With a more open and inclusive economy and a stable political settlement, the report shows that over the coming decades, sustainable economic growth can take Ethiopia on a path to a solid upper middle-income status.

Ethiopia is at a “pivotal moment in its history” but there remain “substantial risks” for prosperity if Government were to pursue an “authoritarian political model”, says new report.

A new report, Pathway to Prosperity: Ethiopia Case Study, which is unveiled today by London-based global think-tank, the Legatum Institute, says that  “changes in the way Ethiopian governments have operated” are needed if the country is to achieve prosperity.

Dr Stephen Brien, the Institute’s Director of Policy, describes the country as “at a pivotal moment in its history” as it charts its way towards “sustainable economic growth” and “solid upper middle-income status.”

The report also says that “[e]ffective and broad-based allocation of capital is critical to unlocking the country’s economic opportunities” and that “[p]rosperity could also be supported by a robust and competitive financial sector, with domestic and international participants.”

In particular the report proposes that prosperity will require:

  • “a more democratic political settlement”;
  • “regions and the centre working together for common interests and objectives”;
  • “more autonomy in the control of financial resources by the regions”;
  • “a ‘merit-based’ civil service that focuses on the needs of the citizen (‘citizen-centred’)”;
  • “a truly competent and independent judiciary”; and
  • “a new civil service ethos, one that demonstrates a commitment to service and empathy and zero-tolerance for corruption, embraces transparency and brings public services closer to all Ethiopians, for example, through digitalisation.“

The report also finds that the:

  • “Process of dialogue and peace and reconciliation could facilitate a difficult transition away from a historically entrenched…authoritarian political settlement”;
  • “[p]rivate sector investment remains constrained”;
  • “International donors, including the US, UK, EU, and the World Bank provided financial support to the EPDRF (previous government) without sufficient regard for the capacity of the civil service”. “There has been a mismatch between the ambitions of the ‘developmental state’ model and the civil service that the ruling party was able to provide”
  • Ethiopia is “one of the most underbanked countries in the world…which particularly affects the rural population”; and
  • the historic “reliance on a monopolistic state-owned provider has resulted in one of the lowest levels of mobile and internet access in the region”, even though “the use of mobile phones in neighbouring countries has resulted in substantial gains for those living in rural areas.”

The report recommends:

  • “[p]utting the private sector in the driving seat…creating the environment where [enterprise] can flourish”; and
  • “more open and competitive markets, away from a heavily state-led and controlled economy”.

However, the report cautions that whilst “[t]he Government has committed to a privatisation process” it is important that this is “carried out when the judiciary and the rule of law systems in the country have been strengthened, to avoid the risks of corruption in these processes, as experienced in other countries.”

And the report notes that “privatisation itself won’t contribute to prosperity…Ethiopia also needs to shift its broader regulatory order to accommodate an embracing of private enterprise and capital.”  To that end the report recommends:

  • To “enable[e] a competitive business environment, reducing barriers to entry, discouraging restrictive practices, and regulating monopolies that are contrary to the public interest”;
  • To “establish a merit-based process for appointing the most senior officials” with appointments being based on “proven integrity, focus on the public good and public service and professional experience and competence, not because of political affiliations”; and
  • To “establish clear procedures to protect the independence of the judiciary, including length of the term of office, security of tenure during that term, remuneration and pension”.

The Legatum Institute’s report on Ethiopia is part of a series of case studies examining the links between a nation’s economic openness and its prosperity. It identifies the constraints to future economic development and the type of actions needed to put Ethiopia on the road to prosperity, with the ambition of achieving global median prosperity by 2050.

The report also finds that:

  • Government has adopted a “policy of using state-controlled commercial banks to finance public sector infrastructure investments and state-owned enterprises (and endowment companies), rather than the credit needs of the private sector” and that this has caused credit to the private sector in Ethiopia (and SMEs in particular) to be “among the lowest in East Africa”;
  • “Ethiopia has had impressive success in attracting some large global manufacturing brands to the country”;
  • “The burden of regulation in Ethiopia has significantly increased over the past decade. This business and regulatory environment is particularly limiting…for the so called informal or ‘independent’ sector”; and
  • “…despite one of the highest rates of public investment in the world…’last mile’ connections and infrastructure maintenance have been relatively weak.”

Recommendations from the report to the Government include:

  • “…build on the success of attracting large international brands by ensuring effective coordination between federal and regional agencies, particularly in relation to the management of industrial parks…”
  • “provide incentives to allow banks to expand affordable banking services to marginalised rural producers by reducing costs of micro-credits, insurance, and the transfer of diaspora funds”; and
  • “provide catalytic investment to develop mobile services in rural areas and increase digital literacy”.

 Dr Stephen Brien, Director of Policy at the Legatum Institute, said:

“Ethiopia is at a pivotal moment in its history.  What this report shows is that with a more open and inclusive economy and a stable political settlement, over the coming decades, sustainable economic growth can take Ethiopia on a path to a solid upper middle-income status.

“The Government has committed to more privatisation as the country charts its way towards prosperity, and ministers clearly understand the need to shift the direction of capital away from the state and towards private markets.  But privatisation itself won’t contribute to prosperity.  It’s vital that Ethiopia also shifts its broader regulatory order to accommodate an embracing of private enterprise and capital. 

“When it comes to mobile coverage and banking, for example, the Government needs to prioritise consumer rather than producer interests. This means focussing in increasing rural coverage and banking rather than protecting the interests of state owned enterprises.”

Read the report here.