In-depth

From Meles’ ‘Dead End’ to Abiy’s ‘New Horizon’

After authoritarian development hit the rocks, Ethiopia needs an equally concerted democratic approach to escaping poverty. But freedom carries its own constraints.

Despite being only months away from his death, Prime Minister Meles Zenawi was on stellar form when the World Economic Forum on Africa came to Addis Ababa in May 2012.

“There has been very little infrastructure investment in Africa for the last 30 years. Since the 1980s, the gap in infrastructure investment has gone in the wrong direction. Why? Because since the 1980s, the policy has been that the private sector does infrastructure,” he told a rapt audience at the Sheraton Addis. Amid a stirring defense of his statist approach to development, Meles then derided the suggestion that democratization precedes prosperity: “I don’t believe in these bedtime stories and contrived arguments linking economic growth with democracy. There is no basis for it in history.”

Former UK Prime Minister Gordon Brown, sitting next to Meles, sheepishly disagreed, but some of the history of Western growth, as well as the recent examples of China and others, such as South Korea and Singapore, suggest the late Ethiopian premier had a point. Mindful of his audience, Meles also delivered soothing words about the essential role of private enterprise in development, but he remained clear-sighted: “What our policy is based on is making the public sector play its role so we have an Asia kind of growth.”

Western partners were frequently wowed by such displays from Meles, despite his illiberal leftist predilections, and stuck by his government, as he argued that developing countries must have policy space. Such ideas and Meles’ rejection of the “neo-liberal paradigm” and its “night watchman state” were the focus of his masters thesis, African Development: Dead Ends and New Beginnings. According to contested official figures under Meles and his successor, an “Asia kind of growth” was achieved over the last decade, as Ethiopia’s economy expanded by more than 10 percent a year.

Now, keeping pace with the dizzying ideological pivot last year by swaths of the Ethiopian Peoples’ Revolutionary Democratic Front (EPRDF) regime, Western partners appear at least as impressed by Prime Minister Abiy Ahmed—who recently put in a star turn at Davos—as he takes the opposite approach: he prioritizes democratization, favors the private sector, and works hand-in-glove with the World Bank. “We are confident that international capital and expertise will deliver significant value for Ethiopia and contribute to the development agenda,” Abiy massaged the Davos set.

Ethiopia can’t afford a sustained slowdown

His office brands the strategy ‘A New Horizon of Hope’ and his advisors say public sector-led growth was unsustainable, as debt mounted, but with no equivalent increase in industrial exports, and a chronic and worsening foreign exchange crunch. The general idea now is to try and achieve returns on the last decade’s impressive investments in education and infrastructure by encouraging the private sector to capitalize on them, while rebalancing macroeconomic policy.

Given Ethiopia’s tenuous predicament, there’s popular support for the EPRDF political reforms championed by Abiy, and also the accompanying moves to temper the government’s economic role, although leftist dissent is flickering. After years of praise from all-comers of high growth driven by state enterprises’ borrowing and spending, now the dominant narrative describes the injustice, inefficiency, and corruption of that period, primarily focusing on the Metals and Engineering Corporation’s (MetEC) bungling.

Rather than a viable strategy for escaping poverty, opponents portray Meles’ so-called Democratic Developmental State doctrines as designed merely to entrench the hegemony of Tigrayan elites that formed the regime’s core. Consequently, Abiy-era economic policy has not been scrutinized closely, and bias has clouded positive and negative assessments. That needs to be urgently redressed. Now is a critical time for Ethiopians to decide which parts of the Meles agenda to keep and which to discard. The country cannot afford a sustained slowdown due to its poverty, bulging population—around 40 million people out of a total of 100 million are under 15—and volatile political crisis. State failure would produce seismic regional and international shockwaves. However, given the level of political dysfunction and elite disagreement, quickly forging a suitable new economic consensus looks like a tall order.

Privatizing prosperity

While some describe the approach under Abiy as a radical “neoliberal” departure, it is so far a pragmatic affair, involving significant continuity as well as novelty. The nuances are still unfolding. “The government will continue to play an important role. It won’t do everything as in the past, but in selected areas it will play a leadership role, and the Developmental State will continue for sure,” outlined Eyob Tekalign, a state minister of finance and former private equity man, one of a slew of key new policy-makers, in a February interview.

