Ethiopia’s stellar growth: Lessons for Kenya – and perhaps South Africa
- C CLAPHAM and G MILLS
- 23 Apr 2015 02:46 (South Africa)
Over the last decade, Ethiopia has emerged as one of the fastest-growing – perhaps THE fastest-growing – economies in Africa. Even though “double-digit” growth has become something of an official mantra, independent appraisals still put it at over 10 percent from 2003-13, double the sub-Saharan average. Growth is driven by a determined government policy of creating the conditions for development, notably through a massive level of infrastructural investment. By CHRISTOPHER CLAPHAM and GREG MILLS.
At first glance you know that the head-office of the Commercial Bank of Ethiopia on Addis Ababa’s Churchill Road must have been built in the 1960s. The tatty concrete rotunda has no redeeming features – save, as it turns out, its staff.
Photo: Commercial Bank of Ethiopia
Inside the tellers are organised in a giant circle, the commercial signs advertising a plethora of money transfer agencies.
“You want to buy a bond for the Grand Renaissance Dam?” exclaimed the startled assistant. “Come with me,” she smiled, showing the way to her colleagues working the inner ring behind the tellers. Such old-world naiveté is unlikely in most places, where security takes precedence over service. “Sit down,” she said, while organising a conversion from dollars into birr.
Construction of the controversial Grand Renaissance Dam, known as the GERD, on the Blue Nile near to the Sudanese border began in 2011. When completed in 2017 it will produce 6,000 MW, making it the largest hydro-electric plant in Africa. With the turbines and other electrical equipment to be funded by Chinese banks to the tune of $1.8 billion, the remainder of the $4.8 billion bill is to be met with the Ethiopian government, financed in part through the bond, targeting diaspora and local Ethiopians.
A group of three Chinese men scuttled past as the bond forms were completed, pushing a trolley on which rested three bulky black holdalls.
Available in amounts from 25 to 1 million birr, and with a dollar denominated option, not many individual foreigners have so far taken up the offer. “You are the second,” said Eyob, the bank manager, “we had an Italian in here some time back”. An Italian construction firm is building the dam, memories of darker days of Abyssinian invasions forgiven. Indeed, Ethiopians exhibit a remarkable pragmatism about their history, intent mostly on looking forward, not back. As one official publication notes about the “Italian colonialists”, they “made enormous efforts to modernise the country with the construction of the first proper road network and numerous public buildings”.
“You want interest?” Eyob asks, frowning, before filling out the colourful bond certificate. A little surprised at that request, he was more perplexed by the stipulated date of repayment. “Why 2025?” he laughed. “Most Ethiopians give just five years”.
Without much in the way of natural resources and, since the independence of Eritrea in May 1991, landlocked, and with its population rising fast towards the hundred million mark, Ethiopia’s development options seem limited.
Yet, so far the absence of natural resource driven growth has proven an advantage.
Over the last decade, Ethiopia has emerged as one of the fastest-growing – perhaps the fastest-growing – economies in Africa. Even though ‘double-digit’ growth has become something of an official mantra, independent appraisals still put it at over ten percent from 2003-13, double the sub-Saharan average.
Growth is driven, rather, by a determined government policy of creating the conditions for development, notably through a massive level of infrastructural investment.
Ambitious plans are afoot for a massive expansion of the rail network, hitherto confined to the ancient railway from the port at Djibouti to Addis Ababa, which has now been upgraded from narrow to standard gauge, which should be in operation by 2016. The 700-km line is being built at a cost of $4-billion by Chinese companies. Ethiopia is seeking to have 5,000 km of new rail lines working across the country by 2020. A national fibre optic cable system is being laid to help rectify one of the major weaknesses, in telecoms. In addition to the GERD, there are a number of smaller but still significant hydro-electric projects underway elsewhere, notably on the Gibe River in the south of the country.
Funding for infrastructure has come from a mix of sources: improvements in tax revenue collection (businesses routinely complain what a pest the tax authorities have become), some concessional financing (mainly from China) and other donors who provide around $3 billion annually from grants and loans, and domestic borrowing. Local banks are required by government to convert up to 27 percent of their holdings into government bonds to finance infrastructure, including the grand dam, this pressure-point one of the reasons why Ethiopia has so far not permitted foreign banks to open operations. What effectively amounts to a forced loan to the state has created something of a local banking liquidity crisis.
Now the key question is whether Ethiopia can create or attract the level of private sector productive enterprise needed to turn this infrastructure into the basis for a functioning modern economy.
Private sector development and growth has rhetorically, at least, become a government refrain. As the state minister of finance Ahmed Shide puts it, “success to our plans will now be determined by the response of the private sector. Investment is key in this. This process can’t just be led by the state which can’t itself generate wealth; it can only facilitate it.”
