Will Ethiopia be the next African lion?

Without much notice,agriculture recently ceased to be the largest sector in the economy for the first time in Ethiopia’s history. This heralds a major structural transformation of the economy and we forecast that the services sector—which covers real estate, hotels, transportation, communication, banking, health and education—will make up more than half of Ethiopia’s GDP in just two years time, a development with many implications and opportunities for Ethiopian business.

That is Access Capital‘s take on the Ethiopian macroeconomy in 2010-11. Access is our partner on the factory study I’ve mentioned before. If their 6-8% growth forecast is correct, the economy should double in size every decade. Read the full, excellent report.

Here’s a few added thoughts, with the clear caveat that I’m a microeconomist with a mere six months experience in the country:

Labor looks promising. Skilled workers are relatively abundant, and real wages look less distorted than those of its neighbors.

With 80 million people, this is one of the only African nations with a large internal market. Poor infrastructure and expensive transport will cut both ways: it gives natural protection to local producers (remember that big internal market) but limits what you can export to the other 6 billion people on the planet.

The shallow financial sector–there is virtually no commercial credit for midsize firms–will be a big barrier to business growth. The government is very cagey about financial liberalization

But the big risk, for me, is succession. The Prime Minister claims he’s going to step down in five years, but we’ve heard that from him before. Like Kagame and Museveni, I doubt he is leaving anytime soon. While the drug trade worries me most in West Africa, in East Africa I worry about the leaders with endless terms and no plan for succession.

It’s a now familiar story. The leader is convinced he’s the only person to lead the country, and the opposition’s ideas or corruption pose a danger to the nation. We see this instinct everywhere–the main difference between a US leader and an Ethiopian one is that the former faces institutions and norms too formidable to subvert.

To hang onto power, the leader must undermine institutions, even his own party, and personalize power. His fear that he is the only man to run the country becomes self-fulfilling, for the cabal and not the greater institution is what holds the state together.

That’s not a climate one invests in.

8 thoughts on “Will Ethiopia be the next African lion?

  1. I loved the article. But I think you need to consider a few things.
    1. If the country is growing and the people are happy, who cares who sits on the throne? If the government is leading the country in the right direction, why should we try to steer its attention from the main goal?

    2. One think most foreigners, and especially Americans, make a mistake in is the fact that they think what works in their lands must work in Africa. Well it doesn’t. There is a misunderstanding of the way Africa and Africans think of politics, democracy and governance. It would be very arrogant to think that one’s own type of politics and governance is right and should be accepted and practiced the world over.

    3. Right now, the country’s and the people’s concern is turning the country’s economy around. All other issues are secondary. And as you have mentioned all seems to be going well. A country needs to stand on its own two legs before it can mange to survive whatever shocks that a government change might bring. It would be really saddening if there were a government change that had a severe impact on this fledgling economy. It would be disastrous.

    4. The west made the mistake of thinking that it would only invest in countries that met certain conditions politically and economically. Most of Africa was excluded due to not being found eligible. The Chinese and Indians made no pre-conditions when they jumped in with both feet. While the world was reeling from the recent economic-crisis these two countries made sure that they had a firm grasp across Africa. There are Chinese and Indian firms in almost all African countries in almost all industries. What did the West do when they woke to find Asian faces in Africa? They started crying foul by saying that this was neo-colonization, and that the countries being helped were not known to meet certain western standards. Well, boo-hoo! Your last statement is wrong. There might not be Western investment, but there is a definite growth in investment in Africa.

    One Love !!!

  2. I don’t think mine is a value judgment on one form of governance over another. It’s a question of whether short run stability and the personalization of the state leads to long run political instability.

    Most African nations have no shortage of growth spurts behind them. These are spurts alone, however. The same story has been played out again and again for fifty years: to maintain power, leaders destroy the state from the inside out and create systems of personal rule that simply can’t last. Five or ten or twenty years of growth disappear in the political struggles that ensue. In most countries, the growth pattern looks the same: a steep incline followed by a steep decline. The reason is often the kind of politics I describe.

    Investment is core to growth, and sustainable investment must be domestic not international. No country of Ethiopia’s size will grow from FDI alone. It’s domestic investors that have most at risk from long run political instability, and that may explain why African earnings flee the continent more often than they stay.

    A middle class African thinking of opening a factory has a ten or twenty year horizon. A Ghanaian can look at his government and see institutions greater than any one person. Same in Botswana. Not coincidentally, these are the African lions. A Ugandan or Rwandan or Ethiopian cannot see the same. Domestic investment and growth are high, but probably lower, and more short term, than if Museveni or Zenawi built institutions instead of fiefdoms.

    We mustn’t let political allegiances and short run growth cloud our long term priorities: the government is more important than any one party or any one man.

  3. I guess I have to agree with what you have said, but consider this. Ethiopia has been on the path to democracy for only about two decades. And as has been seen there aren’t any well established opposition parties than can take over the reins.

    We have seen that those that were running in the past two elections have so dis-organized that people just gave up on them and decided that it was better to be safe with the growth that has been seen, a spurt as you have called it. The members couldn’t even decide who should do what in their own parties let alone to be trusted to run the nation.

    And that is something that needs to be considered. What if there aren’t any competent governing bodies that can take over? Safeguarding the nation until a political body that has more than just political power in mind isn’t such a bad idea.

    As for the economies of Ghana and Botswana, I agree they are two of the strongest economies on the continent. But again, I would like to remind you that Ethiopia has just started to stand on its own two feet. So far we are doing well. Some countries that had a pessimistic outlook about us have had to do a double take. Some countries are even copying the experiences that we have, especially in the health sector.

    My point is, don’t judge us yet. Give it time. We might prove you all wrong in the near future.

    One Love !!!

  4. I’m thinking – how is this Ethiopian Prime Minister similar or different to authoritarian strongmen like Malaysia’s Mahathir, Singapore’s Lee Kuan Yew or Indonesia’s Sukarno? Arguably, some say they “created systems of personal rule” but others would argue they also created institutions that sparked economic growth and development. Of course, no one would be interested in imitating the Marcos regime in the Philippines.

    Full disclosure – Singapore here!

  5. Hahah…. Deep Ethiopian, I didn’t realise I was supporting your point. Perhaps divergent paths can lead to the same end.

    I guess my point is this – authoritarian leaders (some would say dictators) have dark sides and bright sides. Sometimes one is is more obvious than the other. Both are always potentially in conflict, but the most likely case is that both sides are of the same coin. For example, in Singapore, there are so many dark sides to our economic miracle – personalization of power, control of press, severely limited freedoms of speech, detention of several activists without trail for more than 10 years, torture during detention, dominant one party (Out of 84 elected MPs, only 2 MPs are opposition members) etc etc… Many time I find it difficult to explain to others and even to myself on how to reconcile these 2 very different sides. Is there a tradeoff involved here somehow?

    Any comments Prof Blattman?

  6. i was in ethiopia a few months a go, i lived in the USA most of my adult life and just recently returned to Kenya – the first thing that hits you in Addis is the construction boom, there is a construction boom in all african countries but Addis is just different on a whole different scale, economically it seems to me that Ethiopia has adopted chinas economic model. there seems to be a lo of central planning, but it seems to be working. I have also been to Ghana, Tanzania. Ethiopia has vast potential especially because of its huge population.

    I think African countries need to borrow, and do whatever it takes to invest in infrastructure
    mainly because i think they have demographics on their side, there wil be a larger population to pay off this debts and to use this infrastructure, infrastructure here is a generation behind and needs to catch up