external influence in the making of development ... - FES Ethiopia

EXTERNAL INFLUENCE IN THE MAKING OF DEVELOPMENT
POLICY IN ETHIOPIA
Undertaken for the Friederich Ebert Stiftung
By
Getahun Tafesse
November, 2004

Introduction
Nations rise and fall. Empires emerge and vanish. Development spreads in one part of
the world whereas underdevelopment persists in another. Yet, revolutionary changes that
have occurred in some parts shift places to other parts of the world. The hot spots of
power change places accordingly.
There are some discernable shared patterns in how countries evolve over time. Each
period exhibits, however, unique features and characteristics. The current epoch is
characterized by information driven economic dynamism as opposed to physical capital,
i.e., information technology rather than motor technology drives economic progress.
What uniquely distinguishes current age from past is the force of globalization that is
unleashed by certain economic forces and new types of technologies. Although each
economic period in history has its own unique features, the current stage is probably most
distinguished in the sense that what happens in one part of the world affects events in
different parts of the world where no one seems to have absolute control over events in its
domain. So, this time around, not only the nature of technology but also the conditions
under which human beings and nations interact with each other have changed.
As a result, the current poor nations are doubly disadvantaged. Those at the power end
have the lead not only in terms of resources and technology, but also have powerful
channel at their disposal to shape and guide global trends to their advantage. The weak
points of poor countries are no more restricted to resources and technology but to lack of
sovereign control over their internal matters.
New global initiatives and structures are taking place at rapid rate driven by both
objective economic forces and deliberate policy actions. These in tern are influencing
bilateral and multilateral relations. The new forces of change that drive development
cooperation include the drive to establish global free trade system, promote democratic
systems, peace and stability (counterattack, therefore, terrorism and religious extremism),
and attain international development goals and environmental protection. It is not
surprising, therefore, the developing world is engulfed more and more with proposals of
policy and institutional ideas/measures than the rate of technology and resource transfers
it gets. The two types of transfers are also increasingly becoming intertwined. Transfer
of resources is mostly conditioned on acceptance and implementation of certain policies/
programs (with implications to adoption of specific technologies) by the recipient
countries. One can assert that development aid is being highly influenced by the
globalization process and as such bears now unique ‘globlateral’ dimension.
To the extent that there is some shared patterns on how countries evolve in development,
some lessons could be drawn from relatively more advanced economies. However,
sustainable development is likely to occur only if measures are grounded on objective
local conditions and historical traditions that take into account social, cultural and natural
factors. Unfortunately, the developing countries are increasingly loosing capacity to
shape and govern their own course of development.
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Hence, developing countries are doubly incapacitated. On one hand, they strive to keep
up with the acquisition and adoption of new technologies while, on the other hand, they
desperately try to grasp the implications of the new rules of the game as well as global
development and poverty reduction initiatives imposed upon them. The full long-term
implications of globalization are currently little understood. This paper attempts to
highlight what are the immediate implications of current global trends, as they relate
especially to local policy making process and the options countries such as Ethiopia have
to best respond to the new challenges and opportunities.
1. A Brief Overview of Historical Background
Economic governance in low income countries in general and sub-Saharan Africa in
particular has been influenced by external factors and bodies for long period in the past.
The nature and extent of this influence need to be highlighted in order to appreciate the
implications of current global trends.
In the developing world, planning as routine government exercise began only after the
Independence period. In the newly independent countries, planning began in 1950’ s and
1960’s and the focus at the time was in achieving rapid economic growth. After a decade
or so of desperate attempt to bring major changes in economic performances, which was
largely unsuccessful, increased focus began to be given to human resource development
such as education and health expansion, necessitated by growing population pressure and
demand for basic services. Human development at this stage was merely seen as a means
of achieving rapid economic growth.
African governments were very serious and optimist in taking charge of their
development process after independence. They soon became, however, vulnerable to
external shock, which happened in the form of sudden rise in oil price that has created
serious foreign exchange shortage and rapidly escalating inflation that hurt the wellbeing
of their people. Following the first major oil crisis that has happened in 1973, the
hitherto attempt to unleash dynamic development process from within was thrown back
to ground zero. It has not meaningfully revived since then and current global
developments are ensuring that it cannot easily do so in the foreseeable future.
The international financial institutions intervened in what was thought to be a rescue
operation from which the African nations came out being hostage to this day.
Interestingly, parallels could be drawn from early history on how great empires that
emerged at different points in time subjugate poor communities far away through high
indebtedness. Philanthropy and establishing favor including straight provision of credit
have regularly been used as forms of control and promotion of self interest throughout the
world history. This is not to deny that some aid is transferred on purely humanitarian
grounds, in which case, however, it has not mostly been put into effective outcome due to
local and external factors.
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1.2 Milestone External Influences in Ethiopia
Interference in Ethiopia's internal affairs by outside forces is a well established historical
fact and it has mostly been negative excepting genuine humanitarian relief. Nearby
neighbours with their own self motives and powerful countries from distant regions
driven by religious, economic and political interests have attempted at various points in
time to dictate internal matters of the country. Indeed, these have seriously undermined
local initiatives, which have mostly been curtailed in the bud. Below a brief summary is
made concerning the experience the country had in the past half a century.
In Ethiopia, the first national development plan was prepared during the Imperial regime
in the form of the First Five-Year Development Plan that spanned the years 1957 – 1961,
which according to Alemayhu (2004) constituted the first genuinely systematic
expression of nation-wide economic policy in modern Ethiopia. The Plan was followed
by the second (1963-67) and third (1968-1973) development plans. Alemayhu (2004),
states that, the Third Five-Year Development plan was, perhaps, the most sophisticated
planning exercise conducted up to that time, which he believes even compares fairly well
with any of the plans or strategies prepared since then in terms of its logic, depth, and
coverage.
A break in national policy making effort occurred in Ethiopia about the same time as in
countries of sub-Sahara Africa. The international shock that occurred in 1973 has a
special significance for Ethiopia because it has eventually resulted, among other factors
such as famine, into the overthrow of the Imperial regime and set a new era in the
country's history. Ethiopia did not embark on implementing structural adjustment
programs right away mainly because the new regime that came to power was a socialist
government that looked towards the East block rather than the West.
Many African countries, however, responded to the shock and consequent problems with
structural adjustment programs. Taking reform measures at times of crisis is probably
necessary but the outcome depends on the extent the measures are based on objective
realities and the degree they are controlled by the countries concerned. Nowadays, it is
widely recognized that ownership is an important factor for sustainable and successful
implementation. Ownership, unfortunately, has been lacking and, it seems, unlikely to be
gained easily in the foreseeable future too.
Ethiopia’s abandonment of locally based policy making occurred as a result of adoption
of the socialist system by the military regime that took power in 1974. Hence, another
milestone, that had special significance in the interaction of Ethiopia and other African
nations with the outside world is the Cold War period. In fact, right from the
Independence period, it has been one major factor that influenced the development
process of African nations.
It is important to realize that even after the Cold War was ended, a number of
governments providing aid still deploy similar mechanism to achieve goals that have little
to do with development, which at times, could even contradict development goals. These
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other goals may include advancing the commercial interests of their citizens, promoting
the language, culture or religion of their country, fighting drugs, crime and terrorism,
peace-making and other political objectives.
What is important to note is that African economies have never recovered fully from the
downward spiral they started to experience with the first oil price shock and heavy
dependence they began to experience with the international financial institutions in
particular and politically motivated aid in general. There are various reports that have
repeatedly shown that African countries' economic performances have never been as
strong as they were in the 50's and 60's. This is, indeed, true for Ethiopia as shown by the
analysis made in the following section.
Ethiopia’s economic performance over the past half a century
Ethiopia constitutes basically a rural society that earns its living from agriculture.
Overall the agriculture sector grew annually only by 1.89 percent on average during the
last forty years (1962 – 2002).
Forty Year Summary of Economic Performance
Imperial Derg EPRDF Overall
Agriculture 2.14 1.53 2.21 1.89
Industry 7.53 1.35 6.19 4.46
Dist. Services 8.27 1.26 6.84 4.81
Other Services 7.29 4.97 7.39 6.30
GDP 3.80 1.89 4.50 3.15
Getahun Tafesse (2004), "Agricultural Growth and Poverty Reduction in Ethiopia".
Average growth rates in agricultural percapita value added have been negative under the
past and current regimes. As a result the percapita agricultural value added has actually
declined by 0.9 percent during the same period.
Forty Year Summary of Economic Performance – in percapita terms
Imperial Derg EPRDF Overall
GDP percapita 1.49 -0.67 1.57 0.58
Agriculture percapita -0.04 -1.25 -1.36 -0.93
Indus. percapita 4.4 -2.1 1.56 0.80
One of the spectacular examples how externally initiated policy frameworks and strategic
directions create havoc to internal dynamics of development is witnessed in Ethiopia
during the socialist Derge regime. Signs of promising development initiatives that
emerged during the last period of the Imperial regime (such as mushrooming private
sector and mechanized agriculture) were curtailed in the bud by the socialist government
that came to power in 1974. The period that followed was characterized by stagnant
economy, deteriorating welfare conditions, suppression of freedom and abolition of the
private sector, all in the name of a socialist ideology that was imported from outside.
Under the socialist system, individual incentives were highly undermined and the private
sector was openly and formally discouraged. Prices were controlled, quota systems were
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in place in different areas of the economy and the market mechanism was made
ineffective. Moreover, central planning was exercised with little incentive left at local
level for crafting own agenda and strategies. No wonder, therefore, welfare situation
continuously deteriorated during this period.
The Derge regime was finally overthrown by the current government in 1991. Whereas
important changes with respect to economic management, political administration and
governance were made beginning in 1992 by the new government, an economic
dynamism that is long sought is not yet achieved. So, Ethiopia’s position compared to
the status achieved forty years ago is still worse in many key areas as shown in the table
below:
Ethiopia’s Selected Key Indicators
N0. Indicators 40 years ago Now
1 Per capita income (in Birr) 249.3 252.4
2 %age contribution of Agriculture to GDP 39.4
4 Size of Loan 371 million USD 4.5 billion
5 Loan as proportion of GDP 14 percent 91.3 percent
6 External finance as proportion of total budget 35
7 Proportion of population affected by drought 8.5 21
The diagram below beautifully captures the trend in wellbeing that is witnessed in
Ethiopia over the past four decades.
Birr
210
190
170
150
130
110
90
70
50
1960/61
1962/63
1964/65
1966/67
1968/69
Trends in Per capita Income in the Agricultural Sector
1970/71
1972/73
1974/75
1976/77
1978/79
1980/81
6
1982/83
Year
1984/85
1986/87
1988/89
1990/91
1992/93
1994/95
1996/97
1998/99
2000/01
2002/03

