The political economy of industrialization and structural transformation in Ethiopia: a developmental state perspective

Abstract

Ethiopia has been strongly linked to the developmental state model of the East Asian brand since the advent of the new millennium, at least until the 2018 political reform. As the top EPRDF leaders stated, the model was adopted to bring rapid economic growth through active state intervention that would in turn eradicate poverty, accelerate industrialization and structural transformation of the economy, and eventually lift the country to a middle-income category. The objective of this thesis is to explore, using a political economy approach, the trends of Ethiopia’s industrialization and structural transformation agenda from the perspectives of this model. Data was generated from both primary and secondary sources and a triangulation method was adapted in the analysis and interpretation process. The findings revealed that the Ethiopian economy exhibits dual features in the post-2000 period. On the one hand, the country has achieved remarkable economic progress with GDP grew on average by 8.8% between 2001 and 2020, GNI per capita rose from 130 to 890 USD over the same period, and the poverty headcount ratio decreased from 44.5% in 2000 to 23.5% in 2016. As a result, Ethiopia has been cited as one of the fast-growing economies in the world and a ‘rising star’ in Africa in the past about two decades before it faced a setback due to internal political problems and the outbreak of the Covid 19 pandemic. On the other hand, abject poverty and food insecurity, economic stagnation, high unemployment, and aid dependence continued to be key challenges for the country. Such duality, though expected in the development process, is principally associated with the development policy domain and implementation capacity of the government. Ethiopia under the EPRDF rule had been following Agriculture Development Led Industrialization (ADLI) strategy. This strategy has somehow promoted agricultural productivity and improved the living conditions of the rural poor. However, it was failed to trigger industrialization due to the lack of agricultural modernization and its weak linkage with the urban industrial sector, among others. Though the regime had made a policy shift, since 2010, towards the manufacturing sector to push its industrial transformation agenda, the role of the sector in the economy remains insignificant. Its average contribution to GDP was only 4.9% between 2000 and 2020, which is too low even relative to its 10.9% share in SSA over the same period. Its share in total export is also stood at 12.6% between 2010 and 2018 as opposed to 22.5% in SSA. Similarly, its share in total employment is very low; only 5.2% between 2011 and 2017 in contrast to 6.9% for SSA in the same period. The stagnation of the manufacturing sector generally prohibited industrialization and sustainable structural transformation. The study also identified factors that contributed to the weak performance of the industrial/manufacturing sector. First, the regime, despite some reforms, could not create a bureaucratic institution that is staffed by people who are professionally and morally capable to design, guide and implement the country’s transformation agenda. This is the main cause for government policy implementation inefficiency and widespread corruption. Second, the regime was heavily relied on SOEs and politically/ethnically connected companies at the expense of independent domestic private capitalists, though the role of FDI in the sector increased gradually. This approach did not only challenge its relationship with genuine domestic private investors but also significantly affected industrial development and competitiveness. Third, the regime’s incentive policy for targeted manufacturing industries was not dynamic to address the financial problems of the domestic private sector. Moreover, the incentives provided were not usually linked to performance, though performance standards were in place. This had not only opened a door for a rent-seeking political economy but also incurred a high financial loss for the country. Finally, the regime’s ethnic-based nation building strategy was failed to create a ‘nation-wide public’. Political and economic marginalization (often based on ethnicity) coupled with the ever-growing unemployment of young and educated citizens had triggered social resistance against the regime, which eventually (in 2018) brought the termination of the regime and its development agenda. Learning from past mistakes and addressing these problems should be a priority policy agenda to ensure industrialization and structural transformation of the economy.