To illustrate, there have been no major structural changes to the financial sector and none are publicly planned, meaning foreign banks are still barred, state lenders remain dominant, the central bank politically directed, interest rates low, and capital outflows controlled. Similarly, an agriculture focus is set to endure, including an irrigation push, as are attempts to boost exports from industrial parks, and a bevy of new agro-industrial centers. There are no plans to introduce private land ownership, and certainly no advanced neoliberal policies, such as privatization of water, health, or education provision. In fact, large amounts of donor and government funds are likely to keep pouring into these areas where Ethiopia has made significant strides over the last two decades, reducing poverty, lengthening lives, and improving literacy.

That is not to say there is no change.

Last June, the EPRDF agreed to sell minority stakes in large state-owned enterprises other than public banks, including behemoths Ethio Telecom and Ethiopian Electric Power. Other entities such as railways and sugar projects will also potentially be offered for full sale. Those moves—initiated under former Prime Minister and EPRDF Chairperson Hailemariam Desalegn and advanced under Abiy—are the latest phase of a program to offload state farms, factories, and breweries inherited from the Derg’s command economy.

Although the privatization policy was expedited to ease a fiscal crisis, it’s unlikely equity sales and liberalizations will occur soon. Telecoms is a priority, and selling licenses to a minimum of two new operators may bring in close to $10 billion. There’s no clarity yet on whether Ethio Telecom will be broken-up, but a banker says it might take two years just to value its assets. The monopoly offers a shoddy and expensive service, despite a recent slash in prices. After mostly Chinese-funded efforts to expand mobile and data networks, now seems a reasonable time to expose it to competition.

One of Meles’ biggest misses

There are similar arguments in transport logistics, where state domination created a dysfunctional system. The World Bank and the government are prioritizing this area to try and boost textiles exports. Trucking a consignment from the flagship industrial park at Hawassa to Djibouti’s port costs more and takes longer than it should. This “critical bottleneck” faces a total “overhaul,” Eyob said.

In one of Meles’ biggest misses, the state-owned Ethiopian Sugar Corporation (ESC)—with the helping hand of MetEC, a major contractor that was run by military officers, which also failed on a $540-million fertilizer complex—couldn’t efficiently deliver large-scale schemes after it was tasked with turning Ethiopia into a top-ten exporter. Ethiopia is still a sugar importer, and ESC is generating no hard currency to pay back chunky Chinese loans. It also owes at least 50 billion Birr ($1.7 billion) to the Commercial Bank of Ethiopia (CBE), a giant that has around two-thirds of total bank deposits.

The Ethiopian Railways Corporation ran into similar management and debt difficulties, although it did oversee construction of the China-funded, -built, and -operated Addis-Djibouti line. The two main contractors are reportedly seeking shares in that railway. However, selling parts of Ethiopian Airlines, such as catering, is unpopular due to patriotic support for a successful public enterprise, so that idea is on the backburner.

Gradual modernization is planned for financial services. The central bank is studying options, while a health check is being conducted on state lenders. The power corporation owes more than 200 billion Birr to the CBE, and the Development Bank of Ethiopia is bogged down by bad loans. Supported by the World Bank, there’s a focus on creating a dynamic government debt market to plug the budget deficit with non-inflationary borrowing and an ambition to establish a stock exchange by 2020. Measures have been taken to ease foreign-exchange regulations and are under way to allow non-resident Ethiopians to invest in banking.

Given hard currency shortages, and the gap between the official and black-market rate, clamor is growing for exchange-rate liberalization. Flotation may lead to inflation, which has generally run at more than 10 percent for years, as essential imports such a fuel and medicine become more expensive or simply unavailable as the Birr depreciates. The World Bank says a cheaper Birr would boost exports and crimp imports, reducing foreign-exchange shortages, but gradual depreciation since 2007 and two major devaluations haven’t had that effect. Additionally, most exporters rely on some imported inputs, and depreciation would increase the burden of Ethiopia’s dollar-denominated debt.

Sululta area, Oromia region; February 17, 2017; William Davison

A vital sector with a major shift is energy where public-private partnerships (PPPs) are slated to produce solar, wind, hydropower, and geothermal plants, with the government agreeing to purchase electricity produced from privately funded and run power stations. That’s a departure for a government that borrowed over the last decade for the power corporation to oversee construction of large-scale dams such as Gibe III and the Grand Ethiopian Renaissance Dam (GERD), envisioned as Africa’s largest—although efforts were made to fund the GERD domestically to demonstrate self-sufficiency, partly through effectively mandatory public sector salary contributions in return for low-yielding bonds.

