Ethiopia – Africa’s Wunderkind

Some decades ago Ethiopia was a starving country in dire need of international aid to help feed its citizens – but today, Africa’s second most populous country after Nigeria, has evolved into one of Africa’s fastest growing economies.

Although many African nations are still struggling to cope with weak domestic currencies and declining revenue from commodities, the steady growth of Ethiopia’s 8 percent plus growth rate has been maintained and is set to remain stable in the near future.

With state-owned enterprises such as the commercial Bank of Ethiopia, Ethiopia Electric Power and various other state mechanisms that have played a significant role as stakeholders in local industries, the Ethiopian currency, coupled with capital controls, retained its value along with a 68% injection of capital investment from 2012 onwards.

The direct involvement of the state in its own country’s industries has proved to be a winner in terms of a steadfast economic growth rate that has caught international attention.

Ethiopia has not been overlooked by the Chinese who have a keen interest in the country. Key factors  such as cheap labour, a stable government both locally and regionally, and low-tariff access to markets in nearby rich countries has resulted in  Chinese companies opening textile and leather factories,  numerous massive infrastructure projects such as the completion and  building of an electrified railway to Djibouti, the main port of Ethiopia.

65-70% of the government budget is earmarked to local growth in terms of upliftment of the poor with heavy local state investments being ploughed into agricultural, health, education and local infrastructure developments. The latter has seen significant strides in the road and rail infrastructures, as well as power generations putting Ethiopia in an ideal position to not only take care of its own power consumption needs, but also to export surplus power to other countries.

The state has also focused its efforts in assisting small enterprises to feed into the industry such as the public housing scheme where many of the products and labour are supplied by local small and micro-enterprises. The eventual goal is to grow them into medium and large size companies. 

There has been a huge shift to the to the  manufacturing sector where the government has recognized it as a key platform to be a large employment base with shoe, leather and textile companies setting up shop for European and US markets.

The metamorphosis of Ethiopia has been phenomenal when one considers that some 30 years ago it had a famine crisis and comparing that to the present day agricultural success story that it is, the agricultural sector contributes about 45 % towards the GDP.

In terms of labour, agriculture accounts for 80-85% of employment – this is nothing short of a miracle considering the country’s previous food insecurity history. The roles of government, donors, and local farmers have all contributed towards the productivity in agriculture. In terms of progress and technology Ethiopia now have better seeds and management techniques, more fertilizer and access to domestic and international markets resulting in the creation of wealth for some farmers who have done exceedingly well.

In the light of its history of food shortage, the Agricultural Transformation Agency was created, supported by the UN, which is a government agency staffed by highly trained technical people who are able to drive the transformation agenda. 10-17% of the annual budget is spent on agriculture – testament to the government’s commitment in eradicating hunger.

The Ethiopian government has grabbed the opportunity in investing towards industrialization despite global economic headwinds. In addition, part of the program to attract foreign investment is the setting up of special economic zones coupled with significant infrastructure projects.

In terms of FDI (Foreign Direct Investment), China has emerged as a very strong partner in helping to develop infrastructures such as rail, roads, telecom and power generation projects in the form of soft loans – almost akin to a case of the Asian Tiger helping the African Tiger realize its own strength.

China not only has the economic muscle to partner with the Ethiopian state, but also has the historic advantage of having acquired the experience some 20 years ago – equating Ethiopia to where China was some 20 years ago would not be an absurd concept.

But what exactly makes Ethiopia different from other African countries one may ask. For one thing, wages in Ethiopia are about a quarter of those in China and half of Vietnam’s. The country also benefits from duty-free access to the US market for many of its goods courtesy of the US Africa Growth and Opportunity Act. Fast economic growth, proximity to the Middle Eastern market and the preferential access it has to European Union and US markets are also factors.

Since 2009 China has surpassed the US as being the top trading partner in the region – and China has recognized the potential in investing in Ethiopia becoming a key driver of the ensuing economic boom over the last 10 years.

Ethiopia  also has plenty manpower to become a manufacturing hub in the region – albeit with China’s keen interest, these factors coupled with minimal levels of corruption, relative safety, an efficient bureaucracy and cheap production (read labour) are key factors in Chinese companies stepping up.

The intended completion in 2019 of a massive urban rail project in Addis Ababa is a prime example of China’s involvement in Ethiopia’s Addis Ababa Rail project which commenced a short while ago to the delight of excited residents of the country’s capital.

The $475m urban rail project – funded by China and constituting a joint venture with the Ethiopian government – is one of the most obvious examples of Beijing’s huge role in Ethiopia’s infrastructure development. In a city of 4 million, where buses and taxis were once the only methods of commuting, this presents no mean feat considering that Ethiopia is the second sub-Saharan country after South Africa to build a high tech electrified rail network. The rail system will have the capacity to transport 60 000 passengers to 49 districts within the capital region and at 27 cents a ride, far lower than a taxi or bus fare, the light rail system is already growing with stations becoming mini commercial hubs.

