Economic development: The good news from Ethiopia, and what might make it even better
This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government
What economic growth means in Ethiopia and how Britain and Ethiopia can work togther on the issue.
Justine Greening, my Secretary of State, has made economic development –especially creating jobs to reduce dependency and improve the opportunities of the poor - 1 of the very top priorities for Britain’s international development programme.
I am delighted to be able to discuss with you here today what that means in Ethiopia, and how Britain and Ethiopia can work together on this issue. And to be returning to a country I have visited regularly for nearly thirty years. My first visit was as a fresh-faced twenty-something in 1986 – I hope the economists amongst you can do the maths!
Like my boss (and all good people!), I am an accountant who studied economics and went to business school.
So I’m particularly pleased to be talking about these issues with an audience of economics and business students from the Economics and Political Science and International Relations Department, as well as policy makers and business people. I know this proud faculty can rightly consider itself 1 of the places of strength in teaching economics and business studies in Africa. Students from this faculty have become the bedrock of both the civil service and the private sector in Ethiopia. I know that when I speak today I am speaking to Ethiopia’s future movers and shakers.
I am also delighted to be speaking to you in this new Eshetu Chole Building. I am sure you all know that Eshetu Chole was an esteemed Ethiopian economist whose knowledge, capacity and skill were of enormous pride to Ethiopians, and respected by other Africans.
As well as looking at economic development, I am here in Ethiopia to discuss higher education and understand better how the UK might support your academic institutions. Both DFID and the British Council have supported linkages and knowledge transfer partnerships between Ethiopian and UK Higher Education Institutions. We are looking to do more, and I have just had the pleasure of meeting your State Minister for Higher Education, Dr Kaba, where we discussed this issue.
And I know higher education matters greatly to Ethiopians. Indeed, your late Prime Minister, Meles Zenawi, somehow found the time to study for an MBA at the UK’s Open University, while also running your country. He earned 1 of the best business degrees the Open University has ever awarded. No pressure on you then!
But back to economic development.
It’s always a source of wonder for me how much the country has changed. I know how frustrating it is for Ethiopians that views of your country are still shaped by the terrible famines of the 1980s. Too many people wrongly think that Ethiopia is still suffering in the same way.
Yours is a country of incredible achievements and diversity. From the green and fertile plains of the highland regions. To the dry camel-filled Somali Regional State. From the almost supernatural landscape of the Danakil. To the jaw-dropping vistas of the Simien Mountains. Ethiopia as a country could not be more diverse. Its people could not be more diverse. And their needs could not be more diverse.
But 1 of the things that has brought this most diverse of nations together has been the singularity of vision. Ethiopia’s success, over the past decade in particular, has been to maintain that vision. And turn it from a dream into a living, breathing, and forward looking reality.
In the last 30 years life expectancy here has increased by 50%. Ethiopia is on track to meet most of the Millennium Development Goals. You have achieved the infant mortality goal 2 years early. Economic growth, in double digits, has been impressive. All the more so because, unlike other parts of the continent, it hasn’t been driven by commodities alone. Per capita income has doubled.
On my last visit to Ethiopia, 2 years ago, I was privileged enough to spend a day alongside a young woman called Eyerusalem. She has a job breaking rocks for road building, but I was not very good at that. She earns money washing clothes for her neighbour, and I was even worse at that. And she collects water from the river, which I could not do at all – the container was too heavy and the rocks too slippery. Today Eyerusalem has a job in local government, earning 700 Birr a month – money which helps her to support both herself and her family. Her story illustrates how far – and how fast – Ethiopia has changed.
On this visit I’ve had a very different but equally fascinating time. I spent yesterday looking at how economic development is changing Ethiopia. I spoke to farmers whose land tenure is being made more secure, to small shopkeepers benefiting from micro-finance in Addis’s outskirts and to workers at a state-of-the-art leather factory.
I have heard first hand from a range of Ethiopian firms and foreign investors about the increasing attraction of Ethiopia as a place to do business. Drawn by Ethiopia’s sustained economic success, the size of its growing market, and its potential as a location for production, a range of industries are emerging that barely existed when I first visited.
