ETHIOPIA’S TRANSFORMATION


14 Dec Ethiopia’s Transformation

 

Ethiopia is being held up as the epitome of the “Africa rising” story. We look at the role that international investors – both public and private – are playing in this rapidly changing economy.

Progress

Ethiopia’s economy is growing fast, albeit from a low base. Since 2004 the economy has recorded an average growth rate of almost 11 percent, according to the World Bank. 44 percent of the population was living below the poverty line in 2000; in 2011 that number was 30 percent. Ethiopia is one of the most equal countries in the world, and this has been sustained throughout the rapid growth. The government is heavily involved in the growth process, pushing ambitious infrastructure construction programs. And the round-the-clock construction in Addis Ababa is not being driven by oil revenues; agriculture is responsible for 46 percent of GDP. Coffee is the largest export commodity, generating 26 percent of total export revenues. The national airline, Ethiopian Airlines, is a major source of foreign currency. This year, low oil prices could help the economy, since last year oil was estimated to account to around 20 percent of the total import bill.

International involvement

International investors of many different forms have played a role in this story and will continue to do so. China has provided Ethiopia a range of infrastructure loans and projects that are well suited to state-led investment. Chinese companies, backed by Chinese state loans, have constructed hydro projects, roads, bridges, power stations, schools, and cellular networks. The China Railway Group and Ethiopian Railway Corporation signed a $1.1 billion agreement for the construction of part of an Ethiopian-Djibouti railway project in 2011, according to David H. Shinn.

The Tekeze Hydropower Station, partly built by China’s CGGC. (Photo Left)

But China isn’t the only country building Ethiopia’s infrastructure; Turkey is heavily involved, too. In late February Yapi Merkezi, the Turkish construction company, laid the foundations of a 391km stretch of a railway project. The financing of the project underscores the diverse array of international players in Ethiopia’s economy. An $865 million package was announced in October last year, split into a $450 million, seven-year commercial loan, which includes a syndicate of lenders from Europe, Africa, the Middle East and the US, and a $415 million 13-year loan backed by various export credit agencies, among them the Swedish Export Credit Guarantee Board, and the Swiss Export Risk Insurance export credit agency.

If state-led investment in infrastructure is one strand of Ethiopia’s development project, encouraging its nascent manufacturing sector is another. The Ethiopian government is expanding one industrial zone on the outskirts of Addis Ababa, building another 30km further south, and planning to build another three manufacturing hubs in the next decade. But the private sector is also being encouraged to fund their own industrial hubs.

 

“China’s China”?

Chinese manufacturers are among those answering the call. One is Huajian Shoes, which established a shoe factory outside of Addis Ababa in 2011. Part of the allure for manufacturers are local wages – Ethiopian wages in the manufacturing sector are on average about 10 percent of those in China. This is only one company operating in one country in Africa. But it seems to support the narrative that China is on the other side of a process that it went through (and is still going through) after the late seventies, that prioritizes the manufacture of labor-intensive goods for export. The broader implication is that it is not only the scale of China’s economy and demand for resources that is affecting its relationship with Africa; how China’s economy is changing matters a great deal, too.

Staff at Huajian’s plant in Ethiopia. Photo: China Daily.

But again, China isn’t alone in seeing the investment potential in Ethiopia’s manufacturing sector. Turkish companies are heavily involved in the textiles sector, and a UK leather goods company, Pittards, has three factories and a tannery in the country, hoping to make the most of Ethiopia’s massive livestock population.

Manufacturers such as these will be hoping that Ethiopia’s infrastructure plans are going to work. In spite of improvements, high costs of transportation and logistics can still negate the lower costs of wages and other advantages of operating in the country. So can the power outages which periodically halt production. The intention is that the massive infrastructure projects will remove these barriers, and create an environment that keeps attracting foreign, as well as local, investment. This will have to happen if Ethiopia is to achieve its ambitious goal of becoming a middle-income country by 2025.