On a sunny October day in 2009, I presented a speech about the Ethiopian economy to a business conference in Washington DC in the US. The audience of mostly senior business executives and government officials listened intently – with the customary diplomatic politeness that Washington is famous for – until I presented the forecast that “Ethiopia will be the third biggest economy in sub-Saharan Africa in 15 years, with a GDP of $472bn”.
Then, a visibly energised mood took over the conference hall. Some were pleasantly surprised while others were incredulous as to how a country more synonymous with poverty and famine could become such a high performer. This column reiterates the same forecast first made more than three years ago and discusses some of the key factors that are contributing to Ethiopia’s rapid growth.
The gradual shift of economic power from the developed West to the newly emerging East is benefiting Ethiopia. For example, China is now a major foreign direct investor (FDI) in Ethiopia, strategically benefiting both countries. And, unlike elsewhere in Africa where China’s focus is primarily on natural resources, in Ethiopia it appears to be broad-based. One only needs to visit – as I did a few weeks ago – the brand new multi-million dollar factory of Huajian Group, just outside of the Ethiopian capital Addis Ababa, to understand China’s emerging strategy.
Huajian is China’s largest manufacturer of women’s shoes and plans to export $4bn worth of footwear to the US and the rest of the world from Ethiopia. Not coincidentally, Huajian’s factory is in a huge Chinese-owned industrial park, one of four such facilities in Africa, financed by a Chinese investment fund.
The demographic dividend
Ethiopia’s population, already the second largest in Africa after Nigeria, will top 120m by the middle of the next decade with a median age of under 20. This represents an abundant and competitive workforce, especially for large-scale labour-intensive manufacturing and agro-industry. Brazil, Russia, India, China and South Africa have all leveraged their young populations to transform their economies into the BRICS, and I believe Ethiopia’s demographic means it can do the same. Ethiopia still needs to do a lot more to improve the business operating environment. However, last year’s annual ranking of the World Bank’s Doing Business guide indicated that Ethiopia outranked three out of the four BRICS countries, confirming that policy reforms are already showing some positive results.
I am frequently asked when the financial services and telecoms sectors will open to foreign investors. The short answer, according to the government, is there is no plan any time soon. However, my guess is if the economy continues to grow sustainably, the government may gradually liberalise the ownership rules some time before the end of the decade. For the likely scenario of how that may happen, one should examine China’s approach, since that’s most likely the path Ethiopia will follow, especially in telecoms.
For example, by 2015, there will be 60m mobile subscribers in Ethiopia, one of the largest telecom markets in Africa. But just like China, which had a state telecom monopoly, practically all Ethiopia’s subscribers are customers of the state-owned monopoly, Ethio Telecom.
Another recurring question is, when Ethiopia will establish a stock market? Again, my forecast is, there will be a stock market probably in the next five years. This is a logical step considering several other African countries with much smaller GDPs already have capital markets. The success of the Ethiopian Commodity Exchange has been a confidence-builder and bodes well for allowing an organised and regulated stock market in the country.
Untapped natural resources
Agriculture is one of Ethiopia’s major resources and private investment will be transformational, not just for the domestic market but for exports as well. I also strongly believe that FDI targeting the agro sector will contribute to Ethiopia’s goal of becoming a major exporter. For example, the Saudi-Ethiopian billionaire Sheikh Al Amoudi has planned a $3bn agro investment. I recently outlined this initiative to the US-Saudi Summit in Atlanta, US, suggesting Ethiopia could earn over $1bn in annual exports when the projects are fully operational.
Ethiopia’s other natural resources – from gold to potash, rare earth materials to oil – are still largely unexploited, although the recent discovery of oil in neighbouring Kenya, close to the Ethiopia border, has raised hopes that Ethiopia will be next frontier discovery.
The government has rolled out its signature economic programme called the Growth and Transformation Plan, better known as GTP. However, there has been external pressure on the government to aim for something “less ambitious”. In my view, despite potential challenges in securing some of the required finance, advising Ethiopia to scale back misses the big picture. Incremental growth will never transform such a huge country with such enormous development needs. Ethiopia is an early-stage emerging economy and faces many challenges. However, as I hope I have outlined above, there are many positive factors contributing to Ethiopia’s transformation from the bankrupt socialist state it was in 1991 to a private sector-focused, middle-income country by 2025.