China and India and Ethiopia final report - FES Ethiopia

A Survey of the Economic and TradeRelationships between China, India andEthiopia[Final Report]By:Ethiopian Economics Association/Ethiopian EconomicPolicy Research Institute (EEA/EEPRI)To:FES15 December 2009Addis Ababa, Ethiopia1

1. Introduction1.1. Background1.2. Objectives1.3. Research Methods1.4. Scope and limitations of the Study1.5. Organization of the Report2. Overview of the Ethiopian Economy and Review of Studies2.1. Overview of the Ethiopian economy2.2. Review of empirical studies3. Sino-Ethiopian and Indo-Ethiopian Relations and Cooperation3.1. The Evolution of Relations3.1.1. Diplomatic Relations3.1.2. Bilateral Agreements3.2. Development Cooperation3.2.1. Aids and Sector it Finances3.2.2. Loans and Sector it Finances4. Trade and Investment Flows4.1. Trade Flows4.1.1. Exports to China and India4.1.1.1. Trends in Exports and Rank among Trading Partners4.1.1.2. The Composition of Exports4.1.2. Imports from China and India4.1.2.1. Trends in Imports and Rank among Trading Partners4.1.2.2. The Composition of Imports4.1.3. Trade Balance4.2. Investment Flows4.2.1. Private Investment (FDI)4.2.1.1. Investment Flow4.2.1.2. Sectoral Concentration5. Chinese and Indian Companies’ in Infrastructure Development6. Impacts of the global Financial Crisis on the Relationship7. Conclusions and policy implications7.1. Conclusions7.2. Policy ImplicationsReferences2

1. Introduction1.1. BackgroundEthiopia has been trading with various countries across the world, however, itsmajor trading partners, both as destinations of its exports and origins of itsimports, remain concentrated Europe for many years. However, the trendseems taking another direction since recently. The major trading partners ofEthiopia which were, in order of importance, Saudi Arabia, Germany, Italy,Djibouti, Japan, USA, UK, China in 1997/98 have changed in recent years. In2006/07, for instance, the ranks of our major trading partner countries havetaken a striking different shape, China coming from the bottom to the top.Offering preferential treatment for each others` products has helped tostrengthen economic ties between countries. Such treatment will lead trade toflow to the direction it get the maximum out of transaction. In this regard, EU,USA, Japan and others have been offering quota and tariff free market accessfor exports originating from LDCs including Ethiopia. China has also startedoffering tariff free market access to exports from African countries, includingEthiopia.On account of the enabling conducive investment environment and generousincentive package to private investors, FDI flow into the country has beengrowing especially the FDI flow from China and India. According to theEthiopian Investment Agency (EIA), the number of registered Chinese andIndian investors is increasing dramatically compared with other countries.Following the downfall of the Derge regime, Ethiopia has managed to improveits relationship with the western developed countries. As a result, it has beenreceiving significant amount of development assistances and loans, of course,with political conditionalities of some sort.3

Owing to the low domestic capacity of Ethiopian contractors to undertake hugeinfrastructure projects, in the face of huge infrastructure development demandwhich is aimed at alleviating poverty and enhancing the productivity of theeconomy, Chinese and Indian companies has started taking lion’s share. Well,such big infrastructure works was used to be constructed by European basedcontractors before years.The emerging Chinese and Indian economies and their growing ties with therest of the world, especially Africa, has become a research agenda since 2000.Many of the studies have focused on scrutinizing the cost benefit of thegrowing Chinese African relationship. In this vein, though a lot has beenwritten they still lack the depth and breadth required so as to enable a country,like Ethiopia, to design a trade policy and strategy which is viable to regulatethe trade and ensure mutual benefit from the relations.1.2. Objectives of the StudyThe general objective of the study is to survey the economic and traderelations between Ethiopia and China and India.The specific objectives of the study are to:• depict the trends in the loans and assistances provided by China andIndia to Ethiopia;• assess the growing trade and investment relations between Ethiopia,and China and India;• identify factors which are likely to condition the trade flows and theirpotential impacts on the Ethiopian economy;4

