Bloomberg reported on March 4th that the US expressed alarm about continuing human rights abuses in Ethiopia, which may impact its ability to secure funding from multilateral lenders. This concern arises as the International Monetary Fund prepares a mission to the country to discuss a crucial bailout.
Last month, Amnesty International stated that the Ethiopian authorities have used the state of emergency to silence peaceful dissent by arbitrarily detaining prominent politicians critical of the government and journalists. It pointed out that on 2 February 2024, Ethiopia’s House of People’s Representatives endorsed an extension of the state of emergency, which came into force in August 2023 amid escalating violence in the Amhara region between government forces and Fano militia. The nationwide state of emergency has given authorities sweeping powers to arrest suspects without a court warrant, impose curfews, restrict the right to freedom of movement, and ban public assemblies or associations.
Last December, Ethiopia became the third African country to formally default on its debt in as many years, after missing the deadline to make a $33 million interest payment on its only international bond. This default places the East African country among a growing number of emerging economies that have defaulted on their debt in the aftermath of the pandemic. According to the World Bank, there have been 18 sovereign defaults in 10 developing countries in the past three years, a number greater than that recorded in all of the previous two decades.
Ethiopia, apart from a brief Italian occupation, avoided colonization. Its politics have been shaped by the complex relations between its three main ethnic groups – Oromos, Amharas, and Tigrayans.
Ethiopia first sought debt relief in 2021 as pressures from the coronavirus pandemic and conflict in the northern Tigray region hampered economic growth. Ethiopia is the second most populous country in Africa after Nigeria, with a growing population of over 120 million, approximately two-thirds of whom are under age 30. The UK government warned last month that Ethiopia is sliding into a “humanitarian catastrophe” with more than 3 million people facing acute hunger in the north of the country.
Despite a truce to end its two-year civil war, Ethiopia's economy is under pressure, with an annual inflation rate of 28 percent, foreign currency shortages, and growing debt repayments. What happened to the country once described as an “African tiger”?
Ethiopia, apart from a brief Italian occupation, avoided colonization. Its politics have been shaped by the complex relations between its three main ethnic groups – Oromos, Amharas, and Tigrayans. From 1974, a ruthless socialist junta, known as the Derg, governed Ethiopia. They ran the country into the ground, then were overthrown by a coalition led by Tigrayans in 1991. A new constitutional arrangement was introduced, based on ethno-nationalism. At this point, Eritrea, which had been fighting a bitter war for independence against the Derg, was allowed to secede.
Meles Zenawi, Ethiopia's leader from 1991 until he died in 2012, ruled the country with an iron hand and a relentless focus on economic development. As prime minister, he earned a master’s degree in economics in the Netherlands and wrote a thesis on the developmental state, drawing inspiration from East Asian examples such as Korea and Taiwan.
From 2004 to 2017, vast public investment helped Ethiopia’s GDP grow by more than 10 percent a year on average, outpacing every country save Qatar. The spectacular change in Ethiopia was enabled by the relative peace and stability it enjoyed during this period, which in turn has allowed its regional diplomatic influence to increase. Although there were still low-level insurgencies in some parts of the country, it was generally governed effectively. This was buttressed by allocation of more than 60% of the national budget to sectors of the economy, such as agriculture, education and health, that favoured poorer people. The previous rulers spent most of the treasury’s coffers on the military.
Zenawi’s successor, Dessalegn, continued to follow his policies, but his ruthless methods to suppress protests after the 2005 election caused widespread resentment, especially among the country’s large youth population. For them, the growth figures did not translate into rapid improvements in their opportunities, according to Oxford University economist Stefan Dercon.
The dominant role of the Tigrayan People’s Liberation Front (TPLF) post-1991 also caused resentment. Eventually, the Oromos and Amharas combined to put a non-Tigrayan in charge in the federal capital of Addis Ababa. In 2018, an Oromo, Abiy Ahmed, became prime minister and began to implement a democratizing and modernizing agenda. Abiy worked to end a long and violent border dispute with Eritrea that had led to a full-scale war in 1998-2000. For this, he was awarded the 2019 Nobel Peace Prize. On its receipt, he described it as “a prize given to Africa, given to Ethiopia, and I can imagine how the rest of Africa’s leaders will take it positively to work on the peace-building process in our continent.”
In July 2018, Ethiopian government officials declared that the country planned to attract $5.1 billion in Foreign Direct Investment (FDI) during the 2018-19 fiscal year. Ethiopia had plans to utilize FDI as a catalyst to increase the manufacturing share of the country's GDP from the current 5 percent to 20 percent by 2025.
The growth episode of Ethiopia is largely explained by massive public investment in infrastructural development, financed entirely by foreign debt. The state-led model accrued flaws: double-digit inflation, mounting public debt, and the hogging of credit and hard currency by state firms. Ethiopia’s exports fell from 13.7 percent of GDP in 2012 to an average of 7.7 percent in 2019-2022.