This  high-profile example of Chinese investment has been a catalyst  to Ethiopia’s annual growth rate of around 10 percent in the past decade with China and its companies having invested over $ 900 million in Ethiopia over the past five years with trade being worth around $ 1.3 billion a year according to the Ethiopian Investment Agency.

It is perhaps fitting that the relations between the two countries have rotated full circle. Formal relations were stablished in 1970, but after the 1974 Marxist inspired revolution in Ethiopia  and its subsequent relationship with the then Soviet Union, China’s rival,   minimal contact took place between both countries.

It was only after former Ethiopian Prime Minister Meles Zenawi’s visit to China in 1995 that relations resumed again marking a beginning of economic ties. The relationship was further cemented in 2003 after Ethiopia hosted the second Forum on China-Africa Co-Operation summit.

Investment is not a one way street – Chinese consumer products have flooded Ethiopian markets and when  comparing the  China-Africa goods export figure of $ 50 million in 1996 to the  $ 430 million figure in 2006, only then does one realize the enormous significance and impact that China has in Africa.  

The Shiro Meda textile market as well as open-air bazaars in Addis Ababa reveal the multitude of cheap Chinese consumer products such as Huawei smartphones, shoes, jewelry, clothes and household goods – all manufactured in China.

On the other hand, local employment has been a direct result of Chinas involvement with Ethiopia with the creation of jobs being a crucial element for the growth of emerging economies such as Ethiopia. Examples such as the China-Africa Overseas Leather Products factory employing  more than 4,000 locals, the building of a second international airport in Addis Ababa at a cost of an estimated $ 4 billion, apart from the ongoing expansion of the current Bole International airport in Addis Ababa, the 656-km Ethiopia-Djibouti railway line which is being constructed at a total cost of US$3.4 billion by Chinese companies plus the  US$1.2 billion Grand Ethiopian Renaissance Dam (GERD) Power Transmission line where the Chinese company State Grid of China Electric Power Equipment & Technology Co. Ltd (SGCC) is installing the high-voltage electric transmission lines – all these and more illustrate China’s aggressive Go Big or Go Home economic strategy.

Says Tedros Adhanom Ghebreyesus, Ethiopia’s Minister of Foreign Affairs: “This is not just a relationship simply based on diplomatic negotiation but is a kind of relationship that is based on technology transfer, education and assisting each other.”

American and European companies have not been sitting idle either and although not as extensive or as visible as China’s investments, foreign partnerships have helped tremendously in the fields of health and education. Almost half of Ethiopia’s health budget comes from external financial sources, among them the European Union and the US.

Ethiopia has managed to drastically cut the  mother-to-child HIV/AIDS transmission rate with the assistance  of the President’s Emergency Plan For AIDS Relief (PEPFAR), a US governmental initiative to address the global HIV/AIDS epidemic in Africa, initially launched by ex-US President George W. Bush and continued by US President Barak  Obama.

In general most US investments are larger ones involved with the Ethiopian government, whereas smaller private sector US companies such as  Juniper Glass Industries Private Limited Company (PLC) for example, is investing close to $50 million for a glass bottle factory to meet the demands of Ethiopia’s rapidly increasing alcoholic and beverage industry.

With Ethiopia competing in the floriculture and horticulture sector with neighboring Kenya, another US firm made the largest investment so far by a US company into an Ethiopian firm, $200 million in Afriflora, a flower company that grows 730 million flowers a year in Ethiopia for export.

Ethiopian Airlines, the flagship national carrier, is the biggest customer in Africa for Boeing, the American manufacturer of large passenger jet aircraft such as the 787 Dreamliner.

This is very significant considering that the aviation sector, which depends on its aircrafts and supplies from the US, was the country’s top revenue earner at 4.2 USD billion last year, easily beating Ethiopia’s most famous agricultural export, coffee.

Progressive indicators for FDI are also evident in the Ethiopian banking arena with the state-run Commercial Bank of Ethiopia letting foreign banks operate in the country. South Africa’s own Standard Bank has opened an office in Addis Ababa – the reason according to one executive: “to gain a foothold in one of Africa’s fastest growing economies,” said the statement. So too has Germany’s Commerzbank alongside Egyptian, Kenyan, Indian and numerous other foreign banks.

Ethiopia certainly has earned the attention and a positive economic forecast, according to the IMF, an 8.1 % growth rate is predicted for 2016 going forward notwithstanding first place rating among Africa’s Top Fastest Growing Economies Scale no surprise, followed by the DRC Congo, Cote d’Ivoire, Mozambique and Chad in the top 5 countries – a testament that other African countries can learn from and grow their own economies thereby improving the lives of their citizens.

This article was written by BRUCE GERMAINE.