Growth in Ethiopia: Retrospect and Prospect

Ethiopia has had fairly rapid growth since the current reformist regime took power. However, part of that growth consisted of recovery from the disasters of the previous government and the civil war. The permanent component of per capita growth under the reformist government in the 1992-2001 period is estimated at about 1.1 percent per annum. That growth is explained by total factor productivity growth rather than by capital deepening. Most of the growth is due to non-agricultural sources, despite the government’s commitment to agriculture-led development. This 1.1 percent growth rate also corresponds to the average growth payoff to the policy changes initiated by the current government, measured by variables such as the inflation rate, the budget deficit, the black market premium, the ratio of M2 to GDP, the level of infrastructure, and real depreciation of the currency. International comparisons suggest that a growth acceleration of the magnitude foreseen in the HIPC documents is only rarely achieved. Further increases in Ethiopia's growth potential would require a second generation of reforms that address some of the poor initial conditions -the poor quality of institutions, the high illiteracy, the low level of openness to trade, and the low degree of structural transformation of the economy (measured by urbanization). This does not even take into account other severe long-term problems like the AIDS pandemic and environmental degradation. Poor institutions include flawed democracy and human rights, lack of property rights in land, and excessive business regulation. Since any reforms to these initial conditions take time (and have already taken time) to implement and bring to completion, the 4 percent per capita HIPC growth projection seems overly optimistic even under the best case reform scenarios for the medium term. The government should assess how it will deal with debt servicing requirements and other macro balances under a scenario of lower growth and saving than what is projected in the HIPC documents. Ethiopia’s long history of involvement with foreign donors has not yielded very happy results. The current relationship is one of a top-heavy donor bureaucracy imposing too many burdens and too many agendas on a small group of managers in Ethiopia’s national and regional governments. It would be better to experiment with more decentralized mechanisms to match the multitudinous needy poor in Ethiopia with donors who want to help the poor.