Ethiopia’s Economic Development Is Neither “Cautious” Nor “Paranoid”

Last week, the Economist described Ethiopia’s economy as “Neither a sprint nor a marathon.” Exactly what the title was supposed to convey wasn’t clear but the sub-title “Africa’s most impressive economic managers suffer from excessive caution” made it clear this was going to be one of the Economist usually critical pieces. At first sight, given the Economist’s basic disagreement with Ethiopia’s developmental state processes and the country’s rejection of neo-liberalist development, it is a surprise to see any acknowledgment of Ethiopia’s economic successes or references to “Africa’s most impressive economic managers”. The article quickly returns to its more usual approach claiming all is not well in Ethiopia’s relationship with China, which is described as a “lodestar” for Ethiopia, and making references to “paranoid leaders” who suffer from “a lack of courage”. The Economist puts Ethiopia’s successes down to China and to the “close intellectual links with China’s Communists’ and to the supposed fact that “Ethiopians imbibe the gospel of industrialization overseen by a strong state that exerts tight control over an ethnically diverse population with a history of strife” at the party school in Beijing. However, now, it claims China is insisting Ethiopia “discard the isolationism of the past and open up an economy in which the flow of money and information is still restricted.” The Economist describes banking and telecoms as “almost antediluvian’ and claims investors are frustrated. It admits the Government’s main priority is industrialization but then claims endless red tape and restrictions on finance deter investors. This is where the problem is a lack of courage: “many in the Ethiopian government, ruling party and security apparatus acknowledge that only further reforms can sustain the goals of economic growth and political stability” but they simply aren’t carrying these out . The Economist, whose political analysis is as wide of the mark as its economic views, claims this is because of a fear of being overthrown lies behind the reluctance to reform. The central problem with all of this is that much of it is inaccurate and frequently just plain wrong, not least as Prime Minister Hailemariam noted in his last half-yearly report to Parliament, that the 10 year strategic plan recently signed between Ethiopia and China will boost their strategic partnership “particularly in the area of infrastructural development.” The article makes much of its claim that Ethiopia’s mobile phone connection is one of the lowest in Africa, giving a figure of around 23 million. In fact, as of the end of 2014, the figure was 34 million and it is expected to be up to 50 million by the end of this year. Still lower than most but increasing fast. It might also be relevant to note Ethiopia launched a 4G service in March this year. Banking is not “almost antediluvian”, it is merely not open to western institutions. Not quite the same thing. The article mentions the Chinese Huajian, rather disparagingly referring to it as “a Chinese shoemaker” despite the fact it is the largest producer of shoes in the world and says Huajian now employs 3,500 workers in Ethiopia, up from 600 just a few years ago. The Economist says “Ethiopia needs a hundred Huajians”. Well, yes, but the Economist, typically, doesn’t mention that the Huajian Group’s ‘Shoe City’ in the eastern industrial zone, now employing 3,200 (not 3,500) workers, making 180,000 pairs of shoes a month, has now been joined by another 20 Chinese firms. Nor does it bother to note that Huajian plans to invest an additional US$2 billion to build its own industrial park and expand its Ethiopian workforce to 30,000 in the next few years. As the Economist could have easily found out, there are now six industrial zones in Ethiopia with more under development. Certainly the key question is whether Ethiopia can create or attract the level of private sector productive enterprise and of foreign direct equity investment necessary to turn the infrastructure development into the basis for a functioning modern economy. Despite the Economist’s allegation that the late Prime Minister Meles “hated the private sector”, a stupid comment which merely displays ignorance, a more accurate version of the Government’s economic approach is that described by the State Minister of Finance, Ahmed Shide: “success to our plans will now be determined by the response of the private sector. Investment is key in this. This process can’t just be led by the state which can’t itself generate wealth; it can only facilitate it.” The Economist suggests the prospects for attracting investment remain “dim”. Others, including most importantly investors, have a different view. The United Nations Conference on Trade and Development’s World Investment Report 2014 recently defined Ethiopia as one of the major investment destinations in Africa. It said it had become a steadily increasing recipient of foreign capital flow and described it as the most attractive destination of investors in the region in 2013. It said Ethiopia had received US$953 million of FDI in 2013, and implied that this notable progress in attracting FDI was a response to the Government’s right mix of industrial policies and strategies. The report indicated the country’s industrial strategy had played a crucial role in attracting foreign investors into the manufacturing sector and bolstering the growth of FDI. In this context, the UNCTD Report also noted that Ethiopia had used the FDI flows to start to build its Climate Resilient Green Economy. Ethiopia is certainly located in a volatile region suffering from considerable conflict and instability, but it is itself one of the most stable states in Africa and is frequently described as a hub of peace and stability in the Horn and East Africa regions. Indeed, the Economist might also have noted that Ethiopia has a number of real advantages in attracting the needed private sector enterprise and foreign direct investment. A large and young population with a median age of 17; cheap and expanding power supplies; a state that works and a government with the capacity to make and implement policies effectively; further education is booming with over 30 universities geared especially to turning out graduates in engineering and natural sciences; better governance provides less corruption than many states; and above all overall peace and stability. It also has an effective foreign policy that recognizes the need for regional stability as exemplified by its international peacekeeping role. Ethiopia’s vision is to be “a middle income country according to a democratic development model, an activist state grounded by plans and a comprehensive development outlook … and grounded in the party and in discipline. We are free market and open, but with caveats”. In the last resort, Ethiopia’s prospects are good not least because it “owns its recovery and its security.” Both of these appear to offend the Economist which cannot apparently forgive Ethiopia for its refusal to hand over its financial institutions to western organizations. Ethiopia is ranked 55 out of 148 for security by the World