The PPP policy aims to produce public goods and private profits and so will be a critical test of Meles’ maxim that developing nations should not rely on the corporate sector to deliver infrastructure. It will also be a test of the government’s ability to negotiate favorable terms in complex contract negotiations, and its lack of experience suggests this will be a stiff challenge. Private funding of infrastructure is presented as a way of transferring risk to the private sector, although arguably the UK used it as little more than an accounting maneuver to take capital investment off the government’s balance sheet.

Electricity generating capacity was supposed to increase to 17,346 megawatts by July 2020, yet that was quietly, but spectacularly, downgraded to a target of 6,000MW in the one-page A New Horizon of Hope strategy document in November from the Prime Minister’s Office. That’s 4,000MW less than the target in a five-year growth plan rolled out in 2010. The revision acknowledges that the flagship 6,450MW GERD on the Blue Nile is years behind schedule, after more MetEC blundering. Although it’s plodding along, a project closely associated with Meles has lost momentum, perhaps partly due to its relative inefficiency.

The aim had been to capitalize on a comparative advantage in hydropower potential to become a regional electricity hub through developing 35,000MW of installed capacity by 2037. The government signed a preliminary deal in January to connect with Gulf nations, but it does not appear electricity sales are a priority, although officials claim otherwise. A new bout of power rationing has just begun as dam levels dwindle at the end of the dry season. This involves reducing exports to Sudan and Djibouti and reduced shifts at factories. The World Bank says it’s not electricity generation that’s deficient in Ethiopia but distribution that’s inefficient.

Seemingly insurmountable challenges

In October, the government listed 14 energy and three road projects worth $7.5 billion it wants built as PPPs. A new secretariat announced in January it’s looking for investors for six solar schemes costing $800 million, and aims to have all energy projects contracted this year. That scheduling recalls the ambitious missed targets of the five-year plans—soon to be trumped by a 10-year economic blueprint—and there are other doubts. A frustrated investor says energy PPPs face a seemingly “insurmountable challenges” due to reduced political support for new schemes, the lack of a sovereign guarantee in case the electricity utility defaults on payments, and increased compensation demands by land users. “Without oversized support from the government, Ethiopia’s energy sector is very risky,” they said.

The government’s had stuttering experience of energy PPPs since 2014 with the Corbetti geothermal scheme, although an obstructive regulatory approach should now end with the pro-private sector mindset. The electricity tariff needs further revision to try and make projects bankable, but that will reduce Ethiopia’s attractiveness to investors, as cheap power is one of few competitive advantages.

Ethiopian consumers enjoyed one of the lowest prices in the world at around $0.03 per kilowatt-hour, which was doubled recently to bring prices into line with inflation and devaluations. A new “cost-reflective” tariff will be introduced by 2023, although the World Bank wants “full cost recovery” by 2021, which is unrealistic. Although businesses and the wealthy will bear the brunt of overdue increases, the government will have to move astutely in this area. With around a quarter of Ethiopians earning 17 Birr or less a day, extensive subsidy of basic services will be needed for some time. Miscalculation could lead to the type of discontent over living costs recently expressed in Sudan and elsewhere in the region, further complicating the political scene and destabilizing the state.

Debt issue

The commonly stated reason for ramping up economic liberalization is debt: public borrowing is 54 percent of gross domestic product, while external debt is 28 percent of output. This is much lower than, say, Greece or Italy, but is considered problematic because of a debt-servicing bill that hit $1.5 billion last year. “The reason that they are classified in our analysis as at a high risk of debt distress is because of debt and debt service relative to exports,” explained Mathew Verghis, World Bank Practice Manager for Macroeconomics, and Investment, to journalists in December. Abiy’s government has, however, had initial success at renegotiating the terms of some Chinese loans. Since 2012, Ethiopia’s had annual foreign goods sales of only around $3 billion, primarily coffee and other commodities with volatile prices, while Ethiopian Airlines brought in another $2 billion. Remittances, aid, loans, and foreign direct investment ease a balance of payments pressured by a trade deficit that was $12.4 billion last year.