Since 1991, Ethiopia mainly followed and implemented economic reform programs
championed by the World Bank and the IMF. Unfortunately, the free market economy
championed by the capitalist ideology and which has been under implementation for the
last decade or so under the current government has also failed to take root. As will be
discussed in later sections, the performance of the economy in recent years has been very
dissatisfactory leading to deteriorating welfare conditions as confirmed during the PRSP
consultation and escalating size of drought victims.
There is now general consensus that structural adjustment programs have failed to bring
the promised results (in terms of generating economic growth and poverty reduction) in a
number of African countries. Some of the reasons why Structural Adjustment Program
has generally failed include:
1. The Program is characterized by “Top down” conditionalities, which are
driven by Washington Consensus;
2. There has been no “ownership” by countries implementing the program;
3. “Wrong economic fundamentals” that explain more how current highly
developed economic systems work as opposed to how poor economies can
revive and initiate a dynamic process from within;
4. The Program has failed to appreciate and take into account “ institutional”
factors
Ethiopia’s experience with the WB/ IMF resembles what is witnessed in other poor
countries but with its own specific features and characteristics. These are discussed in
some detail in subsequent sections. Generally, the market-led model of development,
now dominant in the DC, has not been, so far, successfully applied in the developing
world.
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2. The Current Global Context
Development cooperation takes various forms: financial or technical support for projects
and programs, provision of capital or infrastructural goods or credit on easier terms.
Humanitarian aid is the aspect of development cooperation directed towards bringing
speedy relief during emergencies, such as those caused by natural disasters or war.
Different milestones that guided development cooperation include: -
• Colonization ties
• Oil-price shock
• Cold War period
• Natural disasters
• Concern over the Environment
• Concern over human right, absolute poverty
• Fight against terrorism
• Globalization
2.1 Recent/ New Features
This section attempts to analyze recent and new features that are influencing external aid
and development cooperation. Some of the key features that have occurred beginning
with the new millennium include:
1. Increased open talk at WB/ IMF of the failure so far
2. The PRSP initiative
3. The MDG goals
4. Emphasis on Good Governance and Democracy
5. Emphasis on free trade and flow of capital
6. Declining development aid
7. Growing demand for financing global goals
8. Gaps in economic theory and modeling of current epoch
Here, only selected issues will be discussed to highlight the pressure that exists on less
developed countries in the face of global competition that has no fair ground and level
playing field. This is underlined by a growing discrepancy between declining
development aid and the simultaneous growth in demand for financing of global social
and development policy objectives. Efforts have stepped up, therefore, to look for new
sources of finance, new mode of resource channeling and identification of international
priority areas. Key global challenges identified include environmental protection,
poverty reduction, promotion of free trade, peace and security, and the stabilization of
capital markets by new global means.
Probably as a reflection of this, political support for conventional aid is declining
worldwide, except by Japan. The majority of industrialized countries have continued to
cut their development aid budgets in spite harsh criticism they are facing. According to
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WIDER (2004), total official development assistance (ODA) to sub-Saharan Africa
trended downward from the early 1990s. It fell substantially in the mid-199s, falling
from $16.9 billion in 1994 to 11.6 billion in 1999 and the region has received $1.4 billion
less of aid during 1993 to 2002 than during 1983 to 1992.
Globalization
In the previous era, two superpowers competed politically, economically, militarily, and
ideologically across a worldwide landscape. A new aspect of global trend after the end of
the Cold War period is the globalization process which initially promised peaceful
relationships based on market economics, free trade, instantaneous telecommunications,
and the liberal movement of financial capital across national borders.
Globalisation means that capital and jobs; pollution, crime and terrorism;
people, ideas and values, all move increasingly across national borders in
response to changing patterns of incentives and disincentives. What happens
in one country does have an influence over what happens in another, and the
aggregate effect of national actions may make all worse off in the long term -
a classic example being the progressive degradation of the "global
commons" as a result of unsustainable use of natural resources(Source to be
indicated).
Hence, the globalization process has also a non-economic side that is reflected in terms of
extra-territorial pollution, extravagant culture, exodus of talented people, trade in drugs,
criminal and other security threats, and new diseases. Some of these, of course, will have
eventual economic implications in the long-term. The implications of globalization are
many including fierce competition, increased inequality, erosion of national sovereign
power, and cultural invasion. The process is likely, therefore, to put additional pressure
on national policy making process.
Globalisation is good news for economies, firms and workers who are internationally
competitive, but not so good news for those who fall behind; as in any liberalised market,
the disciplines imposed on poor performers are severe. Given the extreme differences
which exist between rich and poor countries in the "starting conditions" which have such
an influence over competitiveness, globalisation is likely to exacerbate existing global
inequalities unless conscious action is taken to address these differences. Efforts to
"catch up" with industrialised countries in terms of competitiveness may also result in
falling labour and environmental standards as firms cut costs, thereby resulting in
increased environmental degradation, social exclusion, and economic exploitation in
industrialising countries (source to be indicated).
What is most unacceptable is the double standard and rigged rules that are punitively
targeted at developing countries. Countries like Ethiopia are not only isolated and
marginalized but are also unfairly targeted to loose and further slide down to
underdevelopment. For example, rich countries spend a billion dollars a day to heavily
protect their own markets so that exports from the poorest countries cannot come in. In
addition, these countries charge high import duties so goods from abroad are much more
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expensive, and they assign quotas to goods from abroad, so only a certain number of a
product from one country is allowed in.
The rich countries have also continued to subsidize their own agricultural sectors --
making it impossible for African farmers to compete, both abroad and in their own
countries. Agriculture is so subsidized in Europe and America that there is
overproduction, which means products are sold off cheaply in poor countries, crowding
out local produce which is not subsidized. It is ironic that international financial
institutions still insist that poor countries like Ethiopia should remove subsidies even
though rich countries can do what they like. In fact, European subsidies cost more than a
dollar per day per cow — more than many Africans earn in a day (Oxfam, 2002).
On the other hand, the problem of low and unstable commodity prices, which consigns
millions to poverty, has not been addressed seriously by the international community.
Note, for example, that a decline in coffee price in recent years has devastated many poor
countries including Ethiopia. According to Oxfam(2002 ) "persistent poverty and rising
inequality are standing features of globalization". It seems, therefore, that the
globalization process needs to be advanced slowly and carefully with deliberate measures
to mitigate its negative consequences. However, there are economic forces that drive
globalization which probably are out of anybody's control; and this comprises the most
worrying aspect of this new development.
Ethiopia hopes to become a member of the WTO. As an observer at the WTO since
1997, the government claims that Ethiopia has made efforts to acquaint and familiarize
itself with the WTO agreement and working of the multilateral trading system as well as
enhancing its negotiations skills. But joining the WTO is not an easy matter. It took
China some 15 years to become a full member. Other countries that applied for
membership years ago are still in the cold (Yohannes, 2004).
Because of institutional weaknesses, scarce resources, and a general lack of experience in
trade policy, least developed countries like Ethiopia find it rather difficult to implement
the wide-ranging and sometimes complex legal and policy obligations undertaken by
WTO members. The benefits and opportunities offered by globalization do not come free
of charge and that important costs can be involved. That is why decisions with respect to
integration with the globalization process have to be made carefully in order to minimize
its negative implications.
2.2 Gaps in Development Interventions
A factor that complicates current development cooperation is the fact that there are
divergent views on strategies for development and poverty reduction. In a situation
where developing countries are increasingly loosing capacity to become architects of
their own development visions and directions, lack of clear policy framework and poor
cooperation among development leaders threaten any meaningful prospect of sustainable
development in the foreseeable future.
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The end of the Cold War removed the prime motivating force behind aid and intervention
that persisted between the 1950's and 1980's - keeping and winning allies. It should also
be noted that economic reform programs based on neo-liberal free market philosophy has
not brought the promised result in majority of African countries. While the philosophy of
the left eventually vanished as an important alternative framework, unchecked western
type liberal capitalism has also proved ineffective, at least, in tackling the problems of
poverty. Hence, there seems to be an intellectual vacuum waiting to be filled. No
adequate economic theorizing or model has so fare been developed to argue and justify
an approach which should be put as the middle ground of the extreme left and right
paradigms that persisted in the past.
The following outstanding gaps characterize the existing policy paradigm:
1. Gap in economic theory and modeling;
2. Rapidly changing global context;
3. Dichotomy in a number of issues that is not yet resolved: state –vs-
market interventions, global –vs- national, liberalization –vs- subsidy,
equity –vs- efficiency, rural –vs- urban, primary –vs- tertiary
education, etc.
4. Implications of the “globalization” process, which are not fully
understood; and
5. Environmental challenges
Note the following alarming situation concerning the current global context:
- The level of Aid going to LDCs is declining continuously;
- Aid allocation is still guided by political interests;
- The international trade system is very unfair to LDCs;
- Double standard and rigged rules characterize policy dialogue between the
DCs and the LDCs
- The DCs heavily subsidize their economies;
- The market of the DCs is heavily protected through tariff and quota;
- The International Financial Institutions still put pressure on LDCs to
liberalize and open their economies & cutback their subsidies;
- There are divergent views on strategies for development and cooperation;
- New challenges (disease, climate changes, etc.) and rapidly changing
global context.
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3. How Important is the Outside World to Ethiopia?
To appreciate the implications of current global developments it will be helpful to see the
significance of Ethiopia’s interaction with the rest of the world. This can be seen in
terms of resource flows into and out of the country. Here, only limited indicators are
used whereas the country's linkages with the outside world encompasses various spheres
such as remittances, air transport, tourism, etc. which are not discussed.
3.1 Trade and External Resource Flow
Export Revenue
Ethiopia’s export structure is limited to few major items such as the supply of coffee,
leather and pulses. This picture has not changed over the past decades and export in
general suffers both from supply and demand side constraints. Moreover, the
significance of coffee as a major foreign exchange earning commodity has sharply
declined in recent years following a decline in coffee prices in the international market.
No wonder then the trade deficit of Ethiopia is widening rapidly.
Ethiopia's Export Items for Three Years " In USD"
S.N. Product 2001 2002 2003
1 Coffee 51,528,286.00 142,666,050.00 85,176,299.00
2 Hides and Skins 46,394,116.00 27,415,787.00 45,005,274.00
3 Gold 34,653,685.00 26,738,221.00 38,251,753.00
4 Oil Seeds 11,063,193.00 4,287,396.00 12,684,427.00
5 Sugar 5,989,721.00 2,577,847.00 7,911,490.00
Sub-total 149,629,000.00 203,685,301.00 188,729,243
T.E.E. for FY to EU 166,714,925.00 213,833,052.00 210,243,495.00
% of major products earning 89.75 95.25 89.77
Source: Eyob (2003): Economic Commentary, Fortune Newspaper, Vol 4. No. 189
Internationally, coffee prices have fallen by about 70 percent since 1997 (Oxfam, 2002).
It is claimed that for some countries, these losses have outweighed the benefits of aid and
debt relief. Poor households have suffered particular hardship.
In Ethiopia, in just a period of six years, the share of coffee in total export has been
halved from about two-third in 1995/96 to about one-third in 2002/03 (see Table 1.7 in
EEA, 2003/04 report). Coffee exports continued to decline as both prices and export
volumes declined. However this fall was more than offset by robust growth in other
merchandise exports and by a continued increase in non-factor service exports (largely
from Ethiopian Airlines). In aggregate terms, exports rose by an estimated 8.6% of GDP
between 2002/3 - 2003/4.
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Aid (grant)
Data on aid flows is incomplete and inconsistent; as a result it is difficult to ascertain with
certainty how much aid Ethiopia actually receives. One the one hand, large amounts of
aid are not captured in the budget, while at the same time, substantial aid that is
programmed is not actually spent in any given year. Report on actual level of aid is
likely to be, therefore, incomplete. Within these constraints, total aid in recent years, not
counting food relief, is estimated to be on average about $ 800 million equivalent p.a.,
representing about a third of total public spending.
According to the recent public expenditure review by the World Bank (2004), Ethiopia
currently receives approximately $ 1 billion equivalent in development assistance. In
addition there are major inflows of emergency food relief, which vary from year to year,
but have averaged US$ 265 million equivalent p.a. over the past 7 years. Approximately
65% of development aid is reflected in the budget. Using different data sources, it is
estimated that about $350-450 million equivalent p.a. is received off-budget.
There are three sources of information on aid flows: data as reported by MoFED;
estimates collected from donors for UNDP’s Development Co-Operation Report, and
OECD numbers on official development assistance. Of these, the UNDP data probably
represent the most complete picture.
Estimated Aid Disbursements to Ethiopia – Various Sources
(US$ million)
1996 1997 1998 1999 2000 2001 2002
UNDP i : aid 570 424 523 498 459 762 1047
Humanitarian 122 181 152 232 480 390 436
Total 692 605 675 730 939 1152 1483
OECD ii , aid disbursements 818 578 660 643 693 1080 n.a.
MoFED iii ,
aid disbursements (fiscal years)
Fiscal and calendar years
472 463 419 355 550 788 n.a.
i
Aid flows are reported in calendar years. Source: UNDP, “Development Cooperation Reports”, 1998 and 2003
ii
iAid flows are reported in calendar years. Source: OECD, “Geographical Distribution of Financial Flows to Aid
Recipients, 1996-2001”.
iii
Aid flows are reported in fiscal years, 1996 in the table represents fiscal year 1996/97, 1997 is 1997/98, etc.
Despite the inconsistency in estimates of aid, all sources confirm the increasing levels of
aid inflows in recent years 1 . On the basis of UNDP and other donor sources, we estimate
that development assistance has increased from about $400-500 million equivalent p.a. in
the mid-1990s to about $1 billion in 2002/03. This increase has been driven by two
factors: the return of bilateral grant donors who had largely withdrawn support during the
war with Eritrea, and substantial increases in budget support – particularly from the EU
and the World Bank.
1 Note that this is in contrast with declining level of aid to sub-Saharan Africa during the 1990s (WIDER,
2004, No.1).
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Note, however, that Ethiopia receives a significantly lower level of development aid than
most other low-income countries. Excluding humanitarian relief, aid inflows have
averaged between $7.50 and $9.00 per capita over the past decade, rising to about $12 per
capita in the recent past. This compares to an average of US$23 per capita for sub-
Saharan Africa, and of US$ 21 for all least-developed countries (source to be indicated).
Note also that about a third of external assistance comprises food aid; and of the balance
a substantial part consists of technical assistance, funding for donor-initiated activities,
or other forms of project aid which, while useful, do not directly finance the delivery
services or fund capital investments that the government would otherwise have to fund
out of the budget. Given that grant and loan constitute significant proportion of the total
public budget in a given year, the country is highly vulnerable in case of a sudden
withdrawal and termination of aid by the developed countries.
Aid (emergency/ food aid)
Ethiopia is one of the few countries in the world that still consistently receives substantial
quantities of food aid, and this somewhat distorts the aid picture. Such humanitarian
relief has averaged about $265 million p.a. in the recent past, and accounts for almost a
third of all donor inflows. The increase in frequency and severity of drought has also
spurred a sharp increase in food aid imports.
Population affected and assistance requirement
Year Pop affected Mt requirement
2000 7,732,335 836,800
2001 6,242,300 639,246
2002 5,181,700 557,204
2003 14,490,318 1,461,679
Getahun Tafesse (2004)
The substantial amount of food aid Ethiopia receives at least partially has displaced
developmental assistance particularly within the fixed aid budgets of donor countries.
Ethiopia is unlikely to avoid dependence on food aid in the short to medium term as selfsufficiency
will be achieved only over the long term as economic growth provides the
necessary means to address issues of absolute poverty.
Foreign Direct Investment
Ethiopia has not been so far successful in attracting foreign direct investment, despite the
government claim that it has put in place a highly liberal investment code. Whatever FDI
exists in Ethiopia, it is dominated by an individual investor accounting up to 80 percent
of the investment.
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FDI flow to Ethiopia
Year FDI Inflows in Million USD
1996 22
1997 288
1998 261
1999 68*
2000 80*
* Estimate
Source: UNCTAD (2001), WIR in Worku (2004) unpublished working paper.
FDI is alleged now to have touch down a record of 20 million dollars (Eyob, 2003). Of
the total global FDI flows in 2000, which amounted 1167.3 billion, sub-Saharan Africa
accounted for only 0.57% of these flows. Of this meager resource coming to SSA,
Ethiopian had a share of merely about 0.74 percent. No wonder, therefore, World
Economic Forum (1999) ranked Ethiopia among the bottom third of sub-Saharan
countries in terms of competitiveness ability in 1998 and economic improvement (1992-
1997) (Worku, 2004, unpublished working paper).
Loan
By the end of the Imperial period, Ethiopia’s debt was only $371 million, which
constituted 14 percent of the GDP at the time. The level of Ethiopia’s debt significantly
increased during the military regime and reached $8.8 billion constituting 146 percent of
GDP. Significant portion of the loan (78 %) was obtained from the former Soviet Union
and was largely related to procurement of armaments. The level of Ethiopia’s debt
reached at one point $10 billion under the current government which consequently was
reduced, first, to about $6 billion mainly as a result of debt cancellation the country has
obtained through Paris club and cancellation of about 80 percent of the loan from the
Soviet Union.
Financial resource flow into the country in form of loan in recent years mainly comes
from the World Bank and the IMF. Ethiopia’s access to loan from bilateral sources is
very minimal. It should be noted, however, that about 50 percent of the resources that
Ethiopia gets in terms of grant and loan, returns back to the donor and creditor countries
in various forms (source to be indicated).
Debt relief dividend
Ethiopia’s current debt service payments amount to about ETB 1.9 billion, or $225 m. in
the 2002/03 budget – representing about 10 percent of total public expenditure. Of this,
about a third is payable on domestic debt, and two-thirds on external debt.
Inflows of HIPC funds allowed an increase of about ETB 779 million in the 2002/03
budget. In 2003/04, projected interest and principal repayments on external debt, before
HIPC, would have been about US$ 180 million. HIPC debt relief reduces this to about
15