I have seen, for example, a successful vegetable producer, who exports produce to the EU. And I’ve met with a host of UK firms who are being drawn here, from leather glove makers, to clothes retailers to drinks manufacturers. This is both to their benefit, and that of Ethiopia, which stands to gain from their financial investment, creation of jobs and sharing of best practice.
I think that that the strides that you have made away from poverty and famine, towards development and shared prosperity, make Ethiopia 1 of the world’s great development success stories of the last twenty years.
Theme of inclusive growth and managing transitions
The theme of my talk today is what drives inclusive growth and how to best manage the transitions that growth may bring over the next 10 years.
Why? Firstly, because Ethiopia is already booming. But Ethiopians know there is still much to do. I hope the keen young economists and business students among you, not to mention policy makers and business people, will be asking yourselves these questions. How can Ethiopia sustain its success? How can you adapt to the changes which will come in its wake? There may be useful lessons to learn from other countries. And others can learn from you too.
Adjusting to the challenges that transformation brings is just as important as sustaining growth. I believe there is a saying in Ethiopia, ‘siroTu yetatekut siroTu YeFetale’. Just in case my attempt at Amharic is less than perfect, I’d better add the English version: ‘a belt fastened while running will come undone while running’.
Secondly, because the UK’s partnership with Ethiopia needs to adapt and change too. This is our largest development programme in the world. We’re incredibly proud of the things we’ve helped Ethiopia achieve to date. We want to be here for the long-haul. But we would like our relationship to change over time from a donor-recipient one to one of import-export and equal partnership on the world stage, on issues that affect us all, like climate change, world trade and counter-terrorism.
As part of this, we want to expand our work on economic development here. Mindful that in the long run it will be the private sector development that will lead the process of job creation and provide the tax base for social spending and public investment by future generations.
We’re starting with new support on land certification, access to finance and helping make the leather, textile and horticulture sectors in Ethiopia truly world class. But we want to go beyond this. We want to help Ethiopia attract the private capital, technology and know-how it needs to achieve its ambitious growth targets. And end reliance on external support, potentially within a generation. I hope in the discussion after my talk, you’ll give me some ideas on where we can best help.
So, back to my first theme. What drives inclusive growth?
Ethiopia has very clear ideas about where it wants to be by 2025, and the best way to get there. Now, every country grows differently, and finds its own path. But it’s worth reflecting on some of the common features of countries that have successfully transformed themselves.
The Commission for Growth and Development, set up by the World Bank in 2008, did a good job of setting out some of these features. They looked at 13 success stories of sustained and transformational growth to see what feature they shared. They came up with 5 ‘ingredients’. With 9 of these 13 countries being east Asian, I think the ingredients have particular resonance for a country like Ethiopia.
The first of these features highlighted by the Commission was integration into the global economy. Two aspects of this are particularly important. First is the willingness and ability to import ideas, technology, and know-how from the rest of the world. Second, these countries exploited global demand. They encouraged a specialisation that allowed them to excel in world markets. The 4 east Asian Tigers, for instance, saw their manufacturing exports grow from under $5bn in 1962 to $715bn in 2004.
Ethiopia is moving towards this kind of integration. It has publicly set a target of joining the WTO. It has a rising export base, including diversifying from traditional crops like coffee into new areas like cut flowers. There’s a booming services sector, to which energy exports could soon become a major contributor. And foreign direct investment is being actively courted. This is an incredibly effective carrier of ideas and know-how, as well as bringing in capital resources. However, inward FDI flows have not yet matched the levels of other parts of Africa. Nor the levels associated with take-off in many of the Asian examples of dramatic transformation. More on this later.
The second common feature of these high performing economies has been macroeconomic stability. Whilst some may have experienced periods of high inflation – Korea in the 70s, for instance, or China in the mid-90s – it’s clear that the countries of east Asia took action in the face of these episodes, even though this may have been unpopular at the time. They knew that inflation would deter savers and threaten long term goals. Equally, fiscal deficits rose and fell but were contained to ensure they did not pose a risk to savers and deter investors.
