner, also showed similar characteristics. The same is true of oil seeds. Comparison of data on annual basis reveals that the contributions of coffee to national income would have been much lower, if not for improvement in prices; this, owing to supply constraints attributable to various factors (Source: National Bank of Ethiopia, Annual Report for 2003-2004, Table VI.4, p.6; MOFED, Macroeconomic Development in Ethiopia (2005/06), Table 5.3). Outside weather and security problems, this is attributable in general to weak or poor performance of the agricultural sector characterized by lack of productivity.

Many experts have concluded that population growth, declining farm sizes, land degradation, inappropriate use of land such as cultivation of steep slopes, over-cultivation and overgrazing and inappropriate government policies have become the major obstacles to increases in crop production (Source: Measuring the Economic Impact of Climatic Change on Ethiopian Agriculture 2007). Furthermore, there is growing concern both within the World Bank and amongst environmentalists that mere expansion of agriculture into fragile and marginal lands with the aim of increasing production would only result in more soil loss, mining of soil nutrients, and deforestation (Source: Humbo and Soddo Community-Based Natural Regeneration Project 2006).

ADLI has both its supporters and critics, within academic circles and amongst its peasant beneficiaries. A research by the Department of Sociology and Anthropology at the Addis Ababa University has presented useful non-agronomic perspective into the debate, especially whether ADLI interventions have been beneficial to the peasants. Academician supporters argue, without strong evidence though, that the reforms have rehabilitated and revitalized the agricultural sector. They point to erratic output increases in some years followed by decreases and then further increases (Source: Derese Getachew, Peasant Reflections on the Agricultural Development Led Industrialization (ADLI) Programme, AAU).

On the other hand, its critics stress that, despite efforts to intensify smallholder agriculture for nearly a decade, ADLI and its green revolution packages have not attained their basic objective of food self-sufficiency. They say food insecurity has become chronic with several millions of people still remaining dependent on food aid every year. On the peasants’ side, also there was a range of responses with a significant number amongst the surveyed fifteen villages opposed to it. In the latter case, they disapproved of ADLI not on its merits, but because of the high price of fertilizers, and the manner in which profiteers are allowed to gain at their expense. They said prices of these fertilizers were reasonable when they were distributed through local mass organizations, such as the village kebele shops.

The accusations levelled against the ruling party include its singular focus on keeping itself in power, mostly by exercising political control over the peasantry through promises of fertilizer supplies and control of land holdings, or direct threat and use of force. In that regard, Addis Fortune, the English weekly in Addis Ababa on 20 May 2007 wrote an editorial that noted:

Looking at how inefficiently the fertilizer business is being managed, and in the utter absence of the private sector, critics of Prime Minister Meles Zenawi's administration have a point in their argument. The production capabilities of the agricultural sector [are] now threatened because his administration has made the conscious choice that retaining power is more important than raising the productivity of farmers and granting them the opportunity to lift themselves out of poverty.

Already two years before that, following its extensive research in the country, Human Rights Watch had observed, “Control over fertilizer and agricultural inputs in general have given Meles’s government a remarkably effective tool for quashing dissent in rural Ethiopia.” (Source: Human Rights Watch, ‘The Dark Side of Ethiopia’s ‘Green Revolution’’, 5 September 2005). Similar arguments have been forwarded by many experts, both Ethiopian and foreign, regarding the land tenure system. Discussions on the subject have been fruitful in the sense that the government came forth to admit the problems of insecurity of holdings, which it had denied before. In 2003, it began to issue land ownership certificates. Its implementation is full of problems, but is an initial good step that should be improved at every stage.

There must be an on-going effort to reassure the farming population of their security of ownership, much as the need for their protection from overzealous and overreaching local officials that are obsessed with the dominance of their party politics. At the same time, given the country’s history on land tenure that reduced the peasants to serfdom, one should not lose sight of the fact that privatizing rural land could still open up a Pandora’s box. Out there is enormous appetite to get rich quick at the expense of the poor and the defenceless, as demonstrated in recent years by greedy fertilizer traders.

