Despite generating rapid economic growth, Ethiopia needs to focus on building productive capacities to transform its economy, create jobs and build resilience to external shocks.
Ethiopia’s recent development strategy has yielded some important achievements. The country has achieved rapid economic growth and aims to become a lower middle-income country by 2025.
To achieve this, the government has deployed industrial policy and a sector-driven strategy, designed around developing agricultural productivity, manufacturing and exports of cut flowers.
This strategy has delivered impressive GDP growth, averaging 10 per cent per year in the 15 years up to 2019, among the highest rates in Africa. Rapid growth contributed to a steady reduction in poverty, down to 24 per cent of the population by 2019.
Nevertheless, other development objectives remain elusive. Despite the construction of industrial parks and other turnkey investments, manufacturing output has yet to grow as planned.
Although agriculture’s share of GDP has fallen, it remains the main source of livelihood for much of the population. And the country continues to rely on exports of agricultural commodities and gold, which generate little added value or transformation.
Absent the anticipated transition to more productive activities, GDP per person has grown at a slower rate than the overall economy, and inequality has crept up.
An updated strategy for sustainable development
These trends suggest that Ethiopia needs to tinker with its strategy to drive the productive transformation of the economy and achieve inclusive and sustainable growth path.
Ethiopia already has two important elements in place: a strong industrial policy, which orients incentives towards priority sectors and investments and, since 2012, steady inflows of foreign investment.
Where it may fall short is in delivering the productive capacities that entrepreneurs and investors require to establish a business, produce and trade more value-added goods and services.
Productive capacities include inputs necessary for business operations, such as skilled workers, energy, transportation and ICT services. The availability and quality of these inputs influence whether a firm can compete, innovate and grow.
Similarly, an economy’s “soft” productive capacities – such as institutions, the ease of doing business and the state’s ability to allocate resources – influence the feasibility of investing in new, more productive industries.
According to UNCTAD’s Productive Capacities Index (PCI), Ethiopia had overall score of 23.53 in 2018, ranking 169th in the world.
Relative to other economies in sub-Saharan Africa, Ethiopia scores better on PCI components such as human capital, transport, and structural change. But it lags on capacities related to institutions, energy, ICTs and the private sector business environment.
With its recently adopted Ten Years Perspective Development Plan (2021 – 2030), the Government of Ethiopia aims to address some of the gaps in productive capacities and structural economic transformation. The plan also incorporates a policy shift from government- to private-sector-led development.
Private sector development is crucial
Fostering private sector development will be crucial as the implementation of the African Continental Free Trade Area (AfCFTA) progresses. Expanding intra-African trade being a key objective of the AfCFTA, many new opportunities generated by the agreement will flow through cross-border trade and regional value chains.
Attracting new regional investment flows will depend, in part, on Ethiopia’s ability to build professional, independent public agencies that ensure a conducive business environment, by improving access to finance, enforcing contracts and establishing clear and coherent rules and procedures.
Furthermore, reducing the time and cost required to procure land, credit and permits will improve the competitiveness of Ethiopian firms in entering new markets and industries.
Given Ethiopia’s recent experience with rapid but vulnerable growth, the country must also redouble its focus on building human capital, in the form of a critical mass of skilled workers.
As well as being a crucial input in more productive industries, skilled jobs are an important channel in combating inequality and achieving inclusive socioeconomic development.
Skilled jobs typically offer better pay, more protections and benefits. They give workers the means to access nutritious food, health and education services, housing, and utilities. Successful human capital development programmes therefore offer a triple-win: for workers, employers and the national economy.
Along these lines, Ethiopia can address some of the gaps in its development strategy by focusing on building economy-wide productive capacities, towards structural economic transformation and a more sustainable, inclusive development.
Melaku Alebel is Minister of Industry, Federal Democratic Republic of Ethiopia while Paul Akiwumi, Director, Division for Africa, LDCs and Special Programmes, United Nations Conference on Trade and Development (UNCTAD)
Editor’s Note: The views entertained in this article do not necessarily reflect the stance of The
BY MELAKU ALEBEL & PAUL AKIWUMI
WEDNESDAY 2 MARCH 2022