Again, this reminds me of what I see in Ethiopia. The Government has recently taken action to get inflation back under single digits and there is not the history of macroeconomic instability we see in much of Africa. I admire the way my friend Ato Sufian, your Finance Minister, and others in your Government approach macroeconomic stability
The third feature is a focus on the future and high saving and investment rates. A key pillar of the success of the east Asian tigers was their farsighted decision to forgo consumption today in order to pursue higher levels of income in the future. China, for instance, is famous for having saved more than a third of its income for over a generation. These savings rates are what facilitated the high levels of investment, both public and private, that characterised these countries’ development paths.
Whilst savings rates have increased in Ethiopia in the last couple of years, they remain lower. Definitions vary but over the last 5 years they have averaged less than 10% of GDP. Whilst investment spending has passed a quarter of all economic activity. In some ways this appears to be an enigma. Ethiopia is 1 of the few countries in the world to have successfully raised incomes but seen private savings rates drop. This is possibly the biggest difference between Ethiopia and the east Asian tigers.
Learning from Asia, a 2 pronged approach seems sensible. First, expanding financial services and new savings products. Great strides have been made here with the number of bank branches doubling in less than 2 years. Secondly, linked to my earlier point on macroeconomic stability, savers will need to be reassured that their deposits are safe through positive real interest rates. Savers might not want to defer spending today if inflation means those savings are actually worth less tomorrow.
The fourth common feature of these 13 successful economies was the importance of property rights and letting markets allocate resources. Whilst they varied in the strength and clarity of property rights, in all of them businesses and investors could be confident their investments were secure.
There was variation in the degree of state intervention. Hong Kong is as famous for its laissez faire approach as China has been for a more hands on role. But even with this hands-on approach, China knew that you can’t just celebrate and foster success. You have to allow failure when sectors and firms are not viable. To avoid wasting precious resources that could be better used elsewhere. And send important signals about what works and what doesn’t. All successful economies have examples of things they have tried but no longer do, for instance even Singapore experimented with import substitution before looking outwards.
Looking east has already yielded results for Ethiopia. Whilst land remains the property of the state, improving the security of poor farmers’ land tenure through better certification helps give them the incentives to invest in that land.
The Commission’s final observation was the importance of committed, credible and capable governments. For these high-growth economies, growth and poverty reduction is the overarching political priority. A long term vision that is well communicated is a common feature. Just as important is pragmatism about how this plan will be delivered, learning from mistakes and adjusting course as necessary. The Chinese premier, Deng Xiaoping, described it as ‘crossing the river by feeling for the stones’. A common theme in all 13 countries is a technocratic administration, a focus on delivery and an approach to policymaking that is driven by evidence and learns from mistakes.
Your late – and widely admired - Prime Minister, Meles Zenawi, with whom I had the privilege of several discussions on these issues - set out a clear vision for the country with the PASDEP and subsequently the Growth and Transformation Plan (GTP). This, in turn, is about to enter a new phase as the Government charts its course from 2015 with a second GTP.
These 5 ingredients are a useful way of looking at Ethiopia’s progress and future choices. I would add 1 more, related to the investment climate.
Whilst the Growth Commission’s observations on prioritising future incomes through investment and the role of property rights are right, they only take us so far. It is also important to think about the way the world looks to those making those important decisions on whether to consume or invest – or often whether to invest in Ethiopia, or somewhere else.
A key factor here is the investment climate: the rules, procedures and norms that underpin how business is done. For instance, how much it costs to register a business, how long it takes to pay tax and the likelihood of being asked to pay a bribe when you do.
In many respects the world has changed profoundly since the east Asian ‘miracle’. The increasingly mobile nature of global capital flows and the proliferation of countries competing for the same investors have changed the landscape. Investors (both international and domestic) have more choice in where and how to invest. The process of offshoring labour intensive manufacturing from advanced countries to the Asian Tigers is winding down and competition in these sectors is fierce. We know about that in Europe!