A key part of rebalancing is the World Bank’s $1.2 billion six-year Growth and Competitiveness Program to boost private enterprise and modernize the financial sector. The budget support is split equally between loans and grants that will be released if the Bank is satisfied with macroeconomic policy. There are also several policy-related conditionalities that Meles would have blanched at, although officials say they weren’t imposed. “It’s our reform, not their reform,” argues Mamo Mihretu, a senior advisor to Abiy. Conditions include passing a public-private partnership directive; cabinet approval for an electricity-tariff increase and privatization guidelines; removing restrictions on private investment in logistics; and streamlining trade licensing and business-administration processes—a welcome measure for long-suffering small businesses, entrepreneurs, and foreign investors.

Renewed efforts to enhance tax collection are underway, with Ethiopia still in the bottom third of sub-Saharan African countries in terms of gross tax take. Abiy’s cabinet has delivered a new Civil Societies Proclamation and approved the establishment of an independent telecoms regulator, two more Bank conditions. “Our sense is that if all reforms go through as planned—many steps in complex reforms—it would represent a quite significant change in Ethiopia’s development model,” the Bank’s Verghis said.

The jury remains out on whether that would be a good thing.

Eyob Balcha Gebremariam, a development scholar at London School of Economics, has cast his verdict. He wanted continuation of an East Asian-style developmental state tailored to Ethiopia. “The priority should be addressing the structural problems that make us a rain-dependent primary commodity exporter,” he says. For Eyob, rather than market efficiency and autonomous institutions, the mechanisms for rapid industrial growth are learning by doing, and close, thus sometimes corrupt, ties between business and political elites that are needed to get deals done. MetEC’s failures and outrageous abuse of its privileges should be treated as a useful if painful lesson, not used to justify curtailing industrial transformation efforts, he believes. Controversial ruling-party affiliated conglomerates and close ties with select tycoons were part of the Meles model. That said, Abiy’s highly personalized leadership is ideal for cultivating plutocrats, as he did recently with a lavish fundraising dinner. Recent reports suggest Saudi billionaire Mohammed Al Amoudi’s Ethiopian business prospects have not suffered unduly in the EPRDF power struggle and a well-connected Moroccan company may take over MetEC’s fertilizer debacle.

A food distribution point in Afdem Woreda, Somali region; October 8, 2014; William Davison

After a chaotic open election in 2005 ended with a deadly crackdown, Meles dropped any pretense of pursuing liberal democracy, used draconian legislation to crush dissent, and expanded the EPRDF to consolidate control of all tiers of government. He even rode roughshod over the federal system as he aggressively pursued national development at the expense of nominal regional autonomy on land and investment policies. The surge was the latest iteration of the EPRDF’s Marxist-driven class-based analysis, which led it to focus on the rural masses and dismiss urban elites as selfish “rent seekers” aiming to use pluralism to direct public policy in their narrow interests. The upshot of the EPRDF ideology was that liberal democracy was presented as an obstacle to improving the general welfare. Furthermore, democracy was recast as popular participation in the existential battle against poverty, rather than a system where government was accountable to people and individual rights protected.

This means the EPRDF took a side in a global ideological schism relating to development and liberty. For example, rather than seeing them as staunch defenders of fundamental rights, the EPRDF wildly characterized liberal Western organization such as Human Rights Watch as part of a fundamentalist neoliberal plot. As with the Soviet Union, Communist China, Chavez’s Venezuela, and many others, the EPRDF unabashedly prioritized the right to shelter, health, and food over civil rights, and were criticized for it. What this entailed was a brutally utilitarian approach to development, and that meant many people were knowingly sacrificed for a perceived greater good.

In Ethiopia, they were either moved out of the way for national priorities, such as hydro dams, or silenced because a hegemonic strategy didn’t allow dissent to be expressed, as countless opposition activists can testify. After more than three years of anti-government protests forced a rethink from Hailemariam and other EPRDF reformists, there is no doubt that this ruthless political-economic model failed in Ethiopia—but that does not disprove the developmental logic. More generally, there is no strong moral consensus among progressives on the rights and wrongs of China’s bulldozing state capitalism, which has certainly involved plenty of cronyism and crackdowns, while doubtless lifting tens of millions out of poverty.

The Meles approach was given some credibility by academics who grouped it under “developmental patrimonialism” along with the likes of Rwanda, another authoritarian state that’s received plaudits from donors for its use of billions of dollars of aid and fury for its human rights record, with critics doubting the veracity of its growth statistics. “The economic potential of developmental patrimonial systems, then, should be set against the loss of civil liberties they may entail,” wrote one scholar, Tim Kelsall. The claim was that undemocratic approaches could still be developmental, rather than extractive, if economic rents—such as the extra revenues generated by Ethio Telecom’s monopoly—were directed into productive areas, and that such a model might well produce better outcomes than more pluralistic systems.