The continued dependence of Ethiopia on international food aid, even when there is no drought is a serious indictment against the current politics as well as its enforcers. There is insufficient food production because there are structural deficiencies, an outcome of years of partisan politics, other man-made problems combined with environmental factors. At present, the international community is providing cash grants for purchase of food from the domestic market, instead of direct food aid. Definitely, this approach is better as it would help to reduce the added discouraging factor to agricultural production that direct food aid engenders. Nonetheless, it does not help the country address its underlying problems. Moreover, direct food aid through rented ports is no longer a feasible proposition for landlocked Ethiopia, as it would come at the expense of other vitally needed imported goods.

At present, the impact of man-made disasters are mostly localized in conflict areas, aggravated by the on-going military operations and lack of rain, in some instances because of floods as witnessed in the past few years. In spite of improved crop prospects for the ‘meher’ season in most of parts of the country, there are several food deficit pockets in the south, north, east and central parts where structural dependence has become a perpetual phenomenon for over a quarter of our population.

The current initiatives in expanding horticulture are a welcome step in economic diversification. There are, however, a number of problems to be concerned about this sub-sector especially. The first one relates to environmental factors because of the huge volume of chemicals horticulture needs and uses. Secondly, the attraction of Ethiopia to the sub-sector is the fertile land, the convenient climate and the very low wages. I had mentioned earlier, when discussing the ease of employing workers Ethiopia that it ranked 89^th in the world. However, the details show that the non-wage portion of labour cost in Ethiopia is 0, whereas Africa has components of welfare levies of 12.3 percent and OECD countries have 20.7 percentage points. This reflects that Ethiopian workers do not enjoy any other benefits when they are sick or fired, even by way of token contributions to some sort of wellbeing fund. The labour law would need to review this inadequacy within the broader context of the needs and rights of labour and within a national context. There is no doubt that this would raise some eyebrows and even some vocal resistance on the media from both policy and business sides. It does not mean, however, that Ethiopia should surrender the wellbeing of its working population because of resistance by domestic or international sources of capital. I am sure, in any situation, there is always the middle ground, if all sides know what they need.

(b)        Infrastructure development

Development is unthinkable without modern infrastructures, which would make access to the market easier. They bring producers and consumers, buyers and sellers, government and services closer to the people. They facilitate communications and commerce with the outside world.  In this paper, the narrower definition of infrastructures is adopted, which comprise mainly of roads and highways, telecommunications, and energy sources and generation.

(i)         Federal highways and rural roads

Less than 15 percent of the people in Ethiopia have access to roads. As of the year 2005, almost 65 percent of the total road network of 37,000 km, only 23,600 km is in good or fair condition, according to the Ethiopian Road Authority (ERA). Of this, 4,484 km is asphalted, 8,968 km is gravel roads and the remaining 10,148 km are regional roads. In terms of achievements to date, according to the road sector development project document financed by the World Bank, several improvements have taken place. This puts the road density in Ethiopia to 33, compared to 21 km in 1994, the lowest by African Standards. In view of that, the nation’s policy has given appropriate attention to road development as a major challenge for Ethiopia.

Regardless of the level of success or accuracy of the statistics, these are noteworthy improvements and achievements, especially compared to the past, although road density in Ethiopia is the least in the world. It is estimated that, by 2015, the length of road networks in the country must extend to over 110,000 km., if Ethiopia is to be successful in its economic and social development endeavours. Unfortunately, based on the estimate of 17,943 km length of roads to be constructed in the next ten years under the third phase of the programme, launched last September, Ethiopia would still be short by no less than 50,000 km of all weather roads.

(ii)        Sources of power & generation

Ethiopia is a country with huge endowments of energy sources such as hydropower, solar, wind power, gas and coal. However, due to weak national policies by past governments and lack of sources of funding—because of the objections of neighbouring countries, especially Egypt and the Sudan, the so-called riparian states, to date Ethiopia has used only a fraction of its endowments. Therefore, for a long time use of electric power has been limited to the capital city and a few other towns, resulting in the neglect of the rural areas. Obviously, this is the main reason why per capita consumption of electricity in Ethiopia has been the lowest in the world.

According to available data, in 2006 the amount of power sold was 2,408 gw. Although this represents a 33 percent increase over 2001, its achievement is like a drop in an ocean, in view of the low level of electrification of the country, as measured by the standards of Sub-Saharan Africa. In 2001, the Ethiopian Electric Power Corporation EEPCo had 654,885 customers; in 2006, this figure notched up to 1.1 million customers, out of a population of 81.2 million. What demonstrates better the low-level of electrification of Ethiopia is also the fact that in 2004/05 the number of electrified towns was 1,658, representing only 22 percent of the cities and towns in the country, and 1.4 percent of the total population (www.eepco.gov).

