Development Economics in Ethiopia GRADE 12 economics case study

1. Overview of Ethiopia

Although Ethiopia is experiencing relatively high rates of economic growth due to progress in the agricultural and service sectors, thus becoming the 5th fastest growing economy among 188 IMF member states, it remains one of the poorest countries in the world. Development in Ethiopia is threatened by rapid population growth (which often surpasses GDP growth) and a low starting base. Its dependence on agriculture also poses a challenge as the country is vulnerable to sudden weather changes-e.g. it saw the worst drought in 30 years in 2015-2016, which threatened food security. Infrastructure development is difficult due to the abundance of mountainous and desert regions. Ethiopia operates under a planned economy, which also hinders development.

HDI: Even though Ethiopia is one of the 10 countries globally that has attained the largest absolute gains in its HDI over the last several years, it still ranks 173rd out of 186 countries in the latest UNDP Human Development Report.

2. Comparing development in Ethiopia with Singapore

Relationship between income per person and adult literacy in Ethiopia, compared with Singapore
Relationship between income per person and life expectancy in Ethiopia, compared with Singapore

GDP and GNI per capita (PPP)

Ethiopia: GDP per capita=1529.89; GNI per capita=1,620

Singapore: GDP per capita=80,191.54; GNI per capita=81,360

3. Domestic factors leading to economic development

Access to education

The halving of poverty since 1995 has in part been attributed to rising education levels- for instance, between 1994 and 2009, rural households where the head of the household had completed primary education were 16% less likely to be chronically poor. Ethiopia's education system has undergone significant institutional changes in the last century, transitioning from the Ethiopian Orthodox Church system to a secular system. Illiteracy rate has also fallen from 90% to 48% between 1974 and 2016. Despite this, the education system remains unsatisfactory, especially in rural areas, which prioritise work over education, creating regional disparities in education and employment. Progress in education is also hindered by rampant corruption, which results in a misallocation of funds dedicated towards the education sector. According to research, the root cause of the problem is the inextricable link between education and politics. Moving education away from the public to the private sector would therefore be a positive step forward.

2. Property rights

Access to property rights is limited in Ethiopia. The nation has failed to sign several international treaties regarding the issue of intellectual property rights, such as the Paris Convention for the Protection of Industrial Property; the World Intellectual Property Organization (WIPO) copyright treaty; the Berne Convention for Literary and Artistic Works; the Madrid System for the International Registration of Marks; and the Patent Cooperation Treaty. The Ethiopian Intellectual Property Office (EIPO) is responsible for overseeing IPR issues, but is weak and ineffective in enforcing laws and regulations. For instance, several businesses in the tourism industry are able to operate under trademarked names and symbols without any consequences.

3. Technology

Enhancement of modern and science-based technologies, such as bio-technologies, have led to the development of the agricultural sector- the predominant economic sector in Ethiopia. Product quantity as well as quality (with increased resistance to insects) has improved, along with productivity. This has led to a general increase in food security.

4. International trade and economic development

Over-specialization on a narrow range of products: Ethiopia is highly reliant on the export of coffee, which currently comprises 26.4% of Ethiopia's foreign exchange earnings. Agricultural products such as coffee are sensitive to external factors beyond human control (e.g. weather), rendering Ethiopia's economy vulnerable.

Price volatility of primary products:

Price inelastic supply of primary products

Supply of primary products such as coffee is highly inelastic due to the reliance of production on external factors like weather. As seen in the diagram above, a shift in demand causes a greater increase in price when the supply curve is inelastic. Similarly, primary products are also price inelastic in their demand, especially due to the availability of a wide range of substitutes, and the fact that they generally comprise a small portion of people's incomes. The same shift in the supply curve causes a greater increase in price when the demand curve is inelastic. Thus, low PES and low PED render prices of primary products volatile.

Inability to access international markets: Being landlocked, it is difficult for Ethiopia to physically access trade routes. Ethiopia has experienced conflict with its neighbour, Eritrea. This has blocked off access to the Eritrean port of Assab, where 75% of Ethiopia's exports used to pass through duty free until 1997. This has forced the country to seek additional trading ports, such as Djibouti. However, this is hampered by a poorly functioning railroad and limited port facilities. Its other option is Somalia, however this is not used frequently due to tense political relations and the Somalian civil war. In addition, Ethiopia has a weak rail system and inadequate internal transportation system.