$85 million. Although the amount varies slightly from year to year, HIPC relief will
average approximately ETB 800 million ($90 million) annually over coming years. This
is equivalent to about a 10% increase in foreign aid levels. While this represents only a
4% increase in total public expenditure, in absolute terms, if focused on priority
activities, the amount can be very useful.
How does this compare with some key aggregates?
• HIPC Relief: approximately ETB 0.8 billion annually.
• Total public spending: (2002/03): ETB 19.7 billion.
• Total foreign aid: approximately ETB 8.0 billion.
• Humanitarian relief: average ETB 2.2 billion.
• Recurrent Education spending: ETB 1.8 billion.
• Primary education recurrent budget: ETB 0.8 billion.
Source: DAG report
In terms of total public expenditure it represents only a 4 percent increase. Nonetheless it
is potentially very useful if focused on some key areas: it is, for example, about equal to
the entire current primary education budget. ETB 800 million would finance the
employment of over 110,000 additional teachers, entirely eliminating the teacher deficit
and restoring student-teacher ratios for much of the balance of the decade; or more than
adequately fund a full-scale population/family planning program, as well as a major
improvement in immunization coverage and maternal child health programs.
3.2 External Shocks
Ethiopia’s economy is highly vulnerable to external shocks such as export or oil price
sudden changes. It has been already mentioned that the first oil price shock that has
occurred in 1973 has, in fact, been the immediate cause for the change of government in
Ethiopia that has been seriously undermined by the famine that has occurred about the
same time. The oil price shock has probably undermined the government capacity to
effectively respond to the famine. More recently, the decline in coffee price has seriously
impacted on foreign exchange reserve of the country and the welfare of coffee producers.
Modeling the impact of shocks shows that public expenditure is largely insulated - partly
because the neither oil nor agricultural exports directly affect revenues very much, and
partly because the large subsistence sector (which is most affected by drought), has little
integration with the cash economy.
Although the Ethiopian economy is very small, it is, however, fairly open to the outside
world. The above discussions have also illuminated the fact that the resource flow into
the country is substantial and that it cannot be underestimated. As a result, the country is
susceptible to changes that occur at global level. This underpins the fact that Ethiopia
cannot remain unaffected by the current globalization process. It is imperative, therefore,
for the country to study in some depth the opportunities and challenges posed by the
current global order.
16

