Mellennium Challenge Series 4: Ethiopia's Socio-Economic Perform,ance, Eshetu Chole, et. al.

Proposal: A Symposium for REVIEWING ETHIOPIA’S SOCIOECONOMIC PERFORMANCE 1991- 98

Third Draft, June 1998

( This proposal has been written by Dr. Eshetu Chole, shortly before his death. )
1. Background

From whatever perspective it is looked at, May 1991 stands out as a decisive watershed in Ethiopian history. With the fall of the military government and the assumption of power by the EPRDF, the country entered a new historical phase, even if the major defining characteristics of the new order were yet unclear to most observers. An early pointer of the new course was the charter for the transitional period, which gave a clear indication of the new political direction, especially in as far as it placed "the national question" at the centre of the impending political transformation. That the new order would also aspire to be democratic was likewise enunciated in the charter.

But the socioeconomic content of the charter was not substantial. However, a document outlining the economic policy of the transition period was made public in November 1991, the major principles of which were moving in the direction of a market economy; creating a conducive environment for investment, especially domestic investment; and rehabilitating the war-torn economy. The economic policy of the transition raised as many questions as it sought to answer, and it did - as was only to be expected - draw considerable attention from those interested in the Ethiopian economy.

It was against this background that, in January 1992, Inter-Africa Group organised a symposium on rehabilitating the Ethiopian economy, the major purpose of which was to provide a public forum to discuss the state of the Ethiopian economy, the challenges facing it, the policy options available, and problems of the major sectors; and to make recommendations for rehabilitating the economy and setting it on the path of sustainable growth and development.
In a large sense, the symposium proved to be a unique experience and - on balance - a highly successful one. It succeeded in bringing together participants from diverse backgrounds (academics, civil servants, individuals from the private sector and NGOs, Ethiopians residing abroad, representatives of donor agencies, etc.), whose range of experiences greatly enriched the discussion. Equally significant was the openness of the discussion, most sessions being characterised by frank and lively controversy. The issues covered were also wide-ranging, from those focussing on broad policy directions to those addressing specific issues such as land. The symposium also came out with several recommendations.

It is now six years since that symposium was held, and much has transpired in Ethiopian society, in both the political and socio-economic spheres. The post-Derg order is now seven years old, and it has a track record which has been variously interpreted.

It has been hailed by some as a new and bold experiment in political engineering with valuable lessons for other African countries. But it has also been roundly condemned by others as irresponsible, with nothing to be expected from it but the destruction of the Ethiopian polity as it has evolved historically.

Neither is there a consensus on the socio-economic gains attained and the setbacks encountered since 1991. And there has not been a follow-up to the 1992 symposium in terms of reviewing what has transpired since then, although more than six years have elapsed since that event. Such a follow-up is now felt to be highly essential, largely to take stock of developments in the economic and social fields and to critically assess Ethiopia's socioeconomic performance during the post-Derg period.

Apart from the fact that there is a record of seven years to consider, the policy changes introduced and the measures taken in the economy have been fairly far-reaching, a situation which provides an excellent opportunity for an independent and informed appraisal of what has transpired.
IAG therefore proposes to organise a symposium for this task, to be held sometime in fall 1998.

2. Major Socioeconomic Policy Developments 1991- 98

The wide range of policy departures and measures taken in the socioeconomic sphere can be outlined under three major headings, corresponding to the three main types of transition that the new period was envisioned to usher in, i.e., the transition from a command economy to a market economy, from a centralised to a decentralised economy, and from a war to a peace economy. A fourth heading concerns regional economic integration, including economic relations with neighbouring states. This set of issues has gained special prominence since the eruption of conflict with Eritrea in May 1998.

First, liberalisation of the economy. The essence of liberalisation is to reduce the role of the state in the economy (a corollary of which is expanding the role of private capital) , both in economic decision-making and in the ownership and management of economic enterprises. That significant moves have been taken in this direction brooks no dispute.