5. Growth and Development Strategies aimed at Increasing Trade

Export promotion: The WBO has made recommendations to the government to tackle how it exports rather than what it exports. It is attempting to increase the value of the coffee it exports either by exporting more wet-processed green beans instead of sundried, or by roasting its beans. Additionally, using higher quality packaging for its cut flowers, processing its meat, and attempting to brand its products would significantly reduce the country's vulnerability.

Import substitution: After suffering from vast trade imbalances for prolonged periods of time, the nation has embarked on producing cement, sugar, various textile products, furniture, family vehicles and heavy duty trucks, foot wear, pharmaceutical products, tires, plastics and several other commodities which meet international standards and quality. Import substitution is necessary not only to improve trade balance, but also to ensure geographical compatability of products- e.g. recently, materials for the construction of the Great Ethiopian Hydro Electric Dam have been locally sourced, which has ensured that the dam is compatible with local climate. Despite these efforts, import substitution is at its infancy. Efforts are hampered by consumer mindset, which has built up a preference for imported footwear, clothes and cosmetics.

6. Aid, Trade and FDI

Aid: Ethiopia has attracted a lot of foreign aid due to its rapid economic growth, making it one of the most aid-dependent economies in the world. The nation has been receiving $3.5 billion on average from international donors in recent years, which represents 50 to 60 percent of its national budget. However, there is significant evidence to suggest that aid is doing more harm than good. Foreign aid is used to fund the government's development strategy, which is underpinned by the "villagization" scheme, whereby 1.5 million people will be relocated from areas targeted for industrial plantations. With 80% of the population dependent on agriculture for subsistence farming, disruptions caused by the villagization scheme are causing increased food insecurity, destruction of livelihoods and the deterioration of cultural heritage. Research has shown that this relocation has been achieved through violence, intimidation and political coercion, stripping locals of their basic human rights. Unfortunately, much of this international development aid is actually implicated in this problematic villagization scheme.


Ethiopia has been experiencing a trade deficit for prolonged periods of time, due to the discrepancy in the value of exports (mainly in the form of raw materials) and the value of imports (mainly in the form of manufactured goods). In order to combat this, Ethiopia pursued a policy of import substitution, which failed miserably. At the same time, complete trade liberalization may do more harm than good due to the inability of Ethiopian firms to compete with superior foreign firms.

The country engages in a variety of bilateral and multilateral trade agreements, although it is not currently a member of the WTO, and is instead still an "observer" in the process of negotiating membership, arguing that liberalization of some areas might harm national interest. However, the country is part of COMSEA (Common Market for Eastern and Southern Africa), which offers members the opportunity to benefit from increasing trade from a more sheltered area. Although there haven't been significant increases in trade between COMSEA members, overall, trade has significantly contributed to economic growth and development.


FDI is relatively powerless in contributing to significant amounts of economic development. This is because majority of FDI projects are concentrated in the capital city, Addis Ababa, with very few elsewhere in the country. This has failed to improve, and possibly even aggravated, Ethiopia's imbalance in economic growth and social disparities. Limited amounts of FDI in poorer regions mean that FDI can be of little help in alleviating poverty, economic isolation, or in stopping migration to urban centres- the current biggest challenge facing Addis Ababa.

It is difficult for Ethiopia to integrate into the global market because of their low level of competitiveness arising from high operating and trading costs, poor infrastructure, limited human capital and shortage of potential local partners.

7. Impact of Debt on Economic Development

Debt compromises economic development because:

  1. Debt overhang: private investors expect tax increases to fund accumulated debt, thus hindering investment
  2. Crowding out: income from exports is used to pay accumulated debt, resulting in a negative balance of payments. This is an especially grave problem for SSA countries like Ethiopia, where income from exports is low. As opposed to developed countries which mainly spend borrowed money on capital goods/infrastructure that leads to growth, developing economies like Ethiopia spend this money on consumables.

Ethiopia's debt has been worsened by internal and external factors.

  • Internal: overly expansionary fiscal policies, drought conditions and highly distorted trade policies
  • External: deterioration of terms of trade leading to BOP deficit, high world interest rates, oil price shocks and increased protectionism by developed countries-->discrimination against LDCs exports.

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