• examine the impacts of the current global crisis on the relationship, and• put forward policy recommendations emanating from the findings ofthe study1.3. Methodology and Data SourcesThe study has collected secondary data from various sources. Descriptivestatistical technique is used to analyze the data. The results of the analysis arepresented in tabular and graphic forms with due discussions. Besides, tradesimilarity indices calculated for Ethiopia, china and India are presented anddiscussed along with empirical studies conducted on the relations betweenAfrica, china and Ethiopia, china and India.The major data sources of the study include Customs Authority (CA), NationalBank of Ethiopia (NBE), Ethiopian Investment Agency (EIA), Ministry of Tradeand Industry (MOTI), Ministry of Foreign Affairs(MoFA), Chinese and Indianembassies to Ethiopia in Addis Ababa and the International Financial Statistics(IFS), UNCTAD, internet and other sources.1.4. Scope and Limitations of the WorkThe survey will focus on the following issues:• providing a brief background on the Ethiopia along with the historicalaccount of the evolution of the Cooperation between China and Indiaand Ethiopia;• analyzing the trade flows between Ethiopia and China and Indiaincluding Export to and Import from China and India and hence thetrade balance and its implications for Ethiopia;5

• identifying the development opportunities that is created due to theimproving relationships and the challenges that may face Ethiopia;• identifying and assessing the characteristics of the FDI from China andIndia into Ethiopia,• identifying the major infrastructural development projects undertakenby Chinese and Indian based/owned contractors in Ethiopia and• trying to depict the impacts of the global crisis could have on therelationships .1.5. Organization of the ReportThe study report is organized into seven chapters. The first chapter isintroductory; the second presents about Ethiopian economy and review ofempirical studies; the third describes the development cooperation betweenEthiopia and China and India; the fourth draws on analysis of trade and flows;the fifth deals with Chinese and Indian companies in infrastructuredevelopment, the sixth presents impacts of the current global crisis on therelationship and the last wrap up the result with conclusions and policyimplications.6

2. Overview of the Ethiopian Economy and review of studies2.1 overview of the economyEthiopian economy has been suffering from various structural bottlenecksduring the Derge command economic management regime manifested by loweconomic growth, macro economic imbalances and negligible private (domesticand foreign) participation in the economy. Following the down fall of theregime in May 1991, the country has adopted a market economic system. Inorder to address those problems and transit to market economy, the countryhad implemented a series of Structural Adjustment Programs (SAPs) and hadstarted a set of institutional reforms since 1992/93 sponsored by IMF andWorld Bank.In order to consciously guide the development of the country, the governmentdesigned and pursued Agricultural Development-led Industrialization (ADLI)that focuses on productivity enhancement of the small holder peasants throughincreased utilization of improved seed, fertilizer and farming techniques. Withrespect to trade, the country is oriented outwardly favoring export sector.In the fight against poverty, the country has been implementing a series ofpoverty reduction strategy programs since the last 8 years and is currentlypreparing PASDEP II that covers the time period from 2010/11 to 2014/15.Owing to various policy and institutional measures, the performance of thecountry has shown significant leap in the last few years. Over the last 5 years,for instance, the real GDP grew by 11.7 %, 12.6 %, 11.6%, 11.5% and 11.8%,respectively. This growth is well attributable to a double digit growth7

witnessed, especially in the service sector averaging 13 percent in the last 5years. The growth in the agricultural sector has continuously declined from apeak of 16 percent in 2003/04 to 7.5 percent in 2007/08. The industrial sectorhas maintained a steadily 10 percent growth over the years under consideration(table 2.1).Table 2. 1: Sectoral Growth Performance over the period 1997/98-2007/08Average(1997/98-2007/08)2003/04 2004/5 2005/06 2006/07 2007/08Average(2003/04-2007/08)Agricultureand alliedactivities 4.7 16.9 13.5 10.9 9.4 7.5 11.64Industry 7.1 11.6 9.4 10.2 10.2 10.4 10.36DistributiveServices 7.2 6.4 14.7 14.2 16 15.2 13.3OtherServices 8.9 6.1 10.9 12.5 12.5 18.9 12.18GDP 6.2 11.7 12.6 11.6 11.5 11.8 11.84Per capitaGDP5.3 8.7 9.6 8.6 8.2 8.3 8.68Source: Ministry of Finance and Economic Development8

The structure of the economy has not remained unchanged for fairly longperiod of time. The share of the agricultural sector in the total GDP remainedbetween 45 to 50 percent. The share of the service sector including bothdistributive and other services has ranged between 40 to 45 percent. The shareof the industrial sector, however, has remained in the range of 10 to 15 percent.With a stagnating industrial sector, the transformation of the economy seems tohave been taking place between agriculture and service sectors (see figure2.1).Figure 2.1: Share of Major Sectors in Real GDPSource: Ministry of Finance and Economic DevelopmentEthiopian exports are dominated by primary agricultural commodities (over 80percent). The sector is concentrated in few commodities. The traditional exportgoods such coffee oilseeds, pulses, hides and skin, and chat account on averagefor about 76 percent of the total export earning of the country.9