EEPCo generates and distributes power through two different power supply systems, namely, the Interconnected System (ICS), which is mainly supplied from hydropower plants, and the Self-Contained System (SCS) that consists of mini-hydropower plants and a number of isolated diesel generating units that are widely spread over the country. Of the estimated hydropower potential of the country, about 15,000-30,000 MW, less than 500 MW, are in use so far.

Consequently, in order to meet the power requirements of the country on a sustainable basis, some well-documented studies estimate that concerted actions need to be taken between now and the next thirty years, according to a publication of the Association of Ethiopian Civil Engineers. To translate that into reality, power generation needs to be increased by more than 14 times by 2020 and about 25 times by 2040 (Source: Solomon Seyoum Hailu, HYDROPOWER OF ETHIOPIA: Status, Potential and Prospects, Ethiopian Engineering Resources).

In the past, the difficulty of exploiting the country’s energy potentials has been due to lack of funds. After the signing in 1999 of the cooperation agreements between nine countries of the Nile basin and the establishment of the Nile Basin Initiative (NBI), some positive developments have taken place. It has somewhat facilitated some degree of co-operation amongst the Nile basin countries. To date the most important achievement of NBI has been the lifting of bans on project financing by international financial institutions and on a bilateral basis. The only threat to NBI is Egypt’s ambition to use it as a tool for the promotion of its national interests.

At the same time, NBI has opened up new possibilities for countries such as Ethiopia that has many hydropower potentials, which of late has even captured the attention of the international media. Subject to the availability of loans, the country is prepared to engage in a high stake power generation efforts both for local use and for export by building five hydropower dams by 2011 with a total generating capacity of 3,150 megawatts. According to the plan, Ethiopia is aiming at building four more power-generating capacities by 2018. This is expected to increase capacity to 9,000 megawatts, with the surplus power, in line with the existing tentative agreements, to be exported to Kenya (500 megawatts), Djibouti (200 megawatts), and Sudan (200 megawatts). Feasibility study on the Gibe IV, the largest of the four new projects, is scheduled for completion by the middle of 2008. Its cost is estimated close to two billion euros and power-generating capacity of 2,000 megawatts, according to Bloomberg.

Ten years in the Horn of Africa is the equivalent of a lifetime. Therefore, given the complexities of relations in the region and unresolved security problems within Ethiopia and some of its neighbours, this giant undertaking, with significant political implications, should also dictate the need to seek political solutions to the internal problems that are afflicting Ethiopia, in particular. Furthermore, given the flux in relations, one would also need to wait and see the translation into reality of such a major undertaking with restrained optimism.  

Ethiopia’s present national law on energy is open to the private sector and is considered forward-looking. Its implementation has seen a number of activities in energy exploration in different parts of the country, both continuing on past efforts and by initiating new ones. At this stage, coal deposits have been identified in different parts of the country, although commercial exploitation is less likely to materialize for understandable reasons. Moreover, global interest in gas and the attractions of gas and petrodollars/’petroeuros’ also seem to weigh heavier.

Gas is mostly located in the Ogaden region (Calub), whose exploration is currently being carried out by a Chinese company, although temporarily disrupted as of April 2007, because of security problems. Petronas, a Malaysian company, is also carrying out upstream activities in Gambela, Genale, Kelafo and Welwel/Warder. The agreement between Ethiopia and Petronas is for exploration activities and to date the company has spent several tens of millions of dollars. Other new projects are also underway in southern Ethiopia with recent agreements with a major European company.  

Another confirmed area with high potentials is near Adigrat in Tigrai. Drilling undertaken by the Soviet Petroleum Exploration Expedition in 1993 had estimated the existence of 40 billion m³ of gas, according to an Ethiopian expert who has devoted his career to energy related issues (Source: Girma Hailu, Ethiopian Energy Law, 2000). While these are only a few of the evidences for the country’s potentials, the production and commercialization of gas and oil is dependent on the satisfactory resolution of the political and security problems, not only in the Ogaden but also in the other parts of the country, especially in Oromia.