4. Ethiopia's Dependence on Aid
Ethiopia's dependence on aid has reached a critical stage where the country cannot
survive without it. Even though information available on resource flow into the country
is inadequate, it is possible to depict the level of the country's dependence on aid.
4.1 Trend, Size and Source
Aid dependence has increased overtime: In EFY89 (1996/97), some 79 percent of
expenditure was financed by domestic revenues. Although domestic revenues have
grown steadily, external aid has grown faster. Thus, domestic revenues will finance only
62 percent of public spending in EFY95 (2002/03). 13 percent will be financed by nonearmarked
aid (non-project grants and loans, and HIPC relief), and another 21 percent by
project grants and loans. Some 4 percent of planned expenditure in EFY 1995 will be
financed by domestic borrowing. Thus, aid dependence has clearly increased over time
EFY
European Calendar Year
Financing of Public Expenditure 1995/96-2002/03 (EFY 1988-1995)
1988
95/96
actual
1989
96/97
actual
1990
97/98
actual
17
1991
98/99
actual
1992
99/00
actual
1993p
00/01
prov.
Birr million
1994p
01/02
prov.
1995b
02/03
budget
Domestic Revenue incl.
Privatization
6,966 7,886 8,381 9,551 9,983 10,599 10,477 13,004
Budget support 1,727 1,228 720 783 273 1,148 2,442 1,854
Project grants a/b/ 286 383 550 1,230 1,180 1,651 2,120 2,177
Project loans a/ 727 853 792 1,430 1,489 2,022 2,275 2,199
HIPC debt relief
Domestic borrowing
0 0 0 0 0 0 429 779
(excl.Residual
108 -421 592 1,514 4,975 54 309 500
Total 9,814 9,929 11,035 14,508 17,899 15,474 18,052 20,514
a/ According to expenditure tables; information from other sources differ slightly.
b/ Does not include relief aid
Note: /a The World Bank funded “Special programs” are not included, as they are generally off-budget. This line
includes an adjustment for discrepancies on external loans where expenditure reported by spending units differs from
the information compiled by the debt department.
Source: World Bank, 2004: Public Expenditure Review Report, Volume III.
It is also important to note that Ethiopia has poor capacity to absorb inflow of external
resources. There is substantial reported under-spending, for example, on the aid part of
the capital budget in any given year. This due to a number of reasons, (i) aid tends to
fund capital items, for which, as we have seen, implementation capacity tends to limit the
potential to spend; (ii) procedures for release and use of donor funds (for example with
respect to procurement, accounting, and reporting) often present barriers to their rapid
use, especially in the Regions, and, (iii) projections of disbursements have proven to be
excessively optimistic. There are undoubtedly real difficulties associated with physical
execution of capital works, systemic problems in complying with donor requirements for
accounting, procurement, and reporting, which are said to account for substantial delays
in utilizing funds (PER, 2003/4?).