Economic Forum, Global Competitiveness Report, 2013-2014, well above most of its regional peers such as South Africa (109), Kenya (131), and Nigeria (142). With an estimated 43 million or more workers, it has the second largest labor force in Africa, and is the second largest domestic market in Africa with a population of at least 85 million. It is also a member of the Common Market for Eastern and Southern Africa (COMESA) comprising 19 member countries and over 400 million people, and of the TFTA. Ethiopian products have duty-free, quota-free access to U.S. markets under the African Growth and Opportunities Act (AGOA) and access to EU markets under the Everything But Arms (EBA) initiative. A broad range of manufactured goods from Ethiopia are also entitled to preferential access under the US Generalized System of Preference. No quota restrictions are placed on imports from Ethiopia for some 4800 products currently eligible under the GSP. Ethiopia’s public debt level is one of the lowest in the world and the recent successful launch of a one billion dollar sovereign bond sale will also make a substantial contribution to increase investment inflows. The credit ratings of Fitch, Moodys and Standard and Poor last year (of B and B1), and Fitch recently providing another B rating this year, as well as Moodys’ most recent research note also supporting this evaluation, are all factors that might have been considered by the Economist. Another point of relevance is the Prime Minister’s point in his most recent report to Parliament that the Small and Medium Enterprise Projects had created over one million jobs in the previous six-months. In fact, the SEMEP has created some 4 million jobs over the first four year of the Growth and Transformation Plan which ends this year. All this has certainly contributed significantly to attract foreign investment and Ethiopia has become one of the preferred investment destinations on the continent today. FDI this fiscal year is set to be a record following successful efforts to attract overseas manufacturing companies, showing an increase of 25% up on last year’s US$1.2billion to reach US$1.5 billion. China is providing the largest number of investments currently, though by value the biggest investors are Turkey and India, with more recently growing investment from Europe and the US. Recent arrivals include Europe’s Unilever which is currently building a factory and India’s largest paint-maker, Asian Paints. Ethiopia received no more than US$100 million in FDI in 2007, but since then international companies have been attracted by the country’s low wages, cheap power and supportive policies as well as the industrial zones to provide production facilities notably for textiles, leather and garments, political and security stability and the excellent international links provided by Ethiopian Airlines which runs the biggest global network of any African airline. The Government has designed highly competitive and attractive benefit packages for investments and exports in priority areas. Among other incentives are customs duty payment exemptions on capital goods and construction materials and on spare parts whose value is not greater than 15% of the imported capital goods’ total value. Tax breaks include income tax exemption from two to seven years for manufacturing, agro-processing and agricultural investments. There are also a series of export incentives, including the Duty Draw-Back, Voucher, Bonded Factory and Manufacturing Warehouse, and Export Credit Guarantee schemes. The Government guarantees the remittance of profit, dividends, principals and interest payments on external loans as well as provision of land at competitive leasehold prices. Forecasts are for FDI inflows to average US$1.5 billion each year for at least the next three years, and Accountants Ernst and Young, for example, predict the country will rank among Africa’s top four manufacturing hubs by 2025. It notes “the big surge” in deals since 2011 from the US and Europe as well as China, Turkey and India. “Ethiopia”, it says, “is fast becoming the ‘must-visit’ destination for virtually all private equity funds with an emerging market focus.” There are now more than half a dozen private equity firms operating in Ethiopia. Ethiopia in fact offers major investment opportunities with competitive incentives in the agriculture, manufacturing, tourism, mining, hydropower and social services sectors. The country’s industrial development strategy has given substantial attention to boost and expand the manufacturing sector by building vertical and horizontal linkages between agriculture and industries, and establishing industrial parks tied to particular sectors and investments. These have been very successful and they continue to offer convenient environments for manufacturing as well as foreign private investment. The Economist neglects to consider any of this and also fails to actually look at the facts about development and about foreign investment. It is true that state-centric approach to development has not yet created private sector as productive as required nor one able “to translate major infrastructural investment into the basis for a dynamic modern economy.” This is, however, something that the Government is both aware of and is working to correct, a point the Economist could easily have taken note of if it had bothered to carry its enquiries just a little further. In fact, the Government has demonstrated a consistent, determined and successful policy of creating the conditions for development, notably through infrastructural investment. The rebuilding of the railway from Djibouti to Addis Ababa, at a cost of US$4 billion by Chinese companies, and the planned 5,000 km of new rail lines across the country by 2020; the significant expansion of the domestic airline network, funded by commercial borrowing; the national fibre optic cable system to improve telecommunications; the significant hydro-electric projects in addition to the Grand Ethiopian Renaissance Dam, being financed through bonds and the people of Ethiopia and the Diaspora. Funding for these are coming from improvements in tax revenue, concessional financing from China and other donors, and domestic borrowing. The Economist rather sarcastically describes this as “trying to help industry by building roads, railways, power stations and dams—following the Chinese playbook.” This is hardly an accurate account of a deliberate policy of laying down the foundations of infrastructure as the basis for development, not just of Ethiopia but for the region, or of the value of such a policy. It is, after all, a policy which is providing for 5,000 kilometers of railway, thousands of kilometers of both internal and cross border roads, the development of 10,000mw of power, including the construction of Africa’s largest dam, providing enough power to export to neighbors, and developing a Climate Resilient Green Economy by 2025. None of this can be described as “cautious” and it gives no indication of “paranoia”. The Economist should really do more homework. Originally posted at http://www.mfa.gov.et/weekHornAfrica/morewha.php?wi=1817#1817

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