Ethiopia is Africa’s new growth engine – here’s why.
When you think about Africa, probably you think about strong economies like: South Africa or Egypt, Kenya, and fast growing biggest country in the region - Nigeria. But.. there is actually even more promising economy which can boom in a near future. I am talking about Ethiopia!
Please, erase from your mind the picture of poverty and hungry children in the region - and check why that place can be a new growth engine for the continent.
First of all, Ethiopia’s location gives it strategic dominance as a jumping off point in the Horn of Africa, close to the Middle East and its markets. Bordering Eritrea, Somalia, Kenya, South Sudan, and Sudan, Ethiopia is landlocked, and has been using neighbouring Djibouti's main port for the last two decades.
However, with the recent peace with Eritrea, Ethiopia is set to resume accessing the Eritrean ports of Assab and Massawa for its international trade.
With about 105 million people (2017), Ethiopia is the second most populous nation in Africa after Nigeria, and the fastest growing economy in the region. However, it is also one of the poorest, with a per capita income of $783. Ethiopia aims to reach lower-middle-income status by 2025.
Ethiopia’s economy experienced strong, broad-based growth averaging 10.3% a year from 2006/07 to 2016/17, compared to a regional average of 5.4%.
Ethiopia’s real gross domestic product (GDP) growth decelerated to 7.7% in 2017/18. Industry, mainly construction, and services accounted for most of the growth. Agriculture and manufacturing made lower contribution to growth in 2017/18 compared to the previous year. Private consumption and public investment explain demand-side growth, the latter assuming an increasingly important role.
Higher economic growth brought with it positive trends in poverty reduction in both urban and rural areas.
The share of the population living below the national poverty line decreased from 30% in 2011 to 24% in 2016 and goes down according to some resources to ar. 20% in 2018. Worth to add here that in 2000 the poverty rate was 50% (!).
The government is implementing the second phase of its Growth and Transformation Plan (GTP II) which will run to 2019/20.
GTP II aims to continue expanding physical infrastructure through public investments and to transform the country into a manufacturing hub. GTP II targets an average of 11% GDP growth annually, and in line with the manufacturing strategy, the industrial sector is set to expand by 20% on average, creating more jobs.
Ethiopia’s main challenges are sustaining its positive economic growth and accelerating poverty reduction, which both require significant progress in job creation as well as improved governance. The government is devoting a high share of its budget to pro-poor programs and investments. Large scale donor support will continue to provide a vital contribution in the near-term to finance the cost of pro-poor programs. Key challenges are related to:
Limited competitiveness, which constrains the development of manufacturing, the creation of jobs and the increase of exports.
An underdeveloped private sector, which would limit the country’s trade competitiveness and resilience to shocks. The government aims to expand the role of the private sector through foreign investment and industrial parks to make Ethiopia’s growth momentum more sustainable.
Political disruption, associated with social unrest, could negatively impact growth through lower FDI, tourism and exports.
Here are five reasons global stakeholders should take a closer look at Ethiopia, prepared by World Economic Forum. This article is part of the World Economic Forum on Africa.
1. Greater social stability
Ethiopia has received new political and financial support from a number of parties, including the European Union, the World Bank and the IMF. The new policies were also well received by the Ethiopian diaspora, a big contributor to the economy through remittances. The steps taken towards national security and political reconciliation – such as lifting of the state of emergency, releasing political prisoners, and reforming tough laws on anti-terrorism, media and civil society – are considered positive by international observers.
2. Youthful potential
More than 70% of citizens in Ethiopia are under 30, and nearly 50% are under 15. In 2017, a World Bank report found that enrolment in higher education had multiplied fivefold since 2005, with the number of public institutions increasing from eight to 36 over that period. The government has also implemented a 70:30 higher education policy – training 70% of students in technology and science, and 30% in social science and humanities. In a world where service industries account for 65% of global GDP, these are the type of education policies that seem adapted to the new global context. Technology and knowledge-based industries have the potential to thrive, thanks to the cost advantages and the availability of human capital in Ethiopia. If the country’s youth can be channelled through relevant skills training, then this human capital will become a key economy-boosting asset.
3. Possible privatisation of state-owned enterprises
There are plans to offer minority stakes in airlines, power and telecoms to global investors. In addition, the possibility of railway projects, hotels and key manufacturing industries, have already created enough buzz to boost investors’ confidence and in turn, the possibility of attracting investments. The government has also created five industrial parks that have spurred the creation of 45,000 jobs, with the aim to set up a total of 30 and increase their manufacturing from 5% to 20% of GDP.
4. Promising start-up ecosystem
An important piece of the start-up puzzle in Ethiopia is the existence of entrepreneurial role models such as Bethlehem Tilahun Alemu, founder and managing director of SoleRebels. In early 2005, shortly after graduating college in Addis Ababa, Bethlehem founded the trailblazing footwear company to provide solid, community-based jobs. Tapping into her nation's rich craftmanship heritage, she is on track to be the first global branded retail chain from a developing nation to open 100 stores and achieve over $200 million in revenues by 2019. However, structural challenges remain for Ethiopian entrepreneurs. The success of ride-sharing start-ups around the world, like Grab, Didi Chuxing, Lyft, Careem and Ola Cabs, has inspired three such companies in Ethiopia. But this trio – ETTA, Zayride, RIDE – face obstacles including low internet penetration, poor connectivity and lack of access to finance. They can, however, be optimistic as the government plans to unlock two of the most heavily regulated sectors – banking and telecoms.
5. Strategic location between Europe and Asia
In addition to its strategic positioning as a long-haul transfer hub, Ethiopia is increasingly becoming an important destination for manufacturing, especially in the ready-made garment (RMG) sector. With the success of Zara’s business model, RMG suppliers are pressurised to reduce the turnaround time between design and final delivery. One of the easiest ways to achieve this is to stay closer to the brands. However, most big brands don’t currently have interesting alternatives closer to their regions, heavily relying on countries like Bangladesh and Vietnam for cost reasons. Bangladesh’s RMG manufacturing sector is increasingly gravitating towards Ethiopia to maintain its low-cost advantage and, additionally, stay closer to key brands in Europe. With a strategic location and low-cost labour, Ethiopia is uniquely positioned to succeed in the apparel manufacturing space, provided they can train their young people to deliver the required quality.
On the services front, one of the country’s biggest advantages is being situated in a time zone closer to Europe. With its sizeable number of English-speaking nationals, Ethiopia may be able to attract back-office jobs from Europe. If the government succeeds in converting its youth boom into human capital, the service industry could witness growth. The commissioning of the Ethiopia-Djibouti electrified rail line in January 2018 is a significant boost to the country’s export ambitions, by moving goods from newly built industrial parks in landlocked Ethiopia to ports in Djibouti.