Ethiopia: Scaling Up

• Author: David Andrews, Lodewyk Erasmus, and Robert Powell
• Position: Assistant Director/Economist/Senior Economist in the IMF's African Department

Assessing the impact of a dramatic increase in aid on one of Africa's poorest countries

Ethiopia, among the poorest countries in Africa, presents one of the biggest development challenges in a region beset by frequent drought and food shortages and hobbled by inadequate roads and communications. A landlocked country of about 70 million people, sandwiched between Sudan and Somalia in the Horn of Africa, Ethiopia has suffered bloody upheavals and famine over the past two decades and is still recovering from a bitter border war with neighboring Eritrea. It ranks in the bottom 10 of the UN's Human Development Index, a composite measure of per capita income, health, and education (in 2004, it was listed as 170th out of 177).

Donor countries have targeted Ethiopia for extra assistance because of its size and potential for growth. Symbolically, the United Nations has selected Koraro in Ethiopia as one of its test villages, singled out by economist Jeffrey Sachs in an experiment to monitor the scaling up of aid at the local level. On current trends, Ethiopia will not meet any of its UN Millennium Development Goals (MDGs) except for the target on primary school enrollment. Considerably faster economic growth, supported by a strong policy package, and higher inflows of net official development assistance (ODA) are therefore needed.

But will a dramatic scaling up of external assistance really help and what are the potential pitfalls of such an approach? After all, there is still considerable controversy surrounding the record of aid in many countries. Against this background, and in view of the possible lessons for other African countries, we undertook a study to assess the potential macroeconomic implications of scaling up assistance to achieve the MDGs. We looked at the potential impact of higher aid flows on the tradable goods sector and reviewed priorities for improving fiscal management and financial sector development. Our findings suggest that Ethiopia faces enormous challenges in boosting growth and meeting the MDGs, even with far higher levels of aid-in part because of the need to ensure that this aid is absorbed and used effectively.

Sources of growth

Reforms aimed at transforming Ethiopia from a centrally planned economy to a market-oriented one were launched in 1991 after the overthrow of the former pro-Soviet Derg regime, boosting the overall GDP growth rate to an annual 4.0 percent in 1991-2003 from 2.8 percent during the Derg rule (1974-91). The structure of the economy also changed, with the contribution of agriculture to real GDP falling from 57 percent in 1991 to 42 percent in 2003, while that of services rose from 34 percent to 47 percent. But the contributions of industry and the private services sector remained essentially unchanged, and Ethiopia's growth potential remained largely untapped.

During 1991-2003, agricultural value added was driven mostly by increases in the area under cultivation, rather than improvements in productivity. While the area under cultivation increased at an average rate of 5.7 percent a year, crop yields rose on average by only 0.4 percent a year. Despite attempts to diversify, coffee still accounts for one-third of total exports, and agricultural output remains very variable and dependent on the climate. Because...