The worrisome development in Ethiopia today is that, ever since 1992 many citizens have been continuously subjected to politically-motivated clouds of suspicions and harassment by the state, subject to illegal arrests, detentions and even disappearances on account of their ethnic origins. Therefore, disrespect of the rights and freedoms of some citizens by government, based on stereotyping, has assumed ethnic characteristics. As every individual citizen is open to the danger of unlawful and long imprisonments or disappearances in Ethiopia because the state suspects him/her of hostile intents or being supporter or sympathizer of the opposition, some are more exposed than others by the mere fact of their belonging to certain ethnic groups.  Therefore, the manner in which fear and insecurity is building in the country today and the accumulated sense of frustrations at some point has jeopardized the country’s ability to enjoy the benefits of its resource endowments, much as it might eventually endanger its unity and territorial integrity.

Any further delay in finding political solutions to the many political and security problems in those regions would only make peace remote and the cost of maintaining it in the future more burdensome to society. Miscalculation in this matter would only prove that the future cost of settling it by military means would only grow too high in terms of lives and finances, for that matter even for offsetting by the entire amount of any possible future income from the oil, gas and perhaps coal added together.

(iii)       Telecommunications

In continuing past plans, the Ethiopian Telecommunications Corporation (ETC) has received a half-hearted shot on the arm by upgrading to fibre optics. However, in terms of accomplishments, it is the least successful in improving and upgrading its services. In the Country’s five year development strategy “Partnership for Accelerated and Sustainable Development to End Poverty”, (PASDEP), it is planned to increase the number of fixed line subscribers from 830,000 in 2005/06 to 3.2 million by the end of 2009/10. The number of Mobile subscribers and internet users, on the other hand, is expected to pick up to a respective 6.76 million and 193,100 by the end of the plan period from 1.465 million and 48,970 in 2005/06.

Although a beneficiary of substantial loans from abroad, especially China, improvements are slow or increases in services miniscule. Both the number of fixed line telephones, mobile phones, Ethiopia has the lowest teledensity in the world. While the pace of mobile phones seems to be relatively faster, still it is extremely negligible when seen against the overall size of the population. The problem is attributed to politics, allegations of incompetence, unclear government policies and corruption.

In view of the seriousness of the problem, there have been a lot of discussions and comments by many Ethiopian and foreign experts. However, the contributions of some individuals, well meaning though, are more troubling, especially at a time when there is a lot of internal and external pressure to privatize ETC. Its privatization would certainly interest those that would like to invest and reap good profits. There is nothing wrong with that. The problem is, however, first, companies that come from outside would not be that keen in investing massive resources to build telephone lines in Ethiopia, for one, at least cost prohibitiveness and the stability of the country. This may be true in the case of mobile phone services.

Second, if there are companies that would venture to expand fixed line services, which is unlikely, they would require co-financing arrangements with the lion’s share borne by the host government. In our case, that money is not available locally and even for borrowing. If at all a foreign company takes the contract, it would definitely need to re-coop its investments plus handsome profits as quickly as possible. That would end up in higher service costs to users. Telephone charges are already very expensive in Ethiopia and, thus, unaffordable for many Ethiopians. Worst of all, it would result in the neglect of poorer regions, one consideration lacking in the proposals of those who echo the campaigns of pressure groups for privatization.

Unfortunately, more than the logic of their privatization message, the inconsistency of their anomalous proposals for privatization is more evident. For a reason not clear, at least to me, those who favour privatization do not apply the same criteria for the privatization of the Ethiopian Airlines (EAL) or the power, or water company.

I am inclined to believe that at the heart of ETC’s problems lies government policy. Government is more interested in using ETC for its political control purposes, rather than facilitating the Corporation’s mission. There have been testimonies by international experts affirming that the Ethiopian government blocks selected webpages, although it has flatly denied such allegations, even when those webpages are not visible in Ethiopia. Affirming the veracity of such accusations is also the jamming of VOA, DW Amharic service and government’s censorship of the local media for political reasons. Imagine the level of resources, both in terms of expert time and financial resources being expended for censorship purposes, instead of the development of the telecommunications sector. In other words, government is rather committed to using ETC for thought and mind control of Ethiopian citizens, rather than developing the infrastructure as a means to usher in Ethiopians into the modern world of communications and computing.