In this, amidst the debate about whether “Africa can be the next China” as manufacturing input (especially labour) costs rise in Asia, Ethiopia “wants”, he says, to be the light manufacturing hub of Africa. Ethiopian workers cost one-tenth the price of those in China for example. This view is a refreshing departure from South Africa-speak about not “struggling to work in sweat shops”.
The establishment of “Shoe City” by the Huajian Group in the eastern industrial zone, now employing 3,200 workers making 180,000 pairs a month, came about as a result of a personal invitation to the company’s founder to open a plant by Ethiopia’s late Prime Minister Meles Zenawi during a 2011 trip to China.
There are six such industrial zones now in Ethiopia, offering low or zero tariffs on imported manufactured goods, and tax holidays of up to seven years. Another 20 Chinese firms have joined Huajian in the eastern zone, 37kms from Addis.
Kenya, bordering on Ethiopia to the south, has similarly ambitious infrastructure aims. A new $25-billion port complex is planned for Lamu. A $3.5-billion standard-gauge railway is currently under construction from Mombasa to Nairobi and, possibly, beyond.
There are other parallels. Both have young populations, Kenya’s median age at 19 versus 17 in Ethiopia. Both are highly dependent on agriculture (comprising half of GDP and absorbing 85 percent of the workforce in Ethiopia's case, 30 percent and 75 percent in Kenya’s). They run similar budget deficits, levels of public debt are equally high above 50 percent of GDP, and poverty in both remains around 40 percent of the population.
There are differences, of course. While Ethiopia is landlocked, Kenya is the gateway to South Sudan, Rwanda, Uganda, Burundi and Congo in eastern Africa. Kenya’s nominal per capita GDP is, at $1,250, more than twice that of Ethiopia (US$ 570 estimated for 2014). Nudging 100 million, Ethiopia has more than double Kenya’s population, and twice the land area.
But most notably, the dissimilarity centres around security and governance, key factors affecting respective development trajectory, whatever Kenya’s comparative advantages of geography and arithmetic.
Perhaps the most important reason for Ethiopia’s stellar growth performance is its political stability. It has, for a start, a state that works – in striking contrast to many other African countries such as, most obviously, Kenya or Nigeria. The oldest state in Africa, and the only one to retain its independence through the colonial era, it rests on engrained habits of command and obedience. This creates its own problems, but it does mean that the government has a capacity, shared by few African states, to make and effectively implement policies.
Especially over the last decade, since a political crisis in 2005 that raised serious questions about its survival, the government in Addis Ababa that seized power from the Derg military junta in May 1991 has devoted itself single-mindedly to creating a ‘developmental state’ based on east Asian models. This is most visible in the dramatic expansion in the scale and quality of the road network, and urban development not only in Addis Ababa – now a megalopolis of some seven million people – but in cities throughout the country. Further education has likewise boomed, with over thirty universities geared especially to turning out graduates in engineering and natural sciences, though their quality is certainly questionable.
Photo: Despite rapid change, many are still searching for signal and electricity. (Greg Mills)
This reflects extraordinary leadership in Meles, perhaps the closest thing Africa has enjoyed to Lee Kuan Yew – super smart, pragmatic and with an authoritarian streak. The difference between the two may be just the sheer scale of the challenge faced in 1991: Ethiopia’s already poor infrastructure, spread over a massive territory, had been all but destroyed by a combination of the civil war and revolutionary mismanagement.
Photo: Meles points the way, still (Greg Mills)
Better governance also means less corruption and better value for money.
Take the tale of two railways. The cost of the Kenyan line for the first 485-kilometre phase from Mombasa to Nairobi reportedly rose by $1.2 billion between July 2012 and November 2013 when the first track was laid, to $3.5-billion. For Kenya, rolling stock that includes 56 diesel locomotives, 1,620 freight wagons, 40 passenger coaches and one simulator were to cost five times more than Ethiopia’s 35 electric engines, six diesel shunting locomotives, 1,100 freight wagons, 30 passenger coaches and one simulator. The cost premium is likely partly down to the specific route engineering challenges, and partly a “little something” else.
Better governance also means better security. Both countries have a significant Somali population, around six percent of the totals. And both neighbour Somalia where they have deployed troops in trying to deal with Al-Shabaab.
To Addis Ababa’s north-east, Lalibela’s 11 medieval churches hewn from surrounding rock hint at Ethiopia’s religious tapestry, made up 40 percent each of Orthodox Christians and Muslims, the bulk of the remainder Protestant Christians and tree-worshipping pagans.
