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PESA Editorial - Ethiopia - 3Q2018/19

History of Conflict and its Impact on Ethiopian Development

The Federal Democratic Republic of Ethiopia is a relatively stable country with positive indications on economic growth and development across its various sectors. Ethiopia has recorded an annual average economic growth of about 10.5% over the last decade, mainly driven by public investments in agriculture, industry and service sectors[1]. However, despite the significant growth levels recorded over the past decade, Ethiopia’s poor economic performance during the 1980s and early 1990s should not be overlooked. The socialist regime in power from 1974-1991 discouraging private participation in the economy; consequently, State Owned Enterprises (SOEs) performed poorly.

The negative economic outlook imposed significant livelihood constraints on ordinary Ethiopians.  It is unsurprising then that this period is marked by public protests against the government.  During the violent civil wars under the Derg in 1977, tens of thousands of people died in Addis Ababa alone, with many more deaths recorded throughout the country[2]. The insurgencies against the Derg were ethnically based, with the most prominent resistance by the Tigray Peoples Liberation Front and the Oromo Liberation Front[3]. Not only violent civil wars, but also policies such as high import tariffs and export taxes, served to undermine economic growth in the light of the financial burden on the economy and the scale of the human catastrophe sinking the country into political uncertainty and economic devaluation.

Ethiopia has endured sustained pre- and post-election conflicts, and other erratic, generally low-intensity conflict of an ethnic nature with Somalia (both Ethiopia and Eritrea have   armed rival Somali factions to serve as proxies in their conflict); the border conflict with Eritrea from 1998-2000 is an exception. The Ethiopian army has also been supported by Cuban troops and provided substantial weapon supplies by the former Union of Soviet Socialist Republics towards its campaign against Somalia[4].

Ethiopia’s increasingly repressive political climate and downwards economic trend increased dissatisfaction among citizens, prompting the majority of opposition parties to boycott both the 1995 and 2000 elections, in both instances enabling the Ethiopian People’s Revolutionary Democratic Front to secure a landslide victory[5].

In 1999/2000, Ethiopia’s economic situation deteriorated sharply on account of severe drought conditions, the effect of which was a sharp decline in trade, with coffee exports and petroleum imports severely affected.  Exacerbating this was the negative impact of the border conflict, which heightened the fiscal deficit to 11.6% of GDP, prompting a reduction in donor support[6].

 

PESA Editorial - Ethiopian National Defense Force - 3Q2018/19
Ethiopian National Defense Force

 

The Ethiopia-Eritrea interstate war waged from 1998-2000 was primarily driven by economic policies and unsettled common border disputes.  This conflict alone   is responsible for 100,000 deaths, expulsion of tens of thousands of Eritreans from Ethiopia and the diversion of millions of dollars away from much needed development to military activities and weapons procurement[7].

The results of Ethiopia’s 2005 elections were contested by the main opposition coalition, which refused to accept the results, called for a boycott of parliament and organised a series of street protests in Addis Ababa. These rapidly turned violent and nearly 200 people, including 7 policemen, died during the three days of rioting[8]. Political uncertainty during the period resulted in the radical decline of the average annual GDP growth rate from 7.2% from 1992 to 1995, to an average of 3.4% from 1995 to 2000, even though there was a notable increase from 2000 to 2005 to an average of 5.6%[9].

PESA Editorial - Ethiopian National Defense Force - 3Q2018/19
Ethiopian National Defense Force Emblem

Likewise, civil unrest since early 2015, rooted in regional and ethnic tensions, led in October 2015 to the introduction of a 9-month state of emergency.  In 2016, as civil unrest continued, the Cabinet was reshuffled: this included the appointment of a new Minster of Finance and Economic Cooperation in addition to other senior economic policy makers[10]. The prevailing political context continues to suffer from political instability as civil unrest escalates. On 17 October 2018, seven political parties condemned the recent violence in Addis Ababa and other parts of the country, which resulted in deaths and injuries of innocent people as well as damage to property[11].  These political developments have the potential to undermine the country’s economic performance as they discourage investor sentiment and threaten the tourism sector.

Notwithstanding this, however, the Ethiopian economy has continued to register significant growth. The economy exhibited an average growth rate of 10.3% from FY2005/06 to FY2015/16, moderately increased to 10.9% growth in FY2016/17, this substantial and sustained economic growth is attributable mainly to the expansion of industry and the agricultural and services sectors[12]. Ethiopia, following the example of Asian industrialisation, has adopted the developmental state approach to guide development and stimulate sustainable growth[13]. However, in the last decade the government has given increased encouragement to foreign direct investment in various sectors of the economy, stimulating a concomitant rise in domestic investment, particularly in commercial agriculture[14]. This growth is attributed to a steady in­crease in public investment from 0.7% of GDP in 2012 to 5.7% in 2016, and moderating to 4.9% in 2017. Simultaneously, the share of industry in GDP rose sharply from 16.7% in 2012/13 to 25.6% in 2016/17[15]. This stable shift in the structure of the economy points to the government’s overarching policy commitment to develop the private sector, promote foreign direct investment and stimulate port-oriented manufacturing in particular.