Largely through the instruments of policy framework papers agreed to by the government on the one hand, and the Bretton Woods institutions on the other, a variety of reforms have been introduced, some of the most important being price decontrol, devaluation of the Birr and the introduction of an auction system for foreign exchange, opening up of banking and insurance to the private sector, new investment and labour laws designed to enhance investment, etc. Between them these and other measures have moved the Ethiopian economy from the high degree of centralisation of the previous regime.

However, to say this is not to contend that the Ethiopian economy has succeeded in becoming an open one or to argue that the pace and nature of liberalisation have received universal acclaim. For instance, the land question remains as contentious as ever, with the government solidly committed to state ownership, and some critics unwilling to accept the anomaly of a market economy in which land - perhaps the single most important asset in the country (especially rural land) - continues to be owned by the state.

Nor is there contentment with the pace of privatisation. Some also contend that there is quite a gap between policy declarations and their implementation.
In short, there is much that is open to discussion regarding progress made in liberalising the economy. To the extent that the move towards liberalisation has had its flaws, to what extent can these be attributed to real constraints on the ground, and to what extent are they due to policy failures? What have been the major achievements and limitations of the liberalisation process? What is it that can be realistically achieved over the medium term? These and a number of related questions provide substantial food for thought.

A second crucial area is that of decentralisation. While the decentralisation that has been promoted in Ethiopia by the EPRDF is essentially politically motivated, it has also has its economic dimensions. For this reason, a review of the socioeconomic record must squarely address the impact of decentralisation. The economic dimension of decentralisation has mostly manifested itself in the fiscal system. Sub-national units of government have been given wide-ranging responsibilities, and there has been some degree of decentralisation in the country's revenue system. Decentralisation is a novel phenomenon and is therefore at a fairly early stage of implementation. However, sufficient experience has been accumulated to enable at least a preliminary assessment of its impact.

There are several questions to raise in this regard: How have the regions been coping with the responsibilities assigned to them? What are the major constraints they face in terms of implementation? How effectively is the system of revenue sharing working? How much harmony and/or tension is there between the central government and the regions? On balance, how effective has the system of decentralisation been in promoting efficiency and equity?
A third question relates to the transition from war to peace, and especially the question of the peace dividend. With the end of the country's debilitating civil conflicts, there was much expectation that substantial peace dividends would be reaped and that these would be used for much-needed socioeconomic transformation.

The government has steadfastly argued that a great deal of military expenditure has been cut down and transferred to social development, especially to health and education. A cursory look at budget figures tends to confirm it. But the notice of the peace dividend needs to be critically examined. Here too, there are a number of questions to raise: What exactly is the size of the peace dividend? How much of it has been transferred to reconstruction and development? What has been the regional distribution of the peace dividend? It does not appear that these questions have been subjected to serious, critical examination. The proposed symposium would be a useful forum for addressing the issue.

The unexpected eruption of conflict in May 1998 also led to the largest military mobilisation for seven years. The economic implications of the conflict with Eritrea need to be critically examined.

The fourth crucial area is regional economic integration. The January 1992 symposium in Ethiopia followed a few months after a conference in Asmara on the economic prospects for Eritrea. At the time, it was clear that the Eritrean vision of becoming the manufacturing hub of the Horn of Africa, an ‘African Singapore’, ran the danger of conflicting with the economic visions articulated in Ethiopia. Over the following years, this subject dropped from public debate. The general issue of regional economic integration also faded from view as relations with Sudan deteriorated and Somalia failed to achieve peace.
This lack of public debate was unfortunate.

One consequence was that the economic strains between Ethiopia and Eritrea that developed over the succeeding years, coming to a head in the months following the introduction of the Nakfa currency in Eritrea, were not fully analysed and understood at the time. In retrospect, a number of widely divergent elements in the economies of the two countries have become clear. The nature of these differences and the means of dealing with them are an important subject for discussion. In addition, there is a need to ask how economic relations with other neighbours, including Djibouti, Somaliland, Somalia, Kenya, Sudan and Egypt have been handled, and what sort of future role should be played by subregional institutions such as IGAD.