The complexity of managing and attracting investors to a modern and diversified economy also presents challenges. Trying to tailor arrangements for individual firms and granting them high level political access to help overcome obstacles is only manageable when you have just a few investors. There is a risk that the incentives and tailored measures set up for these first few investors eventually lead to a level of complexity and unpredictability that puts off others. Many east Asian countries found that special deals sooner or later had to be replaced with broad based reforms providing clarity and equity, as well as flexibility.
Listening to the grumbles of your key investors is always revealing. I am told that the top constraints reported by Chinese investors in Ethiopia are access to finance, access to land, electricity and the time taken and unpredictability in paying taxes. Do customs and trade regulations also rate highly, and does it takes longer to clear customs here than in other places?
And finally, let me say a word about managing the transitions that growth and development will entail.
Some changes countries face are inherent to the process of growth and rising incomes. Some are external, driven by global factors or environmental change. I want to mention 4 ‘transition issues’, which Ethiopia might want to turn into advantages rather than risks.
Demographic change is my first example. As with much of Africa, Ethiopia has a young population: 85 million today, set to rise to 150 million by 2050. And the median age of Ethiopians is already only just over 16. This youth bulge has often been called a ‘demographic dividend’, with the majority of the population in work, rather than needing looking after.
But it also creates pressures for service delivery and pressures on the labour force tomorrow. At some 2 million new entrants to Ethiopia’s labour force every year, that’s more than the total number of people currently employed in the formal private sector.
I guess I don’t need to tell all you students studying hard and trying to pick up marketable skills what this means. The private sector must take off, particularly in the manufacturing sector. And more people like you need to develop skills in manufacturing and services. To ensure it’s really a ‘demographic dividend’ rather than a problem.
Second, and linked to both structural change in the economy and demographics, is urbanisation. Ethiopia’s population remains overwhelmingly rural. But urban centres are growing quickly. This great city has more than doubled in size since I first visited. Some smaller cities are growing even faster. Again, no country has advanced to middle income status without significant urbanisation.
Cities are crucibles for innovation and specialisation. Clusters of similar businesses can emerge, driving competition and creating demand for workers with key skills. Over the last 5 years almost half the fall in poverty in Ethiopia has come in towns and cities or through rural-urban migration.
But urbanisation also causes upheaval and change. Social networks, service delivery, transport links and issues of environmental sustainability need thinking through. I see signs of this foresight here in Addis Ababa in the construction of the light railway. I am hoping to visit it myself tomorrow. But is infrastructure being developed fast enough?
There are significant opportunities in infrastructure for Ethiopia to draw on the finance and skills of the private sector. Public Private Partnerships, for example, have proved successful elsewhere in harnessing the private sector to help deliver objectives once the preserve of the public sector. Through the “Private Infrastructure Development Group”, DFID has helped stimulate such investment in other developing countries, using a mix of financial, practical and strategic support. We stand ready to do the same here.
The third transition I want to highlight is perhaps the most sensitive, but 1 which I know is on people’s minds. As a country grows, and its population gets more educated, wealthy and urbanized, history suggests that ways for that population to express their views openly and freely get ever more important if stability is to be maintained.
The final transition I want to highlight is increased reliance on domestic revenues and other sources of finance. This will also mean a reduced dependence on aid. Increasing revenues will be essential for protecting the delivery of basic services like education and health care. It will also help Ethiopia build a more comprehensive social safety net. Something which all middle and high income countries committed to social equality need.
Ethiopia has come a long way over the past 30 years. I hope to live to see equal – if not greater – levels of progress over the next 30. There will undoubtedly be bumps in the road and new challenges. The flexibility and creativity with which Ethiopia meets these challenges will be a sign of its true strength. Some– like the shift in demographics – can be foreseen and planned for. Others, like global volatility in food markets or oil prices, can’t. Hence the need to build in buffers now through social safety nets and strong macroeconomic policy.
I want to finish by saying that the UK is in this partnership for the long haul. And as Ethiopia’s development accelerates, our support needs to evolve too. As I said earlier, we have begun our shift towards economic development already. As we get into discussion on what I’ve said today about Ethiopia’s growth and transitions, I hope you will tell me how you think the UK can best support you in this.