With stock of external debt growing fast, poor project execution, along with disappointing export performance, prompted the IMF and World Bank to rate Ethiopia’s external debt burden as a high risk of distress. That greatly undermined the country’s credit standing and borrowing ability. As a reflection of the aforementioned macroeconomic distortions, sovereign debt rose to an estimated 58% of GDP; a government budget deficit of 3.7% of GDP; a trade deficit of 12.4% of GDP and a current account deficit of 4.5% of GDP in 2018.
Against the backdrop of these macroeconomic problems, a new leadership by Abiy Ahmed Ali took over in 2018 and enacted stringent fiscal and financial measures, where the monetary policy was tightened and public sector credit policies were introduced. Those policy reforms of the new government were complemented by the homegrown Economic Reform Agenda.
In July 2018, Ethiopian government officials declared that the country planned to attract $5.1 billion in Foreign Direct Investment (FDI) during the 2018-19 fiscal year. Ethiopia had plans to utilize FDI as a catalyst to increase the manufacturing share of the country's GDP from the current 5 percent to 20 percent by 2025, as part of plans to become an industrialized middle-income economy by 2025. However, FDI, after reaching a peak of 5.6 percent of GDP in 2016, did not recover due to the pandemic and the civil war.
Pakistan must learn that while an authoritarian system is capable of producing rapid economic growth, if the growth does not translate into improvements in the living standards and meet the expectations of a young population in a multi-ethnic country, it can destabilize the entire system.
In late 2019, the Ethiopian government introduced a three-year macroeconomic reform plan, dubbed the homegrown economic reform agenda. This plan was primarily aimed at healing the fractures of the Ethiopian macroeconomic landscape characterized by the current account deficit, foreign exchange crunch, widening fiscal deficit, and increased public debt, among others. The aim was to fix those structural bottlenecks that hampered the prospects of economic growth of the country in the short and medium-run period.
The Ethiopian Investment Commission, an Ethiopian autonomous government organization, was supposed to lead this effort and work to attract and facilitate foreign direct investment in Ethiopia. The commission’s head reports directly to the prime minister. The Ethiopian Investment Commission, established in 1992, is responsible for offering one-stop services to investors, issuing investment permits, registering technology transfer agreements, and facilitating the acquisition of land, utilities, and other services for investors.
The largest source of foreign direct investment (FDI) in Ethiopia has been China, followed by Saudi Arabia and Turkey. Insecurity and political instability associated with various ethnic conflicts – particularly the conflict in northern Ethiopia and violence in Oromia – have negatively affected the investment climate and dissuaded investors, even though foreign investors received generous support from the government at the highest levels.
The Tigray War was an armed conflict that lasted from November 2020 to November 2022. The war was primarily fought in the Tigray Region of Ethiopia between forces allied to the Ethiopian federal government and Eritrea on one side, and the Tigray People's Liberation Front (TPLF) on the other.
Pakistan must commit to memory that debt-fueled growth with a heavy emphasis on infrastructure spending can lead to an unsustainable debt burden if the exports don’t grow.
A UN International Commission of Human Rights Experts on Ethiopia reported in October 2023 that it had found “evidence of war crimes and crimes against humanity committed on a staggering scale”. Nobody has been called to account for these crimes. Many Tigrayans became refugees, pushed out of their homes through violence and pillage, and the inability of humanitarian organizations to reach them. More than a million people remain internally displaced, while other refugees are now stuck in Sudan.
Even a decade ago, doubts had been raised about the sustainability of Ethiopia’s progress. The UK’s Guardian wrote that Ethiopia’s big push, like previous surges by the “Asian tigers”, also had costs that cast doubt on its sustainability. Although the government labelled it a “democratic developmental state”, the political-economic order that the ruling Ethiopian People’s Revolutionary Democratic Front (EPRDF) followed resembled those Asian models, which delivered rapid economic growth in an authoritarian environment.
Yet unlike nations such as Singapore and China, whose economic transformation occurred within a closed political system, the EPRDF operated in what was (and still is) formally a liberal democracy. This ideological entanglement created structural tension, evident in the restrictions on political and civil rights that are, in theory, enshrined in the Constitution.
In 2014, Dereje Feyissa Dori, an expert on Africa, wrote presciently: “Whether Ethiopia will attain its ambitious goal of becoming a middle-income country in the next decade depends on how it manages the transition from public investment-driven growth to a dynamic, private sector-heavy model. It will also hinge upon its attempts to mitigate the many political and social costs of the transition.”
The Ethiopian experience has some lessons for Pakistan. Pakistan must learn that while an authoritarian system is capable of producing rapid economic growth, if the growth does not translate into improvements in the living standards and meet the expectations of a young population in a multi-ethnic country, it can destabilize the entire system.
Pakistan must commit to memory that debt-fueled growth with a heavy emphasis on infrastructure spending can lead to an unsustainable debt burden if the exports don’t grow. A state-led development model, which stifles the private sector, is not sustainable in the long run and is unlikely to attract foreign private investors without liberalization and deregulation.