3. Issues for Debate

The issues for debate are many and inter-connected, but they can - for the sake of analytical convenience - be divided into four major categories:
macroeconomic performance;
sectoral economic performance;
the social situation;
regional economic issues. 3.1 Macroeconomic Performance
That the new government inherited an economy in ruins is widely recognised. The challenge it faced was therefore one of pulling the economy out of the depths to which it had sunk and to create conditions for sustainable growth over the medium and long term. In other words, the key question here is: how has the macroeconomy fared under EPRDF rule?
Enumerating overall successes is important. But it is also important to engage in a thorough objective review of the performance of all sectors to analyse the reasons for success and failure.

First, how has GDP performed over the years, not only relative to the immediate pre-EPRDF years, but also in comparison with the Derg period? Do the positive trends usually highlighted represent merely recovery from an economy that had been driven to bankruptcy by mismanagement, war and a variety of shocks, or do they represent progress beyond mere recovery? Has per capita income showed a respectable increase compared to historical trends? Answers to these questions will have to incorporate the major causes of and constraints to growth.

Second, and one of the important factors in growth, is what has been happening to investment, both domestic and foreign. Ultimately, little can be expected in the way of sustained growth in the absence of substantially increased investment.

This calls for a review of the investment situation in the country as it has been evolving since 1991, broken down by domestic and external, public and private, as well as by sectors. It also requires a detailed examination of factors conducive to investment as well as those inhibiting it. A related but wider issue is that of the role of the private sector in the economy as it has been evolving over the past few years. Specifically, is the sector playing an optimal role or is it constrained by policy and other considerations? Also related is the question of privatization of state enterprises, including the pace of the process, progress attained and difficulties encountered.

Third, and as a corollary of the above, is the situation with respect to domestic saving. In other words, how much saving has the economy managed to mobilise internally, both in the public and private sectors? How much of increased investment is due to increased internal saving?

Fourth, and given the importance of foreign resources in the Ethiopian economy, there is need for a careful examination of the role and impact of external resources, especially external aid, both multilateral and bilateral. There is need to examine the size, sectoral and regional distribution, and efficiency in the utilisation of foreign aid. Directly related to this is the country's external debt situation: its size, debt service position, efficiency of utilisation, and sustainability.

Fifth, there is need to look at the country's external trade picture, both exports and imports. How have exports been performing, not only the traditional ones such as coffee, but also non-traditional ones, to the extent that trends worth noting have been observed? This requires looking at both production and value figures, as well as the geographical destination of exports. This needs to be done on the import side as well.

In addition, there is need to examine what has been happening to the country's terms of trade. In general, an effort should be made to assess the impact of the new policies on the external trade situation. An important sub-theme will be the evolution of trade relations with Eritrea and their implications, and the importance of informal exports to Somaliland and Yemen.
Sixth, there is need to review monetary developments, especially the picture with respect to inflation. Again, the official view is generally well-known, and it is essentially that inflation has been brought under control. However, the issue of inflation in Ethiopia raises many issues of methodology, which are widely recognised but have not been fully addressed. This symposium would do a great service if it succeeded in highlighting this problem, which is fundamental to the welfare of the Ethiopian people.

3.2 Sectoral Economic Performance

While a review of macroeconomic performance reveals much about the state of the economy in general, it obviously does not tell the entire story; it has to be supplemented by an analysis of how the major sectors have been faring. It would therefore be instructive to consider agriculture, industry and services in some detail.

3.2.1 Agriculture
Now, as in the past, Ethiopia's economic performance is largely determined by the agricultural sector. As conventionally conceived, the role of this sector is to feed the population, generate foreign exchange, supply raw materials for industry, mobilise saving for capital accumulation, and provide a market for the outputs of the non-agricultural sectors.