Table 2.2: The Share of Commodities in the total ExportCommodity2003/042004/052005/062006/072007/08Five-yearaverageCoffee 37.2 39.6 35.4 35.8 35.9 36.8Oilseeds 13.8 14.7 21.1 15.8 14.9 16.1Hides & Skins 7.3 8 7.5 7.5 6.7 7.4Pulses 3.8 4.2 3.7 5.9 9.8 5.5Meat Products 1.3 1.7 1.9 1.3 1.4 1.5Fruits & Vegetables 2.1 1.9 1.3 1.4 0.9 1.5Flower 0 0 0 5.4 7.6 2.6Chat 14.7 11.8 8.9 7.8 7.3 10.1Bee's Wax 0.2 0.1 0.1 0.2 0.1 0.1Gold 8.1 7 6.5 8.3 5.4 7.1Others 11.6 10.9 13.6 10.7 9.9 11.3Total 100 100 100 100 100 100Source: National Bank of EthiopiaAccording to the recent seven-year average, Germany, Japan, Saudi Arabia,Italy and Djibouti has been the major destinations of Ethiopian exports with therespective share of 11.1%, 7.2% , 6.1%, 6.0 % and 5.7 %. Ten counties, mainly inthe developed world, has imported over 56 percent of the country’s export inthe reference period thereby indicating how concentrated the destination ofEthiopia’s exports geographically (table 2.3).10

Table 2.3 Export by Destination (share in %)2001/022002/032003/04CountryDjibouti 7 7 7.4 4.9 5.7 4.2 3.6 5.72004/052005/062006/072007/08Seven-YearaverageSudan 0 1.9 1.6 2 2.5 4.4 3.7 2.3U.A.R 0.5 1.6 1.5 3.1 2.9 2.6 3.8 2.3Germany 11.3 8.5 11.1 14.6 10.1 11.8 10.3 11.1Italy 10.1 4.4 5.4 5.2 5.5 6.3 4.9 6.0Netherlands 1.4 3.4 15.5 3.5 3.9 4.8 6.2 5.5U.S.A. 4.3 8.2 5.2 5.3 4.8 5 6.7 5.6China, P.Rep. 2.4 0.5 1.8 5 13.4 5 4.3 4.6Japan 7.6 4.5 10.7 7.6 7.8 6.1 6.3 7.2Saudi Arabia 5.9 4.4 6.6 6 6.1 6.2 7.3 6.1Rest of the 49.3 55.5 33.3 42.8 37.3 43.7 42.8 43.5WorldSource: National Bank of Ethiopia and staff computationsThe merchandise imports showed persistent and accelerated growth during thelast six years from Birr 16 billion in 2002/03 to Birr 58.5 billion in 2007/08.. Onaverage, it grew by 33% per year during the last five years.Ethiopian import constitutes finished good, capital goods, consumer goods,semi-finished goods and fuel constitutes the major share in the total import billwith respective share of six year average of 32.3 %, 29.3 %, 17.3 and 15.8 %. Itshows that the share of capital goods are increasing while that of consumergoods declining in the reference period (table 2.4).11

Table 2.4: Major Imports (Share in %)2002/032003/042004/052005/062006/072007/08Six-yearAverageRaw Materials 1 1 1 2 3 4 2.0Semi-Finished 15 17 18 19 15 20 17.3GoodsFuel 15 12 18 15 17 18 15.8Capital Goods 30 34 33 33 36 28 32.3Consumer Goods 35 35 27 29 26 24 29.3Miscellaneous 4 2 2 2 3 6 3.2Total Imports 100 100 100 100 100 100 100Source: National Bank of EthiopiaEthiopia has been trading with various countries across the globe but withdifferent degree. The country has been purchasing a significant part of itsimports from Saudi Arabia, China, Italy, USA, and United Arab Emirates withrespective shares of 11.8%, 11.5% and 7.14 %, 7.06 and 5.8 % respectively in thelast eight years. While the share of China and United Arab Emirates kept onincreasing, the share of Germany, USA and Italy kept on declining (Table 2.5).Over 70 percent of fuel import to Ethiopia is exports of Saudi Arabia.Table 2.5: Imports by Origin (Share in %)Country2000/012001/022002/032003/042004/052005/062006/072007/08Eight-yearAverageSudan 0 0.1 0 0.4 1.4 0.4 1 2.1 0.7U.A.R 1.1 0.9 6.9 9.5 6.1 6.7 5.2 9.8 5.8Germany 4.9 5.3 4.3 3.8 3.3 3.9 3.7 3.3 4.1Italy 7.7 8.9 6.9 10.7 4.2 5.8 7.7 5.2 7.14Russia 1 0.4 1.4 1 1.2 0.8 1 1.5 1.0U.S.A. 5.1 9.6 6 8.6 10.6 8.4 3.8 4.4 7.0612

