Ethiopia is currently the second fastest growing economy in the world and the fastest in Africa. This is no mean feat and has started attracting a lot of interest from observers around the world. According to Bloomberg, Ethiopian Economy grew at a rate of 8.1% in 2015 a slight drop from about 8.7% in 2014. Nigeria in contrast is expected to grow by just over 2.97% in 2015 and projected to grow by 3.78% in 2016. So how is Ethiopia doing this? The article provides a very instructive clue;
Government Spending
According to the article, the Ethiopian government has been spending massively on infrastructural projects. An independent economist based in Addis Ababa explained to Bloomberg;
“The fact that much of the spending is on capital projects, especially infrastructure, means that government spending has been the key driver of the boom,….It is unimaginable to think of Ethiopia as one of the fast-growing countries in the world without government spending.”
According to Bloomberg it’s that spending by state-owned companies such as the Commercial Bank of Ethiopia, Ethio Telecom and Ethiopia Electric Power that’s led to a 70 percent boost in capital investment in the past three fiscal years to 155.2 billion birr ($7.3 billion). The government is building everything from industrial parks to sugar factories and power lines.
Capital Controls
Ethiopia is also said to have very strong capital controls which means that it heavily restricts the outflow of forex from its country. They do not export much so it obviously makes no sense for them to allow their currency to be flexible. This makes their currency very stable (albeit artificially) insulating the currency from the effects of the drop in commodity prices. According to a report by the Global Center Ethiopia maintains a number of foreign exchange restrictions on payments and transfers that are not consistent with international standards, as determined by the IMF.For example, the Ethiopian birr is not freely convertible because the exchange rates are set by the government. Additionally, Ethiopia limits foreign currency inflows and outflows and the amounts that local and foreign individuals and corporations can hold. Though this out obvious downsides, the government is able to control what it imports.
Authoritarian Government
Now this may sound very contrary to the norm but research also suggest that the authoritarian Ethiopian government has been a major factor in the economic growth in the country. The world is ladden with countries that have attained exponential growth by leveraging on authoritarian regimes. For example, Singapore under LKY achieved a lot of the success it had due to his autocratic style of ruling. Analyst suggest that for this to work, the leader(s) must display a genuine intention and commitment to lead their countries to industrialization. This contrast to most African countries with authoritarian governments whose major impetus is to sit tight in power while looting their country.
The Chinese Ambasador to Ethiopia stated this clearly
“Ethiopia’s government and its military have managed to keep peace and stability in this country…That is the basis of any meaningful economic activity. Without that I don’t think the investors will come over here.”
Market incentives
The country is said to also offer market incentives to investors looking to invest in the country. The report indicates that the country offers security, low-tariff access to markets in nearby rich countries, as well as cheap labor.
The above points are quite instructive for Nigeria considering the experiment we have had with Democracy since 1999. Nigerians clamoured for Democracy in the hope that it will bring about political stability and pave the way for economic development. Except for Political stability, Nigerians have not seen economic development at a scale that is befitting of Africa’s largest economy. Gleaning from above, it appears the missing link is having a “strong” leader with a passion to lead Nigeria to the next frontier. Achieving this in a country where ethnic biases and political grand standing dominates is nearly impossible.
The post above and its ensuing comments, if any, is purely the opinion of the writer(s). It therefore should never be considered as an investment advise of any sort. If required, readers should please consult a competent professional financial adviser for any investment decision.