In the country's recent economic history, these are roles that the sector has not played satisfactorily. Its capacity for feeding the population has been highly flawed. It has been an inadequate source of inputs for the country's limited industrial sector. Although it is the single most important sector in generating foreign exchange, agricultural exports have not shown appreciable improvement in volume, value and composition. Although it is still the single most important sector in terms of contribution to national income, its role in resource mobilisation has not matched its role in the structure of output, largely due to low and stagnating levels of productivity.

This has also meant low purchasing power of the rural population for non-agricultural goods, both consumption items and agricultural inputs. For these reasons, far from acting as a pace-setter for the rest of the economy, it has tended to act as a bottleneck.

The proposed symposium would provide an opportunity for examining if there has been a positive change in this bleak picture. It would address overall agricultural performance in terms of the roles outlined above: What has been the track record of food production? How have agricultural exports performed? What has been the contribution of the agricultural sector in terms of government budget revenue and in terms of other aspects of resource mobilisation? How much of a market does the rural population represent for industry and services?

To pose these questions is to raise fundamental issues of structural transformation, and structural transformation does not, of course, come about in a matter of five or six years. However, it would be instructive to find out if there are any discernible trends in this direction. If there are, there is need to delve into the major factors that have made these trends possible (policies, environmental factors, technology, land utilisation, etc.). If there are no positive trends, one needs to examine the underlying constraints (possibilities again including environmental, demographic and technological factors, as well as issues of policy).

3.2.2 Industry
Industry is here defined broadly to include manufacturing proper, construction, power and mining. Ethiopia's industrial sector has always been limited in size, although its performance has almost invariably been superior to that of agriculture. The government's declared strategy is one of agriculture-led industrial development.

The linkages of the two sectors are quite obvious, and it is difficult to envisage appreciable growth in one, with stagnation in the other.

There is therefore need to examine what has been happening in the industrial sector, broken down into the major sub-categories mentioned above. This would mean looking at the size and composition of industrial output as they have evolved over the last few years, the contribution of the sector to foreign exchange generation, and any change in its capacity to supply industrial inputs to the agricultural sector and consumption goods to the rural population. It would also mean taking a close look at both positive and negative factors at work.

3.2.3 Services

The same analysis needs to be made for the services sector, here defined to include trade, transport, distribution, banking, insurance and tourism. This is the sector that has perhaps been most affected by policy reforms, especially on account of the liberalisation measures introduced over the last few years. An analysis of how the sector has responded to these reforms and what the impact on its growth has been would have much instructive value.

3.3 The Social Situation

Development is more than economic growth, although growth is an indispensable component of it. Development is essentially about enhancing the quality of life of people. For this reason, the symposium would be incomplete if it did not include an explicit examination of what, if any, changes the last few years have brought about in the well-being of the Ethiopian people. However, here again, such an examination must be based on the recognition that a fundamental transformation in the quality of life cannot be expected within a short period of time, especially in a society such as Ethiopia with a complex of web of interlocking economic and social problems. The search is therefore for any visible trends.

This means, in the first place, looking at what has been happening to the state of poverty in Ethiopia. Indeed this is the single most important socioeconomic issue. Unfortunately, it is also probably the most difficult to address, for reasons that are related to conceptual and methodological issues as well as the perennial problem of limited and unreliable information.

However, the symposium would be seriously wanting if it did not tackle this question - however tentatively - based on whatever data are available and taking advantage of the large body of work on poverty that has been done on a global scale. Specifically, the impact of policy reforms on poverty reduction needs to be carefully looked into. At the most elementary level, one should be able to provide a preliminary answer to the question of whether or not there has been change in the state of poverty in Ethiopia in the last few years.


Issues intimately related to poverty are health and education. It is therefore important to review what has been happening in these sectors, by looking both at the policy reforms introduced and the measures undertaken. In both health and education, one needs to look at scope of coverage, resources devoted to the sectors, efficiency of resource use, and distribution of benefits by income groups and regions.