As was mentioned earlier, about a third of external assistance is food aid; and of the
balance a substantial part consists of technical assistance, funding for donor-initiated
activities, or other forms of project aid which, while useful, do not directly finance
the delivery services or fund capital investments that the government would otherwise
have to fund out of the budget. The figure below depicts low in a relatively short period of
time, external assistance has increasingly dominated the capital budget.
ETB billion
Capital Expenditure by Source – EFY88-95 (1996-2003)
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
1988 1989 1990 1991 1992 1993p 1994p 1995b
Ethiopian Fis cal Year
Treasury External s ources
Source: World Bank (2004), Public Expenditure Review, Vol. III
Ethiopia has shown extremely poor record in utilization of foreign capital assistance.
This can be seen clearly in the following table.
Budget Execution Rates (consolidated over tiers of government)
EFY 1989 1990 1991 1992 1993p 1994p
actual Actual actual Actual prov. prov.
Recurrent budget
Agriculture 99% 96% 92% 96% 98% 89%
Health 94% 99% 96% 99% 100% 96%
Education 102% 98% 95% 96% 94% 95%
Gen Admin 102% 99% 101% 100% 104% 108%
Total recurrent excl. defence
Capital budget
100% 100% 109% 84% 101% 106%
Total capital 88% 67% 73% 78% 90% 102%
"Treasury" capital 105% 78% 76% 97% 88% 100%
Grant capital 27% 20% 26% 11% 68% 87%
Loan capital 74% 63% 100% 92% 105% 115%
Note:The table compares outturn (actuals or provisional actuals) against original budgets. The “over-spending”
therefore is not illegal, because budgets were generally revised during the course of the year.
The utilization of grant capital is particularly worrisome. The relatively better utilization
figures reported for the last two years in the table could also be an exaggeration as they
refer to preliminary estimates.
18

Source of Aid
Ethiopia receives a fairly low proportion of bilateral aid (exclusive of emergency relief),
and a generally higher proportion of multilateral aid. Over the past seven years bilateral
sources have accounted for about 38 percent of aid, (based on the UNDP data), and
multilateral sources for 62 percent. The largest multilateral donors were IDA (about 40
percent, or $257 million p.a.), the UN system (about $172 million annually; particularly
UNICEF and UNDP, with WFP providing substantial emergency relief), the European
Union (15%, $93 million p.a.), and the African Development Bank (10 percent, $65
million p.a.). Bilateral aid has averaged approximately $350 million p.a. over the past 7
years (although this includes a substantial portion of food aid) 2 . The largest bilateral
donors historically have been the United States, Italy, Japan, and Canada, followed in
almost equal shares by Germany, the Netherlands, Norway and Ireland.
The proportion of concessional loans in the overall aid mix has been growing in recent
years, which increased from about 20 percent in 1997 to about 50 percent in 2003.
Hence, the grant portion of external assistance has declined continuously. This poses
serious challenge to Ethiopia, which needs to rethink the long term implications and,
therefore, effective use of external resources.
Recently attempt is being made to improve donor coordination. The SDPRP provides an
opportunity for coordination of aid in support of common program, and Ethiopia is a pilot
country for the Donor Harmonization exercise. A High Level Committee is being
formed, with subsidiary sub-committees; and a Donor Budget Support group has been
formed to agree on a common framework and processes for untied budgetary support.
This is critical considering the complex agreements that the government is confronted in
any given year as depicted in the box below.
List of International Agreements that Ethiopia has been a party since 1990:
- The HIPIC initiative;
- The PRSP initiative;
- The PRSC program;
- The ACP-EU (Cotonou) agreement;
- The NEPAD initiative;
- The Nile Basin Initiative;
- The US - AGOA agreement;
- The EU - EBA agreement;
- The Millennium Development Goals;
- The Global Fund for HIV/AIDS, Malaria and Tuberculoses;
- The Bush Fund
- The Blair Commission;
- UN Global Conferences and Conventions (UNCED, UNFCCC, WSSD,
UNCCD, CWFCL, ICN, WFS, HABITAT I, II, ICPD, FWCW, UNCLDC,
GCSDSDS, WCHR, etc.)
2 Note all data averages over past 7 years for which data available, since year-to-year variations are great.
19

4.2 Dependence on Aid and Loan and Local Policy Making
First and foremost, it is necessary to understand the driving force behind development
assistance to unravel its possible development consequences. Early history is full of
examples how powerful kingdoms in the past used to control and dominate poor nations
through mechanism of high indebtedness (ex. Rome – Egypt Empires). One could draw
parallel conclusion and assert with some degree of accuracy that we are now at the stage
of an American Empire and somewhat less accurate European Empire, which dominate
small and poor nations to the fulfillment of their self interests. This is, of course, not to
claim that every external assistance is forwarded with some malicious intentions.
Development assistance is extended out of all kinds of motives, from well-considered
self-interest to a sincerely felt moral duty. In some cases, power and diplomacy are used
in delicate balance to deal with rough states. Until the end of the East-West conflict, geostrategic
considerations also played an important role. They no longer do, leaving both
an opportunity and a problem for development cooperation.
The opportunity consists in the possibility of allotting funds solely according to rational
criteria such as "good governance". Without such a guideline an effective and efficient
utilization of the available resources will not ensue. In times of financial and budgetary
belt-tightening as well as mounting social challenges in industrialized countries
development cooperation must also accept certain constraints. The rich countries, for
example, have reduced their aid budget by $13 billion between 1992 and 2000 (Oxfam,
2002). This situation compels cautious decision-making and efficient performance. It
means heaving to do more for the poverty-stricken in developing countries with fewer
means available. It also means developing countries should be cautious and smart in
maximizing the benefits of aid.
Pitfalls of Aid
For much of its history, Ethiopia has quite been an independent nation. The country has,
in fact, been a powerful kingdom that ruled communities in its surrounding area and
extending its power beyond the Red Sea. Early historians and explorers that came from
Europe and other parts of the world during the middle age have also clearly documented
how Ethiopia’s society and economic organization were superior and civilized than from
their own.
Dependence on Aid is relatively a recent history in Ethiopia. Before the last century,
Ethiopia’s request for external assistance was mainly in form of request for armaments
and help against outside aggressors. Many of the current non-governmental
organizations came to the country only following the problem of the famine that has
occurred in 1973.
20

Dependence on Aid could stifle internal dynamism
In most cases, some crisis or shock precipitate reform measures. For Taiwan (China),
and Korea, there was a sharp drop in U. S. aid three decades ago that precipitated serious
reform. In Indonesia, the decline in the price of oil in the mid-1980s had a similar effect.
An interesting recent case is Viet Nam. It was receiving about 10 percent of GDP in aid
from the Soviet Union until the Soviet Union began to crumble. The sharp drop in aid
was a serious shock to the economy, which we would normally expect to lead to a deep
recession. However, in Viet Nam, the shock was an important factor that galvanized the
leadership to undertake reforms -- reforms that led swiftly to an increase in domestic
savings that more than offset the drop in foreign aid. Thus, investment increased and
growth accelerated during the reform period. The Soviet Union curtailed its assistance to
Viet Nam, and three years later everyone there was better off.
In the case of Ethiopia, the fact that repeated crises in forms of drought and famine were
effectively tackled through emergency aid, which continued to exist in form of
development aid as well, probably explains partly why a dynamic process from within
has failed to ignite. A major problem related to this and one that is widely discussed is
the “dependency syndrome” that aid creates. Hence, aid undermines the will to develop
and with long dependence on external assistance, the inner-drive to develop will be lost.
Ethiopia’s development drive, for example, was significantly taken hostage during the
Derge period by the socialist ideology and associated aid particularly from the former
Soviet Unior. The socialist model of development simply was not based on realities and
objective conditions of the country. The economy continued to weaken under alien
model of development which was replaced yet by another external model, this time in
form of structural adjustment of the international financial institutions on whom the
current government became seriously dependent. In other words, there was high
probability that the drought problem, population pressure and erosion of natural resources
would have set by now internal development momentum that has a good chance of
ensuring sustainable development. Unfortunately, dependence makes our orientation to
be external focused rather than internal on seeking solutions to our problems.
Multitude of priorities and strategies
There are over fifteen UN Agencies as well as Bretton Woods Institutions(the World
Bank and IMF) that have established country offices to support actively the country's
development effort. There are also non-resident UN agencies that provide support to
various development programs in the country. Other multilateral agencies operating in
the country include the European Union, the AU, ADB, etc. In addition, bilateral
international aid organizations such as USAID, DFID, NORAD, GTZ, etc. provide
substantial resources thereby influencing development strategies and interventions.
Complex donor profile inevitably results into divergent focus areas and priorities.
Different strategic areas and crosscutting issues are usually identified by different donors
leading finally into incoherent development strategy and intervention framework viewed
from the national perspective.
21

