Key transformation of Ethiopia’€™s economy

Posted On July 19, 2016 , 12:54 PM Contador HarrisonPeriscope

Ethiopia is one of the fastest growing economies in the world but the country of more than 80 million has more than a quarter of its population living in abject poverty.The country is still at a relatively early stage of economic development. Its markets have progressively opened, and a lot of basic infrastructure has been put in place, but its business environment is still raw and volatile. The Addis Ababa government’€™s master plan for the acceleration and expansion of Ethiopia’€™s economic development seeks to address challenges that persist due to Ethiopia’€™s geographical spread and rapid urbanisation. Its main goal is to ensure sustainable development of resources and labor, aiming to grow per-capita income to US$1,000. This goal calls for an average economic growth rate of 10 percent from 2010 to 2020 while seeking to rein in inflation of 5 percent currently to an average 2 percent in the next decade.The government recently restated the importance of reorienting future economic development from a consumption led economy to one driven more by production. That message recognises that the industrial sector’€™s contribution to gross domestic product has been declining over the past 2 years.Ethiopia needs to actively encourage e commerce, industrialisation and entrepreneurship.Inclusive economic institutions will enforce economic dynamism and culminate in the industrial transformation. Without changes to the development strategy, there will be little chance for Ethiopia to benefit from innovation and new technologies. There are at least three challenges to Ethiopia’€™s Industrial transformation and that include human capital development, financial inclusion as well as political inclusion and bureaucracy reforms.The Ethiopian school system is immense and diverse. With more than 20 million students and 1 million teachers in more than 150,000 schools, it is the third-largest education system in the African region.

Ethiopia has made impressive progress on many fronts in the education sector such as coverage of basic education. Many challenges remain, including expanding enrolment in secondary and tertiary education, increasing the quality and relevance of subjects taught and making governance and finance more responsive.In order to achieve its goal of becoming a developed economy,Ethiopia must be an innovation power. While the government commits huge funding of state budget funds to education, the quality of teachers, the standard of educational facilities and the quality of research and development remains a problem. The ratio of engineers in the population is low compared to other African like South Africa, Egypt, Nigeria and Tunisia. This suggests that the capacity of business people to absorb new science and technology to drive their companies forward is very limited. Only with reliable education and good training can good industrial development be achieved.The level of financial inclusion in Ethiopia is at a critical level. Eighty percent plus of the Ethiopian people are excluded from banking deposit products and 92 percent are excluded from financing products. Micro, small-and medium-sized enterprises dominate business units with up to 93 percent of total business units and employ around 76 percent of the total labor force.Unfortunately, their contribution to GDP is still relatively low, at only about 25 percent. Meanwhile, large enterprises, which account for only 3 percent of the total number of enterprises, contribute 52 percent to GDP and receive loans of more than 90 percent of total bank loans.

Moreover, they still get a small portion of bank financing. Based on central bank data, outstanding loans of for such business total 13 percent of total outstanding bank financing. Medium-scale enterprise loans dominate that credit with a share of 51 percent of total loans. Micro enterprises, which account for 89 percent of all business units, take a share of just 2.4 percent of total bank loans.Inclusive economic institutions foster economic activity, productivity growth and economic prosperity. Inclusive economic institutions create inclusive markets, which not only give people the freedom to pursue the vocations in life that best suit their talents but also provide a level playing field that gives them the opportunity to do so. Those with good ideas will be able to start businesses, workers will tend to go to activities where their productivity is greater, and more efficient firms can replace less efficient ones.Ethiopia adopts an economic planning approach under the purview of several competing agencies. Interdepartmental communication has been growing in recent years, allowing for the formulation of coherent long-term planning that takes into account the broad scope of Ethiopia’€™s national economy. However, problems central to economic policymaking remain a lack of civil service reform, a lack of strong oversight in the planning process, a high incidence of corruption and difficulty in coordinating between the regions and the center. The key leadership skill today is the ability to identify long-term, large-scale opportunities and build the capabilities to turn them into reality. Countries differ in their economic success because of different institutions, different rules influencing how the economy works and the different incentives that motivate people.Societies that have already taken steps toward political and economic institutions have taken advantage of these new economic opportunities and started a process of rapid economic growth.