Photo: The Church of St George, Lalibela. (Greg Mills)
Lalibela’s World Heritage site is a labyrinth of passageways, tunnels, and confines, carved over 800 years ago by the Zagwe dynasty - the architectural intricacies a metaphor not only for Jerusalem, as intended, but for the delicate and complex management of Ethiopia’s contemporary religious and ethnic fault-lines.
Ethiopia’s prime minister, Hailemariam Desalegn, says that his government’s understanding of tolerance does not mean ‘a religion-free society’. ‘Rent-seekers’ using religion as ideology, he warns, have to be ‘checked’.
Despite the mutual Somali link, it is Kenya which has felt the domestic blowback as the Islamists have struck at soft targets from shopping-centres to, now, universities. The level of government control through its armed forces, competent intelligence services and the co-option of the domestic Somali leadership makes this less likely – indeed, so far fortunately unprecedented – in Ethiopia.
Lalibela receives 60,000 foreign tourists annually, ten percent of Ethiopia’s fast-climbing total. The tourist numbers to Kenya are, by comparison, falling fast, hard hit by terrorist attacks, from 1.7 million visitors in the mid-2000s to under a million today.
Terrorists require usually an active support base to be effective. By playing local Somali clans against each other, and through rigorous security screening, especially along the Somali border, where Ethiopia has created a 100 km buffer zone with troops patrolling both sides, the threat has been blunted. “The federal police is catching insurgents every day,” says one foreign security specialist based in Addis. Not surprising, since it is “Addis where Shabaab would most like to place a bomb if it had a free pass.”
Other practical lessons for Kenya from Ethiopia and others in addressing security in an insurgency revolve around the importance of ensuring effective integration all sources of intelligence, and the need to generate trust in the army and people so people feel confident that they will be safe if they inform on the insurgent or terrorist group and the military and police will use their information properly to protect them. As Nigeria’s former president Olusegun Obasanjo has put it about the importance of this aspect, “Trying to fight terrorism without intelligence is like trying to box blindfolded”.
Al-Shabaab’s failure in Ethiopia is not because its Somali population is more committed to the Ethiopian cause than the Kenyan Somali minority, as some would argue. The Ethiopian system of the kebele – or neighbourhood – ensures that newcomers are carefully scrutinised and, if suspect, reported to the authorities. Ethiopia’s success at fighting terrorism is not down to luck or to natural barriers of geography and topography.
While it has a tradition of not sharing information with willing international partners, Ethiopia’s security sector is effective, using its capacity and resources to best effect, very little being squandered through corruption.
If and when Al-Shabaab is defeated in Somalia, reportedly reflected one member of the Ethiopian security forces, “Some will go to ISIS, and some to Syria. And some,” he says, “will go to Kenya” since with a little bit of money, the security forces will turn the other way.
All this does not mean Ethiopia has no development potholes or security threats.
For one, the in-built suspicion of foreigners (as seen, for example, in the prohibition on foreign banks) always makes long-term investment more risky. A second is an in-built suspicion of the profit-motive of business, relating to the Marxian background of the current generation of leadership, where the party is above the private sector. Ethiopia has not yet really liberalised either its economy or its politics. Rather it has created space for the private sector within a highly state-dominated and regulated economy. The paradox is that the government is looking for long-term committed investors, which at the same time pushes investors into taking short-term, often trading oriented positions with expectations of quick (high) returns.
Ethiopia, with its strong government and weak private sector provides a mirror image of Kenya, with its dynamic private sector and largely dysfunctional governance structure.
Where Kenya has a vibrant telecoms sector exemplified by M-Pesa, Ethiopia’s network is mostly down. The Kenyan paradox is that it is unable to translate private sector dynamism into public sector capacity because of the corrosive effect of poor governance – in a word, corruption.
At some point, the law of averages says that Al-Shabaab will eventually manage a terrorist spectacular in Ethiopia since, as the saying has it, the government has to be “effective 100 percent of the time, while the enemy has to be effective just once”. Regardless, Ethiopia’s prospects look somewhat better than its neighbours. For it owns its recovery and its security. DM
Clapham is at the Centre of African Studies at Cambridge University, and has written extensively on Ethiopia; Mills heads the Johannesburg-based Brenthurst Foundation. This is based on a Brenthurst Discussion Paper resulting from field-work in Ethiopia.
Main photo: Matti Multiplex building (R), Ethiopia's first three screen movie theatre complex is pictured on 03 March, 2015 in Addis Ababa, Ethiopia. The building also houses the Edna Mall shopping mall. Ethiopian economy has seen a strong growth in recent years, with African Economic Outlook reporting the growth rate in 2012/2013 being 9,7 per cent, making Ethiopia one of the fastest growing economies in Africa. On global scale, Ethiopia was rated as being the 12th fastest growing economy worldwide. EPA/MIKKO PIHAVAARA
- C CLAPHAM and G MILLS