Destitution is not solved by copying WB/IMF-inspired rules

Theorizing aside, Meles’ credit-driven high-risk coercive transformation effort was anyway essentially cut short by his 2012 demise and the subsequent unraveling of EPRDF control and discipline. It limped on under the dogged leadership of Hailemariam, who was torn between loyalty to his mentor’s approach and reformist inclinations, but internal fissures, popular discontent, and economic pressures surfaced in 2015. The rupture of EPRDF authoritarianism made a liberal democratic lurch the alternative to increasing bloodshed—but there’s no reason to think it will end Ethiopia’s poverty, according to Eyob from LSE. “Democracy is the solution for tyranny, but not for development,” he says, paraphrasing renowned late U.S. political scientist Samuel Huntington. “There’s an inherent contradiction between consensual democratic decision making and the radical action required to eradicate poverty.”

Eyob says Ghana is an example of a system where elites compete democratically but there’s no concerted effort to improve livelihoods. Ethiopia may be moving in that direction, or towards Kenya’s services-based growth. That may not be such a bad thing when you consider that, amid greater political freedom, Ghana’s GDP per capita went from $263 in 2000 to $2,046 in 2017, compared to Ethiopia’s increase over the same period of $124 to $768. However, Ethiopia had a higher population growth rate during that period. Coastal Ghana has a medium-sized population, while Ethiopia’s is the second-largest in Africa after Nigeria and it is by far the most populous landlocked country in the world.

Eyob’s case does become more persuasive when you consider that despite a relatively long history as a nation, and an infamously entrenched bureaucracy, Ethiopia’s still a developing nation with a weakly funded government, a fact that will only alter if tax receipts soar. Government spending is only 17 percent of GDP, while it is more than 30 percent for all but two of the 36 rich countries that belong to the Organization for Economic Co-operation and Development. As a comparator of the scale of global inequality in this area, Ethiopia’s annual government expenditure of 372 billion Birr is less than the UK NHS’s budget for mental health services, or the same as the cost of one U.S. aircraft carrier.

The EPRDF is praised for running extensive donor-assisted social protection programs, but foreign aid helps more than 10 percent of the population survive. Although Asian Tigers achieved sustained rapid growth with relatively small states, Eyob thinks Ethiopia’s autonomy has been sacrificed at a critical moment and policy is now geared towards constraining the state, rather than building it; and boosting private profits rather than improving general welfare. “The reality is development’s a political process about deciding how limited resources are distributed. There’s no country that’s addressed destitution by copy-pasting World Bank- and IMF-inspired rules,” he says.

How Ethiopia works

This sort of leftist thinking used to pervade the Prime Minister’s Office, but not any more, after Abiy recruited non-EPRDF policy whizzes, some donor-funded. One new face, Mamo a former World Bank official, is an arch-pragmatist, decrying sweeping ideological claims. He doesn’t rule out an interventionist approach, but wants to promote commercial enterprise, including where the state’s run out of steam: “There’s a huge potential we have not utilized in telecoms, energy, agriculture and logistics, where there’s been no meaningful participation of the private sector.” Mamo’s aim is to exploit unfulfilled economic potential to conserve and earn hard currency. Food security will be eased by expanding wheat production in irrigated lowlands, and he hopes negotiations with fertilizer giant Yara International, a concession holder, will catalyze $300 million worth of potash exports. Improved logistics and electricity distribution will be a shot-in-the-arm for manufacturing exports, he says.

Expedited World Trade Organization accession is not an end in itself, but incentivizes transparent economic governance, which is also how Mamo sees the Bank’s budget support. He says streamlined regulations and improved credit availability for the private sector should lead to a tech boom, and tourism will hit new highs, aided by relaxation of the visa regime, opening up Emperor Menelik II’s palace, and the Prime Minister’s 29 billion Birr Addis Ababa river project, the beneficiary of the fundraising banquet.