This reflects government’s unpopularity, discomfort in its own policies that citizens do not approve of. Recall that Ethiopia is the only country that had blocked text messaging on mobile phones until September 2007. More than the action itself, most worrisome is the thinking of Ethiopian officials to tell the outside world that there is merit in their actions. For instance, Mr. Bereket Simon tried to justify such official policy of censorship, repeat, to justify such official policy of censorship unabashedly. How can this be justified in this age and time? Here is what he said in his interview with Nick Wadhams and Zoe Alsop on 19 February 2007, when they visited Ethiopia on a Pulitzer Center Crisis Reporting travel grants. Mr. Bereket said:

Now, we have lived 15 years of new life, new relationships [TPLF & the people]. This has changed attitudes by and large; but there are still sensitivities. For instance, let me tell you one thing. When the government banned the SMS text messages, one of the reasons was that using the SMS simply people were sending messages, which were ‘Resist.’ There were calls to kill certain members of a certain community. So this type of rampant…

Is this a sign of need for privatization, or an evidence of government policy of thought control of citizens that is undermining the development of the telecommunications sector in Ethiopia?  There were suggestions by some experts that the government would not allow privatization, because the telecommunication business is their cash machine. If that were the case, the Endowment Fund for the Rehabilitation of Tigrai (EFFORT), the business empire of the TPLF, would have been the first investor in the sector a long time ago!

(c)        The construction sector

The boom in the construction sector has lifted some spirits as the crowning glitter of present economic growths. More and more buildings are rising, especially in the capital city, which has transformed its size and appearance. Dessie, Dire Dawa, Mekelee, etc have also become the obvious beneficiaries. The need to satisfy the industry’s voracious appetite for cement and other building materials has necessitated their import, even with precious foreign exchange. Today, new cement factories are under construction, while existing ones are expanding. These are positive developments.

Besides, what makes the construction industry interesting is the proliferation of private companies, which has marked the true beginning of professional entrepreneurship by Ethiopian engineers in collaboration with other investors. By 2002, the Ethiopian Privatization Agency had registered 12 major private companies engaged in all sorts of engineering and construction activities. Today, the number of members of the Ethiopian Construction Contractors Association has grown to 187, registered under different grades and categories. This is a significant progress, especially within a short time. The booming construction activities would certainly keep most of them busy, assuming that the criteria for awarding business contracts are strictly quality of professionalism and lowest bids. Unfortunately, there have been a number of complaints about unfair business practices, political corruption and favouritism of individuals and contractors with ethnic and party affiliation as a basis for awarding state construction projects.

To date, according to available data, the construction sector has created a good number of temporary and permanent jobs. In 2006, the number of people who found permanent employment was 5,674, excluding 2,769 foreigners in the same category. The number for 2005 was 9,474, without including 1,388 foreign employees. In 2005, 45,131 temporary jobs were created, including 6,797 foreign employees. Since 2006, construction activities have started slowing down, partly because of pressure from the IMF for fear of the spiralling inflation and the levels of government debt, both domestic and external.

It should be realized that the young construction sector is in need of a lot of institutional and legal support for both construction standards and building codes. Unless that is done, it would be extremely difficult to keep it clean from the already known tendencies of the sector in many countries to encourage rampant corruption and fraudulent practices that have become cause, even for the loss of lives either when earthquake strikes or temperature changes bankrupting small businesses. Furthermore, if the experience of other developing countries in times of boom is of any relevance, the construction of luxury houses and estates with borrowed monies requires special caution by both the banking industry and monetary officials. This not to say that property ownership should not be encouraged; it should as a matter of policy and principle; there is no doubt about that.

Nevertheless, in a country where the real interest rate is consistently negative and where a good number of private entrepreneurs in other sectors are starving of working capital, there is need for serious thinking. At this stage, according to the latest data, private banks devote close to 10 percent of their loans to construction by private individuals. Problems of loan collection become obvious only after things have gone out of control. This might lead to the build up of non-performing loans (NPL), which already are creeping up by substantial percentages, after having gone in last few years. Eager banks need not lose sight of the evolution of the economy, by taking the growing demands for construction loans as evidence of the solidity of growth or signs of an economic take of.

(d)        The financial sector

The financial sector in Ethiopia is comprised of the banking system, the insurance industry and micro-finance institutions. The combined capital of these three has reached 9.8 billion birr or the equivalent of close to 10 percent of the country’s GDP at constant market prices in 2006/07, according to the fourth quarter report of NBE for the same period.