Diverting energies and minds of skilled persons
Our policy makers are extremely busy trying to fulfill and meet donor requirements,
responding to donor queries including submission of timely reports, receiving donors,
reading donors' proposals, holding joint discussions, responding to donor
recommendations, and finally implementing donor initiated programs the activities of
which could include execution of studies, designing of projects/ programs, establishing of
institutional structures, organizing workshops, procurement, and implementation and
facilitation of projects/ programs, which of course would further be monitored and
evaluated. Key officials such as the Governor of the National Bank of Ethiopia and the
Minister of Finance are required, for example, to directly report to the IMF and WB
regularly on measures undertaken, progress made, and schedule of planned activities.
Key Ministers of the different sectors are also highly involved with the IFIs as well as in
dealings with the UN country team, European Union, UN-ECA, the AU, ADB and
bilateral donor agencies such as the USAID, DFID, NORAD, GTZ, etc. Aid also makes
the government more open to donors than listening to its own citizens and civil society
groups. Most importantly, the minds of the leaders of the country become preoccupied
and controlled by aid business.
Hence, Aid is a huge business that engages fully some key officials and experts and takes
significant time of other officials and experts. This, indeed, entails a huge direct cost, in
terms of human resource and time. The opportunity costs of the resources used (possibly
wasted) in aid business are also likely to be significant. Its particular negative aspect
refers to the fact that the country's possibly best minds are diverted from making
concentrated and independent analyses of our own local specific objective conditions and
priorities. Poor countries such as ours should probably restrict access by donors to
some key government officials and/ or assign in every sector officials that should
exclusively focus on local initiatives and in analyzing objective realities facing the
country independently. Such officials should formally be restricted from engagement
in donor initiated or led activities.
Sudden withdrawal of assistance
Major disagreements with donors on terms and conditions of aid and local actions
deemed inappropriate by donors could result into sudden withdrawal of assistance. The
immediate negative consequences on smooth functioning of the government apparatus
and implementation of programs are usually grave.
More aid has so far resulted into increased dependence. The developing countries
including Ethiopia are increasingly drawn into seeking more financial support sometimes
even just to run normal government business. Governments that initially carelessly
engage in grant and loan agreements sooner or later will find themselves trapped in
vicious circle of seeking more aid and higher dependence. They became easily
vulnerable, therefore, to sudden withdrawal of external assistance. In the case of
Ethiopia, this has happened during the termination of collaboration with the IMF in the
recent past due to disagreement with the government and the Ethio-Eritrea boarder
conflict during 1998-2000.
22

Aid conditionalities
Aid is expected to meet the interests of both the provider and the recipient, which may
not necessarily coincide. In almost all cases, aid is generally provided with a requirement
that it is spent on specific intervention. Commonly, the type of intervention is identified
by the donor on behalf of the recipient. This is initially conceived in development
cooperation frameworks, country assistance strategies, and memorandum of
understandings which mostly are donor driven.
Specific conditionalities are also attached to the delivery of specific aid or each portion of
aid. Sometimes conditions are put that all or part of procurements under the specific
agreement need to be purchased from the provider own country. Usually technical
assistance in terms of bringing experts from the provider country and assigning them to
work on the design and implementation of the aid supported program is also
incorporated. While in recent years there is some progress in using local experts by
subcontracting baseline studies, identification of gaps and program elements, the practice
is by no means well established.
The problems associated with aid conditionalities could be addressed through pool
funding mechanism and budget support. Funding through pool mechanism where donors
put their support in one basket and leave implementation decisions to the recipient body
is, however, rare. Donors are also hesitant to provide budget support.
The pitfalls of dependence on Aid included:
1. Aid is commonly delivered as "this is what you need to implement and this is
the money you need" rather than "what are your needs?"
2. Diversion of the best mind and occupation of authorities in the country
towards management of external initiatives;
3. Erosion of national capability to utilize resources such as the Nile river;
4. Government that is highly detached from the local society and reality;
5. Powerlessness of the people to demonstrate its force, ability and right to
engage actively in policy debate;
6. Duplication of initiatives;
7. Dependency syndrome;
8. Exposure to significant risk at times of sudden withdrawal of support;
9. Lack of sovereign control over internal matters.
In spite of the above mentioned problems external assistance is still necessary to solve the
problems faced by the developing countries. However, the motive behind aid and
modality of channel need to be significantly revised and changed.
23

5. International Trade Arrangements and Local Policy Making
The key issue concerning trade is whether neo-liberal economic policies are in line or
against policies that favour and meet the real and urgent needs of LDCs population. Well
managed trade has the potential to lift millions of people out of poverty. As stated in
Oxfam report (2004) on global trade, the problem is not that international trade is
inherently opposed to the needs and interests of the poor but that the rules that govern it
are rigged in favor of the rich. Current liberalizations policies, which focus on increasing
exports and satisfying the needs of corporations, actually work, however, in the opposite
direction, threatening those very needs. They are actually destroying livelihoods and
cultures, local methods of production, and access to food, seeds, water and land.
The WTO exists to promote liberalization and trade negotiators focus almost exclusively
on the speed and form of this liberalization. However, the liberalization process is
fundamentally flawed and works in favour of commerce but against the needs of families,
communities, small businesses and the environment. The costs include devastating
impacts on family farmers, peasants, fisherfolk, farm and food workers and consumers
everywhere, and severe environmental degradation occurs wherever intensive farming for
export is introduced. Priortising production for export over production for national and
local markets leads to local food scarcity. It divorces food, farming and fisheries from
their critical social, cultural and environmental contexts. It weakens, therefore,
governments' abilities to develop policies focused on local needs. It enables trade
interests of the largest corporations to prevail. (www.viacampesina.org, article 286).
Double standard and rigged rules
The US and the EU are targeting other countries' agricultural markets, using every
opportunity, including through negotiations in the WTO, bilateral and regional trade
agreements, to obtain lower agricultural import tariffs and more market access. This
policy is designed to drive the prices of key agricultural commodities down to below the
cost of production, which in turn drives peasants and family farmers off their lands.
(Prices have gone down as much as 57% below the actual cost of production). This
'predatory pricing' means that farmers can no longer afford to produce food even for their
own local markets. In many countries, especially in the South, peasant based production
is being replaced with a combination of cheap imports from other countries and
industrial, export-oriented production based on cheap labour and lax enforcement of
social and environmental standards. This behavior is hypocritical, since the EU and the
US are at the same time protecting their own markets, for domestic political reasons, in
ways that they argue others may not(www.viacampesina.org, article 286).
The biggest producers in the DCs are cushioned by increasing domestic agricultural
subsidies. This perpetuates the downward spiral of commodity prices by permitting big
farmers in the EU and the US to produce surpluses, which are then dumped on world
markets at low prices, further devastating rural peasant and independent family-based
economies, especially in the South. In the North, large parts of family farming and
peasant agriculture have already disappeared as a result. So, this is not really a North-
24

South conflict, but a fundamental social conflict that needs to be addressed. It is a
conflict between different models of agricultural production and rural development, a
conflict that exists in both the North and the South. It is a conflict between centralized
corporate-driven, export-oriented, industrial agriculture versus de-centralized , peasant,
and family farm-based sustainable production primarily oriented towards domestic
markets. (www.viacampesina.org, article 286).
While rich countries keep their markets closed, developing countries have been
pressurized by the IMF and WB to open their markets at breakneck speed, often with
damaging consequences to poor communities. As a result of pressure by the WB and
IMF including northern governments, the developing countries have rapidly opened up
their economies than the rich countries. As a result the average level of import tariffs
have been halved in SSA and South Asia, and cut by two-thirds in Latin America and
East Asia.
Africans in turn know they need to diversify their exports from basic crops such as coffee
and cocoa into products which earn more money such as clothes, textiles and
manufactured goods. But Africans could also earn more from basic crops if they were
allowed to process these before they export them. For example, Ghana can export raw
cocoa beans duty free to Europe, but a 25% tariff is imposed if they process that cocoa
before exporting it to Europe. But the processing (canning, roasting, labeling) helps a
country earn more money and develop its manufacturing base — and that allows its
economy to grow. While fair trade could be Africa's ticket out of the vicious cycle of
poverty, unfair trade rules like these trap Africa at the gates.
These double standards have to end. It is important to have rules — but not ones only
written by the rich. The World Trade Organization (WTO) is the place where these rules
are written. But of the 38 African nations which are members of the WTO, 15 nations
have no representative at all at the headquarters in Geneva, and 4 nations have an office
of only one person. Most rich nations have dozens of staff to make their case, and more
experts at home. Poorer countries often aren't able to participate fully or even analyze
what the effect of proposals on their economies would be
How do countries cope?
Various developing countries which are quite comparable in terms of their natural
resources (land, water, arable soil, minerals, climate etc.) and social structures have over
the past thirty years shown strikingly differing records of economic and social progress.
Similarly, countries facing some similar external factors, have faired differently in
development terms, because of internal dynamism differences.
This shows that historical burdens, adverse international economic conditions such as
falling raw material prices or other external factors, though important, do not have a
decisive impact on the achievement of a higher quality of life in the countries concerned.
25