Given the enthusiasm for the Abiy era from citizens, business elites, diaspora, donors such as the U.S., and investors—many of whom turned a blind eye to EPRDF authoritarianism—some aspirations will be realized. Yet Ethiopia remains the world’s 17th least-developed country—just behind Afghanistan and Haiti—and there’s a nagging sense that the strategy may stimulate urban dynamism, so creating prospering pockets of Westernish modernity, yet leave tens of millions languishing in rural poverty, and do little to kick-start industrialization. This impression is bolstered by Abiy’s existing signature schemes being services- and Addis-focused: the riverside rehabilitation, and a deal for an Abu Dhabi real estate company to build high-end apartments and malls, albeit with a social justice component. Thus far, Abiy’s economic blueprint lacks a big idea—something Mamo doubtless approves of—and it also contains several recycled ones, such as large-scale agriculture in the lowlands, tourism, and mining.

Prime Minister Abiy Ahmed at the launch of the Abu Dhabi real estate project in Addis Ababa; February 19, 2019; PMO

In his influential book, How Asia Works, British writer Joe Studwell, another pragmatist, divided that continent into states that had pursued effective development last century, and those that merely created enough economic activity for elites to prosper. He found successful nations with activist governments like China, South Korea, Japan, and Taiwan used three key approaches—and none of them hinged on political or economic liberalization. They encouraged labor-intensive gardening-style small-scale agriculture; manufacturing was promoted and exposed to international competition; and economic policy, including the financial sector, was controlled so funds were invested to support the two sectors. His thesis is that various approaches can work, as long as policies are focused on improving productive capacity.

Studwell does not dwell on authoritarianism. Yet a lack of democracy means economic performance is harder to gauge accurately as independent research is tricky and statistics easily manipulated. There’s an ongoing cost to victims and opponents and, paradoxically, authoritarian systems are less stable, as Ethiopia has demonstrated. It is hard to justify a period of rapid growth if within years or even decades a regime implodes or becomes aggressively militaristic, causing destructive chaos. Development economist William Easterly has long argued that democracy produces better economic performance over a timescale of several decades or longer, and recent research suggests that democracy enhanced growth in southern Africa.

How Asia Works was praised by Bill Gates, whose foundation has funded the Taiwan-style Ethiopian Agricultural Transformation Agency (ATA) since 2011. The idea is for technocratic agronomic wizardry to improve yields and reduce middlemen’s cut. Yet agriculture is a mixed story. Long before the ATA, Ethiopia tried to boost smallholder productivity through an army of development agents that were linked to the EPRDF’s smothering political apparatus. Impressive yields were claimed, but there are doubts over statistics. “Very low levels of irrigation and mechanization point to the fact there is a huge amount still to do,” Studwell says in an interview. “It also links to the manufacturing challenge—making core technology like pumps and small engines.”

Ethiopia scores well on finance, which has been geared towards development and protected from volatile international flows. Since 2011, the government required commercial banks to buy central bank bills worth 27 percent of each loan to ensure they funded priority schemes. However, the policy struggled because of the Development Bank of Ethiopia’s weaknesses at assessing projects.

Studwell is optimistic, as long as the government keeps finance focused on strategic areas, and prevents destabilizing outflows of pension funds’ investments into financial instruments. “If they remove controls while allowing portfolio investment, that would be madness,” he warns. Instead they could ape Chinese or Taiwanese schemes that prevent portfolio investment being “pulled out on a whim.” Studwell says the government could help manufacturing by licensing foreign banks to import capital for trade financing, and that oligopolistic competition between state-owned utilities might best serve the national interest. The author, who like Meles sees no connection between early-stage economic development and democracy, is looking at Ethiopia as a potential Asia-style African breakout state—but only time will tell if Abiy’s government applies his policy mix.

Empowered

Chunks of Abiy’s overall strategy should be uncontroversial regardless of the precise approach. That is because few economies remain as state-controlled, closed, or under-developed as Ethiopia’s, with, for example, few multinational franchises, no stock exchange, little in the way of electronic payments, and a public telecoms monopoly—not to mention enduring extreme poverty. Currently, the big picture is that despite almost $14 billion of credit from China in the 12 years to 2017 for investment mainly in mainly telecommunications, transport, and energy, the infrastructure deficit Meles described at the Sheraton Addis is still present.

Arguably, without more heavy investment in the infrastructural spine of a market economy, Ethiopia will struggle to industrialize, and so fail to move up the global economic food chain by producing higher value-added goods. Additionally, with more than two million Ethiopians hitting the labor market each year, and countryside space shrinking, rapid industrial growth is the obvious way to provide jobs—although the World Bank says even a highly successful manufacturing drive wouldn’t create nearly enough of them.

