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With continued rapid growth, Ethiopia is poised to become a middle income country by 2025


With continued rapid growth, Ethiopia is poised to become a middle income country by 2025

With continued rapid growth, Ethiopia is poised to become a middle income country by 2025
Photo credit: OCHA | Charlotte Cans

Over the last decade, Ethiopia has made remarkable progress in its economic growth exceeding other low income and Sub-Saharan African countries, with real gross domestic product (GDP) growth averaging 10.9 percent in 2004-2014. Ethiopia has moved from the second poorest in the world in 2000 and, if it can keep the current pace, it’s on its way towards becoming a middle income country by 2025.

Ethiopia’s growth strategy stands out for its uniqueness in focusing on promoting agriculture and industrial development with a strong public infrastructure drive. According to a new World Bank report, Ethiopia’s Great Run: The Growth Acceleration and How to Pace It, the agriculture and services sectors, were the main contributors to this accelerated growth, which was driven by high government investment in the energy, transport, communications, agriculture and social sectors.

“Ethiopia is in it for the long run as the title of this highly interesting and very useful report suggests. Our country is in the business of enduring the challenging course of development and breaking new world records just like the famous long distance runners that our country is known for. We have been successful so far and like our runners we are determined to win the race at our own pace.

“We have a clear and shared long-term vision, and committed government for development centered on economic growth, transformation and poverty eradication,” said Dr. Abraham Tekeste, Deputy Planning Commissioner, National Planning Commission.

High public infrastructure investment was facilitated by a decline in military spending as a part of a restraint on government consumption. A strong rise in exports, greater trade openness, and an expansion of secondary education were some of the additional enabling factors that supported the economic boom and facilitated a substantial decrease in poverty from 44 percent in 2000 to 30 percent in 2011, measure by the national poverty line.

“Ethiopia began to see accelerated economic progress in 1992 and it shifted to an even higher gear in 2004, pulling millions of people out of poverty and leading to improvements in other areas like improved life expectancy and reduced child and maternal mortality,” said Lars Christian Moller, the World Bank Group’s lead economist for Ethiopia and lead author of the report. “To continue the impressive run, Ethiopia needs to modernize the policy framework to further strengthen the foundations of its economy.”

The report’s key findings include:

  • Services and agriculture have largely contributed to the growth. Initially, agriculture was the main contributor to growth but aided by a construction boom the services sector has taken over. Services contributed 5.4% to the GDP growth rate, followed by agriculture at 3.6%.  

  • Ethiopia witnessed accelerated growth as service sector began to rise. The shift of workers from agriculture to service and construction contributed to a quarter of Ethiopia’s per capita growth from 2005 to 2013. It was also complemented by a marked increase in the share of working-age population, the so-called demographic dividend, which can be attributed to up to 13% of per capita growth from 2005 to 2013.

  • Rapid growth in the agriculture sector contributed significantly toward poverty alleviation. Each percent of agriculture growth reduced poverty by 0.9%. Yield growth averaged about 7% per year while the country registered a 2.7% annual increase in cultivated land. 

  • Public infrastructure investment has been a key structural driver of growth. With the country enjoying a long spell of relative peace, the government has been able to prioritize capital spending over consumption within the budget. In an analysis of 124 countries over four decades, the country was among the fastest 20% in infrastructure growth in the past decade.

The report highlights three policy recommendations to help Ethiopia achieve its broader goal of becoming a lower middle income country by 2025:

  1. Continued infrastructure investment, sustainably financed: Exploring new ways to finance infrastructure such as raising tax revenues, encouraging private sector involvement, and improving public investment management can help Ethiopia continue its fast growth in the coming years. This would help reduce reliance on debt financing and free up domestic credit for the private sector.

  2. Supporting the private sector through credit markets: Sustaining economic growth through private investments will be critical, and in order to do so firms need to be supported by getting better access to credit. Ethiopian firms are more credit constrained than peers and exhibit poorer performance as a result. 

  3. Tapping into the growth potential of structural reforms. Ethiopia has so far liberalized its merchandise trade, but to continue growing fast it can make further progress by gradually reforming the services sector, including domestic finance. In doing so, it can benefit from the lessons of early reformers and tailor reforms to its own circumstances.

Moving forward, the report also proposes a series of indicators that would monitor the trade-offs that could occur while implementing the current growth strategy. This could provide early warnings to policy makers and help initiate reform efforts to sustain higher growth. 

The launch event held in Addis Ababa on 23 November 2015 was co-chaired by Ato Ahmed, State Minister of Finance and Economic Corporation, and by H.E. Dr. Abraham Tekeste, Deputy Commissioner for Planning.


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