There is broad agreement about the key policies that led to success in East Asia. The
basic story of macroeconomic stability, openness to foreign trade, and investment in
people is a familiar one. Good macroeconomic policies-- especially the open trade
policies -- made East Asia's good education policies more effective.
It is important to understand how good macroeconomic policies and good microeconomic
policies interacted to provide unusually strong benefits. The second issue is why the East
Asian economies adopted good policies. There is growing consensus about what
constitutes good policy. An important question now is why some countries adopt good
policies and others do not.
At the macro-level, the following policies and measures have proved effective:
A sound economic and financial policy designed to forestall high inflation rates or
overvalued currencies as well as limiting government activities to the tasks that the
market cannot handle results in economic growth based on allocation mechanisms in
conformity with the market economy.
Economic growth is a critical but not the sole requirement for success in the fight against
poverty. It is equally important to have a social policy that places particular emphasis on
meeting basic human needs. Education, training and extension services as well as
availability of credit foster self-reliance and initiative in people of all segments of society.
A further component is a social climate in which the door to full personal development is
open to everyone - regardless of gender, race, socio-cultural background or other
differences.
Many of the countries that are successfully integrating with the global economy - such as
China, Thailand and Vietnam - are not rapid import liberalizers. Conversely many rapid
import liberalizers have registered weak record in poverty reduction, despite the spirit
and letter of the WB - IMF policy advice.
With respect to SSA, the experience in the past was not encouraging. In 1950, Africa's
share of what the world earned from trade was 3%. In 2000 this had dropped to 1.4%
(excluding South Africa), despite the fact that Africa has 12 % of the world's population.
If Africa had maintained its 1950 share of world trade, today it would earn $70 billion
more in exports each year,, i.e. nearly six times what the region currently receives in
foreign aid.
Some studies have shown that improving education – while the trade regime remains
restricted – takes you to 3.8 percent average growth. Similarly, liberalizing trade while
education remains poor takes you to 3.8 percent. But in the long-turn, investment on
education is certainly the better option since it lays foundations that one cannot attain by
simply liberalizing trade. The combination of good education and open trade results in a
much greater impact, raising the average growth rate to 5.5 percent.
However, every year Sub-Saharan Africa, the poorest region of the world, spends $14.5
billion dollars repaying debts to the world's richest countries and international institutions
26

such as the World Bank and International Monetary Fund. Many countries in Africa
spend more each year on debt than on health care or education.
The $70 billion that African will generate through a one percent increase in its share of
world exports is approximately five times the amount provided to the region through aid
and debt relief. Oxfam (2003) reports that "apart from financial benefits, export growth
can be a more efficient engine of poverty reduction than aid". There is a belief that the
aid versus trade dichotomy is overstated. Aid can be used to promote the realization of
the benefits of trade.
Negative consequences of globalization may be numerous, ranging from financial
contagion and banking crises to illegal drug trafficking; but in the context of equity two
aspects deserve particular attention. First, some important benefits brought about by
globalization are typically not equally distributed. For instance, international capital
flows, including especially FDI, are generally highly concentrated, favouring some
selected countries and regions. Similarly, information and knowledge are not
disseminated evenly and freely, but tend to concentrate in countries and/or social groups
where general education levels are already high and advanced communication
technologies already exist, such as personal computers and access to internet.
International trade policies must support, not destroy, the national agriculture and rural
development policies that are desperately needed to stabilize domestic market.
6. Recent Socio-economic/ Development Performance in Ethiopia
Since coming to power in 1991, the government has implemented wide ranging economic
measures in collaboration with the World Bank and IMF. Reform measures undertaken
by this administration at the beginning included: lifting of prohibitions and restrictions
on the private sector, devaluation of the exchange rate which was followed by the
introduction of an auction market for foreign exchange; and most prices and trade items
were liberalized, to name only few. These reforms together with favorable weather and
large foreign largesse, at times helped the economy register an average growth of five
percent. A close observation of the economy reveals, however, most of the growth over
the past decade has come from services, which accounts for 40pc of the gross domestic
product.
Agriculture remains to be erratic, while the contribution of industry more or less
remained stagnant at a very low level. After about 12 years period of reform, internal
economic dynamism and sustained growth are not yet achieved. The economy failed to
surmount structural barriers and unleash vibrant investment and production activities in
spite of huge resource injection and policy initiatives in multiple fronts.
27