(i)         The banking industry

The first modern bank in Ethiopia was established during the reign of Emperor Menilik in 1906, with the founding of the Bank of Abyssinia. In spite of that, due to a number of obstacles, financial intermediation in Ethiopia has remained rudimentary for the last one hundred years. The Bank of Abyssinia was the first African indigenous bank, established with the help of the British owned National Bank of Egypt. Although at the time the Bank of Abyssinia had opened branches in Dire Dawa, Debre Tablor, Dessie, Gore, and Harar and had continued to operate until the Italian invasion, it did not have strong impact on either the public or the economy. In Ethiopia, banking is still peripheral and alien to the majority of the population reflecting the low level of the country’s economic development and its monetization.

In addition, one of the concessions Emperor Menilik was compelled to give the British Egyptian National Bank was a ban on establishment of any other bank in the country for the next fifty years, which theoretically ran until 1956/57. Interestingly, the Bank of Abyssinia, according to NBE, had not proved profitable for the first eight years, that is, until the outbreak of the First World War in 1914.

The only time when bank proliferation was witnessed in Ethiopia history within a short period was during the brief five-year period of Italian occupation. Four major Italian banks opened branches in a number of main towns in the country. Nevertheless, when Italy was defeated in the war, the country had to start all over again. Thus, between 1943, when the State Bank of Ethiopia was established, until 1994, Ethiopia succeeded in setting up only three government-owned banks: the National Bank of Ethiopia (NBE; 1964), the Commercial Bank of Ethiopia (CBE; 1964) and the Agricultural and Industrial Development Bank (AIDB; 1970).

Things began to change in the financial sector barely less than fifteen years ago, with the issuance of the Monetary and Banking Proclamation in 1994 (No. 83/1994) and the Proclamation on the Licensing and Supervision of Banking Business (No. 84/1994), which laid down the legal basis for private investment in the banking industry. Immediately after the proclamation, the readiness of the private sector to be involved in high investment economic activities was clearly evidenced by the eight private banks that were established within a little over ten years, compared to one hundred years it took government to establish three public banks.

Four-hundred and eighty-six shareholders pulled their resources together in 1994 and established the first private bank, the Awash International Bank, which commenced operation in 1995. Dashen Bank followed in 1995. Today, eight private banks are established in the country with fast burgeoning capital base now enjoying huge annual profits, with no comparison even in the emerging markets. All the banks are run and operated by Ethiopians. Foreign banks are prohibited from operating in the country for fear of undermining the local banks with their entry in the local market with huge source of capital and connection to the capital market.

Together with the state owned banks, today the total number of banks in the country has reached eleven: three public banks, excluding the National Bank of Ethiopia (NBE), and eight private banks. It should be noted that, although Wegagen is considered to be one of the eight private banks, it is largely capitalized and owned by EFFORT, the business empire of the ruling party.

Bank branches have expanded relatively faster, compared with the past. At present, there are 487 public and privately owned bank branches catering to a nation of 81.2 million people, yet another indication of how under-banked Ethiopia is with a density of one bank per 166,735 people. Overall, close to forty percent of banks are still concentrated in Addis Ababa, the trend that it is likely to continue for the foreseeable future along that way.  

In terms of overall capital, the banking sector is boasting of 9.3 billion birr, representing a quarterly growth of 30.2 percent, according to 4^th quarter report of NBE for 2006/07. Of this, private banks account for 35.7 percent in contrast to 30.3 percent a year ago. The Commercial Bank of Ethiopia (CBE) is the largest bank in the country with its long and rich exposure to international banking, its 196 branches and 4.2 billion birr capital by June 2007.  Private banks are also doing well with a share of almost 3.0 billion birr capital and 232 branches. A the end of the fourth quarter of 2006/07, the share of private banks had gone down from 35.2 percent to 31.5 percent, due to the recent substantial increase in CBE paid up capital. 

The law does not restrict banks to limit themselves to banking services and operations. Of late, there has been efforts by banks to expand into insurance activities. For instance, Nib International Bank is also owner of the Nib Insurance Company. Another important development in the financial sector is the establishment in 1995 of the Addis Ababa Clearing Office (AACO) within the National Bank of Ethiopia to facilitate the exchange of payment instruments, checks mostly, between member banks within Addis Ababa. Today, checks worth billions of birr are cleared without major difficulties.