Implementation of the 2nd phase of the Growth and Transformation Plan (GTP II) which runs to 2019/20, is a positive effort towards physical infrastructure development through public investment projects. For example, the Adam Industrial Park is one of the government-led projects aimed at transforming Ethiopia into an industrial centre. The park, developed at a cost of more than ETB 4.1 billion (approx. USD 248.5 million) is expected to create jobs for 25,000 individuals and generate more than USD 38.0 million from export of goods[16]. The liberalised investment and marketing environment allow investors to remit dividends and interest from invested capital as well as major and interest payments on external loans, proceeds from sales, salaries and other payments[17].

To enhance the gains of the modestly growing economy, Ethiopia’s government should intensify efforts towards implementation of GTP II policies as this will boost privatisation and private sector participation in the economy. The government should also consider introducing a modern Public-Private Partnerships legal framework and SOEs financial and governance reforms to encourage economic expansion.

Ethiopia’s underdeveloped private sector and political disruptions remain the key barriers to competitiveness, manufacturing, employment creation and exports. In addition, the government should prioritise policy efforts to support the rapid industrialisation and economic diversification to increase export rates, boost growth projections, and expand debt sustainability.  At the same time, measures to reduce public sector borrowing and bring inflation back to target need to be intensified, as external imbalances and indebtedness remain a source of macroeconomic risk[18]. These macroeconomic policies, combined with sound political will, can considerably enhance Ethiopia’s competitiveness, reduce external imbalances and re-establish shields, all while raising the growth potential of the economy over the medium term.

 


[1] MFEC 2018. Fiscal Policy in Ethiopia and Recent Developments, Ministry of Finance and Economic Cooperation: Addis Ababa. Available At: http://www.mofed.gov.et/  [Last Accessed: 5 February 2019].
[2] GoE 2018a. History, on the Government of Ethiopia Website, viewed on 2 October 2018, from http://www.ethiopia.gov.et/.
[3] GoE 2018a. History, ibid.
[4] GoE 2018a. History, ibid.
[5] GoE 2018a. History, ibid.
[6] IMF 2001. Memorandum on Economic and Financial Policies for 2000/01-2002/03, on the International Monetary Fund Website, viewed on 25 November 2018, from https://www.imf.org/.
[7] GoE 2018a. History, ibid.
[8] GoE 2018a. History, ibid.
[9] UNCTAD 2018. UNCTADStat Database, United Nations Conference on Trade and Development: Geneva. Available At: http://unctadstat.unctad.org/ [Last Accessed: 5 October 2018].
[10] IMF 2018. Federal Democratic Republic of Ethiopia 2017 Article IV Consultation, International Monetary Fund: Washington, D. C. Available At: https://www.imf.org/ [Last Accessed: 30 January 2019].
[11] GCAO 2018. Political Parties Condemn Recent Violence in Addis Ababa, on the Government Communications Affairs Office Website, viewed on 15 October 2018, from http://www.ethiopia.gov.et/.
[12] MoFED 2018. Ethiopia Economy Expected to Move Toward a More Sustainable Path, on the Ministry of Finance and Economic Cooperation Website, viewed on 5 October 2018, from http://www.mofed.gov.et/.
[13] GoE 2018b. Economy. on the Government of Ethiopia Website, viewed on 5 October 2018, from http://www.ethiopia.gov.et/.
[14] GoE 2018b. Economy, ibid.
[15] UNCTAD 2018. UNCTADStat Database, ibid.
[16] ENA 2018. Adam Industrial Park Inaugurated, on the Ethiopia News Agency Website, viewed on 5 February 2019, from https://www.ena.et/; NBE 2019. 2017-18 Annual Annex, National Bank of Ethiopia: Addis Ababa. Available At: http://www.nbe.gov.et/ [Last Accessed: 5 February 2019].
[17] GoE 2018b. Economy, ibid.
[18] IMF 2018. Federal Democratic Republic of Ethiopia 2017 Article IV Consultation, ibid.

 

 

 


Ishmael Lupahla

Former Junior Regional Analyst

Nokukhanya Mncwabe

Former Editing and Research Specialist

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