Summary of Policy Frameworks between the Government and the IFIs
- First phase of structural and economic reform program…..1992/3 - 1994/5
o Economic stabilization
o Financial, public enterprises and civil service reforms
o Promoting private sector and export
o Liberalizing the economy & reducing the role of the public sector
6.6 percent growth rate was achieved
8.2 percent inflation
- Second phase of economic policy reform……….1994/5 - 1996/7
o ADLI long term development strategy
o Rehabilitation and reconstruction
o Liberal external trade and foreign exchange policies
o Improving competitiveness of industry & agriculture
5.6 percent growth rate was achieved
- Three year ESAF (Enhanced Structural Adjustment Facility) arrangement with
the IMF………………………... Oct. 1996
- Third Phase of economic reform program…………… 1996/7 - 1998/9
o Poverty reduction through broad based growth
o Financial stability & further deregulation
o Rapid pace of structural reforms
o Strengthening human resource base
o Rebuilding the environment and physical infrastructure
- Second Annual ESAF arrangement ……. ……………Oct. 1998
- Poverty Reduction Strategy Paper……………………Nov. 1999
- Fourth phase of economic reform……………….1998/9 - 2000/1
o Accelerated & equitable economic growth
o Strengthening the legal & regulatory framework
o Fostering Ethiopia's integration with International economy
o Capacity building in public and private sectors
- Three-year PRGF (Poverty Reduction and Growth Facility)
……………………………………………….…March 22, 2001
- Second Annual economic and financial program… Oct. 2001 - September 2002
- WB's Poverty Reduction Support Credit (PRSC)………Sept. 2003
Moreover, recent macro economic developments in Ethiopia have been adversely
affected by a severe drought in 2002/03, the worst to hit Ethiopia since 1984/85. Real
GDP in 2002/03 is estimated to have declined by -3.8%, largely because of a fall in the
cereals harvest. Agricultural production is estimated to have fallen by 12% compared to
the previous year’s production, which was itself already slightly down from the bumper
harvest of 2000/01.
Poor economic performance is witnessed in spite of public spending in Ethiopia that has
increased substantially in the past 5 years, by 80 percent in nominal terms since 1997/98 3 .
This represents an increase from 24 percent of GDP in 1997/98 to 35 percent in 2002/03.
The increase was driven at first by higher military spending during the war years (1998-
2000). Defence spending has since declined, but spending in other areas has been
increased by a corresponding amount, leaving total spending at the new, substantially
3 In the low-inflation environment of recent years there is not much difference between real and nominal.
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higher, plateau level. The large increase in public spending was initially financed by
increased domestic borrowing in 1999/2000; but since 2001 it has been sustained by
substantially increased donor inflows (WB, 2004: PER).
Note also that the level of development aid has doubled, from an average of about $400-
500 million p.a. in the mid 1990s. This is due to two factors: the return of bilateral grant
donors following the end of the border conflict, and the introduction of budget support in
the form of grants from the EU and the re-introduction of quick-disbursing policy-based
credits from IDA and the African Development Bank. Aid finances about 37 % of total
public expenditure. Nonetheless, the absolute level of assistance is low relative to other
low-income countries (at about US$ 16 per capita excluding emergency relief, compared
to, for example, about $33 per capita for Burkino Faso, Rwanda, or Ghana) (World
Bank, PER).
Although the level of debt has been reduced in recent years due to debt cancellation
through the Paris club and 80 percent cancellation of the debt owed to the former Soviet
Union, the debt burden on Ethiopia is still very high. Ethiopia’s debt as proportion of its
foreign exchange earning capacity is around 940 percent. The proportion with its GDP
also reaches 150 percent.
Ethiopia undoubtedly qualifies to the HIPC initiative and has long reached the decision
and completion points as a result of which it has obtained substantial debt relief. Yet,
Ethiopia continues to pay around $325 million to service its debt every year. The high
debt burden in turn discourages the flow of foreign direct investment into the country.
Although there is an effort to resolve some of the existing impediments and boost nontraditional
exports, mainly in horticulture sector, through public private partnership, it is
also true that the country does not have much to trade with. This is better demonstrated
by the fact that the country during the past three years managed to tap less than one
million dollars from the African Growth and Opportunity Act (AGOA) trade initiative
offered by the U.S. government. On the other hand, some African countries on average
gain 50 million dollars. Lesotho is one mentioned often as one of the success stories in
taking advantage of AGOA exporting 300 million dollars worth of apparel and other
goods this year alone, while South Africa attributed the creation of 90,000 new jobs to
the initiative.
7. The way forward for Ethiopia
The responsibility for sustainable development at the national level should first and
foremost lie with the government and civil society in the country. Sustainable
improvement in the people’s quality of life can only come from within through strong
willingness and desire to develop. Favorable economic environment and fair conditions
of competition and trade will make a country’s efforts to that end easier, but external
donors and players can only support and facilitate sustainable development - they cannot
and should not attempt to replace a country’s own endeavors.
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Its economic, social and political fabric is of decisive importance for a country’s success
in developing itself. These are clearly and intimately known only to the citizens
themselves. External support should focus on building internal capacity and
empowering the government and the society at large. In order to avoid the pitfalls of aid,
some possible measures include the following:
• The government needs to accomplish its home work well and identify key strategic
areas of interest. It will then have to take firm stand on these and require donors to
uphold these to the point of turning down pledges of assistance;
• Donors should aim and the government needs to facilitate for increased channeling
of resources through civil society organizations, mainly seeking local initiatives;
• Given the enormous problems the country is facing the government needs to become
active and efficient in utilizing available external resources and global opportunities;
In particular, it has to be selective, avoiding to the extent possible new loans, and
ensure the utilization of resources generated in most productive activities;
• To ensure success, significant work is needed in shaping the attitude, morale and
initiative of civil servants as well as civil society groups towards strengthened inner
drive for a change through appropriate incentive structure and mobilization for the
common goal; and
• The use of Aid to advance foreign direct investment should be given focus by
allocating the resource, for example, in infrastructure development and upgrading of
the education and skill of the labour force in the country;
With respect to integration with the outside world and exploitation of appropriate trade
regime, the government should invest heavily in developing expertise and knowledge of
the global system. Some countries have expanded their export sector and adopted exportled
strategies and managed successfully to compete in the international market. But we
should not forget the fact that Ethiopia’s society is basically rural and traditional. Except
for minority few and glimpse of modernity in Addis and major towns, the rest of society
is largely uneducated, less healthy, hierarchical, etc. indicating the basic fact that the
country is ill equipped to join the rest of the world.
According to Gebre-Michael Paulos (2004), the objectives and economic benefits of
joining the WTO, for example, should be clearly stated quantified and analyzed. This is
indeed necessary as there are risks associated with globalization. For instance, rapid
opening of the banking and finance sector, without adequate financial capacity being
built, could result in financial crises as witnessed elsewhere in Africa and Asia. The
government of Ethiopia has so far made commendable job in resisting the pressure by the
IFIs in this respect. The government has excluded key areas from foreign direct
investment. These include transmission and supply of electrical energy, postal services
(except courier services), and domestic transport and shipping. Banking and insurance
services are open only to Ethiopian nationals.
Overall, the economic and social settings in the country need to be carefully studied and
used as a base to design policies to specific conditions in the country. There are only a
few general lessons that can be drawn from the experiences of other countries.
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Conclusion
Ethiopia has been quite independent for much of its history as a nation. But in less than
half a century period, the country was transformed into a hopelessly dependent country
that is likely to collapse without external assistance. It is very difficult to maintain full
sovereignty in social, economy and politics when a country is hopelessly dependent on
others to run its economy. The fact that significant proportion of the public budget is
financed through grant aid and loan is a very unhealthy sign. Moreover, even after some
debt relief that Ethiopia has recently gained, the debt burden is still quite high.
Ethiopia's current stake on the outside world cannot, therefore, be underestimated. This
is not to assert the simple fact that the country cannot remain an island in an increasingly
globalizing world. Rather to stress the fact that Ethiopia, in fact, is highly dependent on
the outside world for its very survival. Without some form of external assistance and
maintenance of external trade the country is likely to collapse from severe socioeconomic
disruptions. Ethiopia has to become, therefore, very smart to survive in the
current globalizing world.
First, there should be a firm understanding that the DCs are primarily committed to
protecting their own interests. It is not easy to find a justifiable reason to expect them to
sacrifice their interests to protect the welfare of people in poor countries such as ours.
What rationale could exist in objecting them for not doing so - religion, morale? which in
any case are at their will. It is probably, therefore, not reasonable to expect salvage to
come from the DCs for the problems of the LDCs including ours.
The responsibility for sustainable development at the national level should lie first and
foremost with the countries concerned. Measures to improve the people’s quality of life
have to be initiated from within and be maintained locally. External donors can only
support and facilitate such internal dynamism. They cannot and, therefore, should not
attempt to replace a country’s own endeavors. Hence, the role of the international
community should be to assist and support rather than to prescribe and impose.
This study has deliberately focused on the pitfalls of aid, which in practice is the main
reality. There are various assessments of Aid that have highlighted and quantified its
ineffectiveness in achieving the goal of development. The major reason for this failure is
likely to be the fact that aid has often followed political rather than development
objective. In addition, lack of ownership of development projects/ programs by aid
receiving countries and lack of coordination among donors are key factors that
contributed to aid ineffectiveness.
A typical feature of policy making at the national and international levels is the fact that
there are divergent views on strategies for development and poverty reduction. If on top
of this countries loose capacity to design their own policies and strategies, the confusion
that arises from multitude of initiatives aggravated by lack of donor coordination would
make almost impossible the implementation of consistent and well integrated
interventions.
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Given that Ethiopia's underdevelopment has been persistent and that the country faces
crisis situation from time to time, there is a need for major reform and demand for
capable leaders that respond in a prompt and coherent manner. Leaders that look
internally, dialogue with civil society groups and seek local solutions. There is nothing
wrong, however, in borrowing ideas about policies and institutions from other countries
around the world. East Asian countries are the most recent examples in adapting the
lessons of the successful economies in the developed world. However, a country's
economic, social and political fabric is of decisive importance for a country's success in
developing itself. Development should be rooted in local traditions, culture and history.
With respect to integration with the outside world, especially through trade and
investment, the weak initial position of the developing countries in general and Ethiopia
in particular needs to be appreciated and addressed. Ethiopia and other developing
countries should attempt to exploit and develop bargaining positions from the beginning.
In this respect, protection of the environment, genetic resources and the value accorded to
primary products, etc. are areas the developing world should collectively bargain with.
It is also important that rules and standards are genuinely negotiated rather than imposed
by the powerful countries. In this respect, each poor country should strive to protect its
interests and should not be complacent. A careful analysis of current global trade
arrangement calls for ending false promises by the DCs about helping the poor and
pressurizing them to open their markets.
Ethiopia should also protect itself against capital and skilled labour flight without
abandoning equity considerations by pursuing prudent macroeconomic policies, investing
in education and training, promoting industrial flexibility and innovation, and other
measures which keep the economy internationally competitive. By promoting an allinclusive
policy, the country should strive to initiate development dynamism from within
that is based on local history, traditions, assets and cultures of the people.
On the other hand, the fact that some countries have made considerably greater progress
than others, even though they all operate in the same world economic environment
indicates that there is some lesson to be drawn from similarly less developed countries.
There are also globally accepted basic necessities for a country to embark on sustainable
development. These include the promotion of good governance, peace and stability,
popular participation, equity, rule of law, human right and transparent and inclusive
policy and development process. Ethiopia should strive to make considerable progress
in these respects in order to ensure other efforts bear fruit on sustainable basis.
In conclusion, a given country has to be in charge of its development fate and resolve its
own problems. It should not wait to for the actions and decisions of citizens or
governments of other countries to solve its problems. Long lasting solutions to our
problems would only come from own decisions and actions rather than from outside. In
this respect the less developed countries and/or Sub-Sahara Africa in particular should
establish strive to establish their own parallel International Trade Organization that deals
actively with the WTO. The UN should have the responsibility to support such initiative.
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