Private banks give loans to diversified activities. A look at their disbursement of fresh loans during the last quarter of 2006/07 indicates that, of the total 4.3 billion birr of new loans during the quarter, 45.1 percent was by private commercial banks. Of this amount, 28.2 percent was for agriculture, 27.4 for international trade, 12.2 for domestic trade, 9.0 percent for industry, 8.5 percent for housing and construction, and 7.8 for transport and communications and the rest went as credit to government.

One of the major problems of the banking sector is excess liquidity, which private commercial banks in Ethiopia mainly spend on purchase of low yield treasury bills, accounting for 79.1 percent, during the last quarter, an indication of the narrowness of the market. Excess liquidity is created when banks hold money in excess of their mandatory reserve requirements. When it is very high, it pushes down the interest rate, which is very low in Ethiopia, even at a time of high inflation.

In general, excess liquidity is a reflection of structural problems within an economy. It results in an inefficient allocation of resources. Normally, banks do not usually want to carry too much liquidity. However, in an economy lacking sources of adequate information on businesses and credit rating of individuals, banks are restrained to give out loans, sometimes even to legitimate borrowers for fear of being exposed to risks. At the same time, the lack in our country of adequate nation-wide accounting and auditing standards is also a bottleneck for the smooth and efficient operation of banks. The judicial system is also malleable to political influences, thus rendering its ability to ensure respect of the law, especially the enforceability of claims and protection of private property doubtful, as already indicated earlier in respect of the ease of doing business in Ethiopia.

In its 15 November 2007 article, entitled “On the frontiers of finance”, The Economist portrayed rather accurately the environment in which the banking industry is operating in Africa. In part it said, “Many African countries still have to develop and enforce policies and laws allowing banks to compete and operate more easily, while making sure they are financially solid—and customers are protected. In time, regional integration may help ease the problem of scale. Meanwhile, millions of people are still waiting to take their cash from under the mattress.”

(ii)        Insurance

There are nine insurance companies with 146 branch offices in different parts of the country in 2007. As in the case of the banks, half of the branch offices are located in Addis Ababa. In recent years, the insurance industry has shown significant growth, accounting for 75.3 percent of the total branches. In 2006, the total capital of the insurance industry had grown by birr 522 million over the previous year. Of this, the share of private insurance companies is 59.4 percent.

Nevertheless, in Ethiopia the insurance industry is at its lowest stage of development. Their code of conduct, regulatory atmosphere is still in need of refining. Competition between government-owned insurance company and those owned privately is hardly on level playing field, owing to the muscle and political support of the former. According to the Daily Monitor report of 3 December 2007, the insurance industry as a whole is faced with serious problems, arising from the rivalries and unfair completions between the government-owned insurance companies on one side and banks on the other. Of late, while there has been considerable increase in premiums, the report observed that unfair price competition among companies in the industry is becoming a serious threat to their own future growth. Experts urge all sides, according to the report, to act responsibly to ensure public confidence in the fledgling insurance sector.

(iii) Microfinance Institutions (MFI)

There are 28 microfinance institutions in the country, of which 11 (or 39.3 percent) are located in Addis Ababa. As of 30 June 2007, they own assets worth 3.5 billion birr, a capital base of close to 1.0 billion birr, and credits worth 2.8 billion. The number of clients served by these institutions has reached 1.6 million. MFIs are increasingly playing active role in providing loans to members of poor communities that would not be served by the banks. The legal and operational environment needs constant follow up so that loans are provided without any political strings. Political parties own those MFIs that are well capitalized and there is need to ensure that the basis for providing loans to the poor does not include the criteria of political support or coerced membership into the parties. The Amhara Credit & Savings Inst and Dedebit Credt & Savings Inst are the richest with total assets worth over one billion birr each. MFIs have a long way to go before their impact is felt amongst poor rural communities nation-wide.

IMPEDIMENTS TO ETHIOPIA’S ECONOMIC GROWTH & DEVELOPMENT

(a) Authoritarianism

Essentially, the problems of democracy, lack of respect for civil liberties, and disregard for the rule of law have become the most divisive issues in Ethiopia today. At the same time, linked to it are also the continuing problems of peace and security in some parts of the country for quite sometime. It seems that having shelved away political solutions for good, the ruling party’s response has been total clampdown and the use of force against one and all. This has led to profound polarization and growing resentments within the Ethiopian society. In the last several years, our country has lost a greater portion of its educated and experienced manpower because of the wave of exodus the country’s democratic