Another issue directly related to poverty is employment. No meaningful inroad can be made into the country's deep-seated poverty without a substantial expansion of employment in both the formal and informal sectors. The symposium should therefore take a close look at the unemployment problem in Ethiopia as it has been evolving over the last few years. It should in particular review the state of employment in the private sector, given the fact that the thrust of recent policy reforms has been to put the accent on the private sector. This should however be complemented by a review of employment in the public sector as well.

Finally, no review of poverty would be complete without a look at the housing situation. That this situation leaves much to be desired is beyond contention. It is also clear that the backlog of housing problems that have accumulated over the last twenty-five years is substantial, and that it would be unrealistic to expect dramatic improvements over a period of a few years. Still, it would be useful to review any developments that may have taken place in the post-1991 period.

3.4 Regional Economic Relations

In the years 1991-7, there was much talk about a ‘new leadership’ in Africa, led from Addis Ababa and Asmara, which encapsulated a new vision in which national boundaries meant less, and African governments collaborated in assisting their neighbours.

Although action was primarily taken at a political level, notably with regard to developing a common approach to the problem of Sudan and forming an alliance to remove the dictator Mobutu Sese Seko from power in Zaire, this vision also had an economic component. The symposium plans to address the question of how this plan for regional economic integration and cooperation translated into practice, if it did so at all.

The question of the functioning of the Eritrean economy and economic relations between Ethiopia and Eritrea is, for obvious reasons, the most pressing issue that arises. The Eritrean economy was, in 1991, essentially an adjunct economy of Ethiopia, highly dependent on Ethiopia for money supply, food and most basic commodities. Phasing out this adjunct economy was a challenge. Success in this project was not assisted by the differing economic visions of the Eritrean and Ethiopian leaderships. It was further complicated by the unconventional nature of the Eritrean economy, which was highly reliant on remittance income from the Eritrean diaspora and informal economic activities including currency trading.


An in-depth study of the Eritrean economy is hampered by lack of basic statistics including a national budget, and difficulties in interpreting what statistics exist due to the informal and grey nature of a substantial part of the economy.

However it is an important exercise to undertake, for several reasons. First, it is essential to understand the Eritrean economy, not merely for the future development of Eritrea, but also for future economic relations with Ethiopia. Second, many of Sudan’s neighbours have unconventional economies, with a high component of income provided by remittances, the informal sector and grey economic activities, such as the chat economy or unlicensed trading. In some regards, the entire economy of Somalia can be regarded as informal, and there is a danger that it may evolve as an entrepot for illegal economic activities.

There are therefore important lessons that Ethiopia must learn about how to manage its economic relations with its neighbours, which may have contrasting economic systems.

The economies of Djibouti, Somaliland, Somalia, Kenya, Sudan and Egypt all warrant attention. All these countries have an actual or potential impact on the Ethiopian economy, though to varying degrees, and there is an interaction between economic relations and Ethiopia’s strategic national interests.
In the case of Djibouti, its integration into the Ethiopian economy is self-evident, as is the Ethiopian strategic interest in a stable and prosperous Djibouti.

The Somaliland economy is also closely linked to Ethiopia, particularly Region Six. At the other end of the spectrum, the Egyptian economy is almost completely separate from Ethiopia, but the two countries are strategically connected by the River Nile. Egyptian economic prospects are closely tied up with its ability to exploit the Nile waters, which in turn dictates Egyptian policy towards Ethiopia, which is the source of about 80% of those waters, and which to date has exploited virtually none of its potential for irrigation and hydro-electricity.

No Ethiopian government can afford to ignore the regional strategic implications of increased use of the waters of the Blue Nile.
Another important theme is border economies. All Ethiopia’s borders are to some extent artificial, and all have seen extensive cross border trade, both formal and informal. The functioning of these border economies is an important subject of study, which has too often been neglected by economists.

The advent of regionalisation in Ethiopia has made the border economies still more complex. The handling of border trade and border economies in general is emerging as an issue of importance for Ethiopia’s national security.
A final theme relevant to regional economic integration is the functioning of subregional institutions, especially IGAD. Comparable subregional organisations in southern and western Africa have important economic functions to fulfil. This is not the case for IGAD.