“Rebalancing macroeconomic policies could exert downward pressure on activity” the IMF said last year. Yet any such dip would be alarming given major political challenges exacerbated by restive and aspirational youth. Reduced borrowing and slower growth in government spending is already having an impact, although private-equity firm Cepheus Capital expect 8 percent expansion this year. This is partly due to an Abiy-induced feel-good effect, which includes foreign investment that could reach $4 billion, a similar figure to last year. The IMF expects Abiy’s pro-private sector approach to prevent a downturn, but if that doesn’t happen, growing ranks of unemployed young men would fuel an explosive political situation, and probably lead millions more Ethiopians to seek work abroad. That would be bad news for the European Union, which, far from dealing with an influx of Ethiopians, wants South Sudanese, Eritrean, and Somali refugees to settle in Ethiopia, with Sudanese possibly added to the list if its transition sours further.

Few contest that the Meles model was defective and ran into severe difficulties. However, ultimately, Ethiopia is one of the world’s poorest countries and afflicted by intense political, demographic, and environmental pressures. To prioritize its stability and development, foreign partners could back debt relief, not austerity. “There’s a question of whether the international community has fully appreciated the nature of the challenge. Ethiopia needs an infusion of cash on a scale that no-one is willing to contemplate yet,” says a diplomat worried about a Yugoslav-style fragmentation of a fractious multinational federation facing surging ethno-nationalism. Concurrent political and economic liberalization contributed to the collapse of the Soviet Union, while Yugoslavia’s disastrous fragmentation was preceded by serious economic problems.

There’s nothing significant that Ethiopian elites agree on

Ethiopia’s challenges combined with a more empowered population mean trade-offs are stacking up for policy makers. There’s already been a significant rise in labor disputes as workers demand rights, most recently in the health sector, while there’s been high-profile criticism of rock-bottom factory wages. Surplus labor, however, is also an asset for a nation with few comparative advantages trying to attract capital. Political liberalization means more of such demands, without force as a suppressive tool, as Abiy’s government is experiencing.

Last year’s transition occurred after more than three years of protests partly over the evictions of Oromo farmers on the edge of Addis Ababa; demonstrations that reoccurred briefly in March. Past control and repression meant smallholders could be removed from their land for minimal compensation. That’s trickier now, as could be seen with protests at Sendafa in 2017 that closed a new government landfill, contributing to a fatal landslide at the existing overloaded dump. In another example, three major donor-funded road projects, including an expressway along the route from Hawassa to Djibouti, are currently held-up by compensation demands.

Economic nationalism was part of Oromia’s uprising with flower farms and factories torched because of low wages and evictions. Pollution claims shut down the only commercial gold mine last year, while the manager of Dangote Cement’s plant in Oromia was murdered with colleagues a year ago, possibly due to a labor dispute. Other foreign mining and road workers have also been killed and held hostage. Former Oromia President Lemma Megersa expressed his frustration at counter-productive behavior that discourages investment.

Commentators discuss a new “elite bargain” to replace the EPRDF’s uneven regional power sharing, but some argue there’s nothing significant about their country that Ethiopian elites agree on. Others even hope that amid political and economic liberalization there will also be a consensus on a Developmental State 2.0 strategy, pointing to the heavy left tilt on Ethiopia’s political spectrum. But Meles tried to sell the nation on a concerted approach to statist development, and failed; currently, it is hard to imagine Abiy trying. Some see a silver lining with a liberalized political sphere producing popular support for rational approaches to issues such as energy investment.

Others see only dark clouds.

Addis Ababa land-lease prices at auctions were an average of $650 per square meter in 2015. The frustrated energy investor believes farmers occupying valuable real estate could now seek compensation of $100 per square meter. “Even at $50 per square meter the cost of the land will be more than the cost of the entire facility,” they say about planned power stations. “Abiy has created a sense of freedom and empowerment among farmers. But you cannot please everybody: you can’t pay market prices if you want to rapidly develop infrastructure.”

According to this thinking, greater democracy is an impediment to development, and Ethiopia does need a powerful interventionist state to bulldoze its people out of poverty. But that would mean partially disinterring Meles’ legacy and, so far, Abiy has barely mentioned the former Ethiopian leader—let alone borrowed heavily from his developmental doctrines to invest them in Ethiopia’s future.

Query or correction? Email us

Article corrected on October 14 to change reference in 4th paragraph from “unfinished doctoral thesis” to “masters thesis”

Additional reporting by Nizar Manek and Ermias Tasfaye. Assistant editing by Alban Mas Aparisi, Martin Davison, Nizar Manek, Abdulmenan Mohammed, and Chris Preager.