It is not appropriate to blame IGAD for failing to undertake a task it was not mandated or asked to do. Nonetheless it is important to make comparisons with the operation of other subregional organisations in Africa, and to draw lessons for what kinds of structures might be appropriate to facilitate economic integration in the Horn.

4. The Symposium

4.1 Objectives
To review the economic and social situation in Ethiopia as it has evolved over the period 1991-97, with a view to drawing up a balance sheet of achievements and setbacks

To examine linkages between policy reforms and socioeconomic performance, with a view to providing an overall assessment of the policy framework, i.e. the extent to which it is conducive to development
To examine the performance of the major economic sectors
To provide an assessment of the social situation
To assess progress towards and impediments to regional economic integration and the economic relations between Ethiopia and its neighbours
To make recommendations on policy options and measures necessary to accelerate growth and development.

To publish, as an outcome of the symposium, a book containing a selection from the papers presented at the symposium, the intention being to provide, within one volume, an analysis of the country’s economic performance during the period under consideration. 4.2. Participants

The symposium is expected to bring together participants from a wide variety of backgrounds - academics, policy makers and implementors, representatives of the private sector, donors, and NGOs, as well as any others with knowledge of and interest in Ethiopia's development. The emphasis should be on representation of a broad range of opinions and perspectives, and the choice of participants should reflect this consideration. Economists from neighbouring countries will also be invited where appropriate.

4.3. Structure of the Symposium
The symposium will have plenary and working group sessions. The plenaries will be devoted to cross-cutting issues (e.g., the policy framework) while the working groups will deal with specific issues (e.g., agriculture). The following structure is proposed:
Plenary Sessions
The Policy Environment for Economic and Social Development
Macroeconomic Performance 1991-97
The Social Situation
The Impact of Decentralisation on Social and Economic Development
Economic Relations between Ethiopia and its Neighbours 4.4. Working Group Sessions
Agriculture
Industry
Services

Neighbouring countries Based on this structure, papers need to be commissioned sufficiently in advance of the symposium. Resource persons for this task should be carefully selected for their expertise in particular areas. Possible titles for papers are the following, but this is something needs to be refined and developed over time. The list is deliberately long, although by no means comprehensive. Since not all topics can be effectively covered in a symposium lasting a few days, there is an obvious need for being selective. In some cases, it would be useful to commission two papers on the same topic (e.g., the policy environment) to benefit from a diversity of perspectives (e.g., the government position vis a vis a more independent assessment).
Ethiopia’s Macroeconomic Performance 1991-97:

A Balance Sheet
The Policy Framework for Economic and Social Development in Ethiopia: An Assessment

The Role of the Private Sector in Ethiopia
The State of Poverty in Ethiopia, Rural and Urban
The Economic and Social Dimensions of Decentralisation in Ethiopia
The Peace Dividend: Reality or Myth?
The State of Domestic Investment in Ethiopia
The State of Foreign Investment in Ethiopia
Ethiopia's External Debt Situation
The State of Health in Ethiopia
The State of Education in Ethiopia
Employment and Unemployment in Ethiopia
The Housing Situation in Ethiopia
The State of Ethiopian Agriculture
Ethiopia's Food Situation and Prospects
The Land Question in Ethiopia Revisited
An Assessment of Ethiopia's Foreign Exchange Rate Policy
A Preliminary Assessment of the Role of the Private Sector in Banking and Insurance
A Review of Ethiopia's Industrial Performance 1991-97
A Review of Ethiopia's External Trade 1991-97
The Eritrean Economy, 1991-7
Economic Relations between Ethiopia and Eritrea
Economic Relations between Ethiopia and Djibouti
Strategic Considerations in Ethiopia’s Economic Relations with its Neighbours
Opportunities and Obstacles for Regional Economic Integration
Ethiopia’s Border Economies
Sub-regional Economic Institutions
The symposium was succesfully held at the UN-ECA Conference Hall in Addis Ababa. You may contact the Inter-Africa Group for detail about the symposium.
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