Main photo: Prime Minister Meles Zenawi at the World Economic Forum on Africa in Addis Ababa; May 10, 2012; Wikimedia Commons.

Published under Creative Commons Attribution-NonCommercial 4.0 International licence. Cite Ethiopia Insight and link to this page if republished. 

Related Insight

April 7, Abiy must weave together multiple plot lines

Feb. 12, Ethiopia uncorked

Dec. 11, It’s back to the future as IMF spots opening

Nov. 22, MetEC’s wasteful blunders should end Ethiopia’s fling with military business

July 31, Shock death intensifies dam debate: was Abiy pessimistic or realistic about GERD?

We need your support to deliver news from across Ethiopia

Please help fund an Ethiopia Insight reporter

About the author

William Davison

William is the owner and editor of Ethiopia Insight. He has been reporting on Ethiopia for almost a decade and was Bloomberg's correspondent in Addis Ababa from 2010 to 2017.

Leave a Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.

7 Comments

  • To understand Meles is to understand the generation of university students of his time – the generation of the Ethiopian student movement. At that time there was an overall realization, an awakening, by the students that Ethiopia steeped in pride of history, culture and tradition, was also mired in grinding poverty. And this condition became a dominant theme in Meles’ view of government and development for Ethiopia. Meles was so determined about this matter that he would use his verbal skills to defend and convey his thoughts about the economic model with clarity and conviction. I have to believe that other members of EPRDF were in agreement with him in that respect…For an agrarian society dependent on subsistence farming, for a country without capital or capitalists, state led development was the only pragmatic option for economic revival – in infrastructure, agriculture, education, etc. And having a country with a functioning government, focused on economic development, was a desirable condition to attract foreign investment such as the industrial parks…Meles and his EPRDF coalition made a genuine effort to lift Ethiopia out of economic despair – the developmental state has served its purpose. And now it is for Abiy to build on that foundation for a sustained economic improvement, which will require substantial foreign capital and investment in manufacturing and agriculture.

    • I think Ethiopia turned to backwards when student movement started in the mid 70,s embracing communism. Ethiopia was technologically backward but with economic potential in 1970s Now after half a century it is poor and technologically backward. Ethiopia consumes what it does not produce. We created youngsters that loathe investment. Distribution of wealth and income inequality, is so deeply entrenched among the people that entrepreneur is viewed as the exploiter. Unless Ethiopia allows investors in large scale farming, it can not feed its 100 million people. Stop teaching us rent seeking. Capitalism means wealth and competition. Dr Abye must follow capitalism.

  • What a great overview, keep up Will.

    Meles had grand ideas but all were fallacy when put on the ground. Corruption, coercion, impunity, racism, pretention characterised all his leadership. Growth underpined by racism and exclusion will not help Ethiopia, already proved failure.

  • Great article. I believe the industrial parks should be revisited and focus on export. With all this support and subsidy they should be able to produce for export or should do import substitution. They cannot enjoy subsidy by producing from imported material and selling in the domestic market. That should be watched carefully

  • Great overview of the devilish dilemma Ethiopia faces, William

    China had many Metec-style failures -but it alsof somehow maneged to nurture hybrid private state backed companies like Lenovo, Huawei and Geely
    No democracy, but a mix of coercion, patriotic buyin and economic perspectives

    Let’s hope the Ethiopeans crack the secret

  • Hi Will, Trust that you are well. Re DBE and its now reported poor financial position. One of my colleagues at DAI/DFID spent time at DBE and I knew something of the burgeoning bad dept situation and the reluctance to recognise it.

    I’ve recently been part of a DFID economic study of the Ethiopian lowlands to cover the access to finance area where I learnt, inter alia, that MFIs that had received continual support from DBE were no longer receiving lines of credit and their clients were now underserved, e.g. qualifying clients of the DFID LIFT programme were being sent away because of the lack of loan capital. I’m now trying to work with CDC and DFID to produce a solution to replace the DBE funding that will also alleviate any exchange risk of such a cross border arrangement.

    The study’s findings and recommendations were presented to DFID/GoE and the World Bank. At the end of May the WB made available $350 million of grant and loans to support pastoralists in the lowlands but I do not know if this was precipitated by the work that we carried out.

    All the best,

    Tony