China, P. Rep. 7.1 8.4 9.3 10.3 11.5 13.2 16.6 15.6 11.5Japan 5 3.5 6.5 4.5 3.3 3.4 6.2 4.9 4.7Saudi Arabia 4 13.6 8.2 8.4 17 14.9 15.1 13.2 11.8Rest of the 51.4 36.9 37.3 31.5 32.9 33.9 32.8 36.3 36.6WorldSource: National Bank of Ethiopia2.2 Review of Empirical StudiesIn recent years, the two largest countries in Asia, China and India, have becomeincreasingly important players in the global economy. Their rapid growth andincreased openness since 1990s has led to concerns in both developed anddeveloping countries. But up to now no attention has been paid to researchtheir impacts on Africa, despite the fact that trade between China and Indiaand Africa has recently grown significantly. Both countries have also emergedas sources of FDI in the continent (Boardman, 2007).In fact, there could be direct and indirect impacts of the growth performance ofChina and India on Ethiopia. The direct impact, can take a number of differentforms. First, there may be an increase in exports from Ethiopia to bothcountries. Secondly, Ethiopian imports from both countries are likely toincrease significantly. Thirdly, there may be increased competition betweenChina and India and Ethiopia in third markets, which could have negativeimpacts on the Ethiopian exports. Finally, there may be effects on FDI toEthiopia, either negative, if investment is diverted to China and India, orpositive if China and India becomes significant sources of FDI in Ethiopia.The indirect positive impacts of the Chinese and the Indian economic growthon the Ethiopian economy can materialize through the following channel.. Thegrowth of both countries will increase the demand for primary commodities inChina and India which, in turn push up prices of these commodities. Thus,13

since Ethiopia is primary commodity exporting country, the growth of theChinese and Indian economy will benefit the country from increased prices ofthe commodities.Historically, as each country developed and labor costs rose there was a shiftfrom labor intensive production to more capital intensive production and ashift in output as well from simple electronics to more heavy industrial outputas well as more sophisticated electronics. This continual graduation in theproduction processes and output left niches open which were taken up bysucceeding nations that had lower labor costs, this was often assisted by therelocation of industry from high labor cost to low labor cost countries.Despite the fact that China and India produce sophisticated high technologyexports, the 770 million rural Chinese and 788 rural Indians are in competitionwith Africa’s population for the production of labor intensive exports.According to Carvallo Chamon and Kremer (2006) quoted in Mwangi WaGithinji (2007) 1 Africa’s non traditional export opportunities will remain poorwhile labor is cheap in China or India. China and India are not climbing up theladder and leaving the lower rungs empty for occupation by other countries,but rather are stretching up the ladder occupying the upper reaches while stillfirmly resting on the lower rungs.According to Gerald Schmitt (2007) Ethiopia is categorized under resource poorcountries with few industries and a low degree of manufacturing andprocessing. Thus, it is a net importer in its trade relationships with China. Thegoods they export to China are restricted to agricultural products. It does notpossess broad manufacturing and processing industries. Therefore, they1Mwangi Wa Githinji (2007) “Is that a Dragon or Elephant on Your Ladder: The Potential Impactsof China and India on Export Led Growth in African Countries”14

usually appreciate the import of cheap manufactured products from Chinamaking these goods accessible for a large part of the population. But in the longterm, this trade relationship limits their development perspectives toagricultural production. Given the tendency to wealth accumulation in Chinaand the emergence of a middle class, we can assume that the export share ofagricultural products from Africa to China will continue to rise. This will atleast provide a basis for the further development and investment inagricultural production in Ethiopia. In the long run, other developmentopportunities might appear, especially in the fields of food processing and lightindustries.Among similar works on the issue, the study by Alemayehu Geda(2008) titled,“Scoping Study on the Chinese Relation with Sub Saharan Africa: The Case ofEthiopia” can be cited. His study attempted to give the scope of Chineseengagement in Ethiopia. He has indicated strengthening Ethio-Chinese relationin the last five years, particularly in the areas of road construction, supply ofmanufacture goods, telecommunication and installation of big electric powerstations by Chinese companies.He attributed the success of Chinese firms in this areas to the political ties theirgovernment created with the government of Ethiopia, the low initial biddingprice by Chinese firms offered in bidding for projects, the self financing options(sometimes referred as ‘vendor financing’) that they give to the Ethiopiangovernment owing to the support they get from the Chinese government, aswell as the relatively lower level of skilled Ethiopian personnel (in terms ofnegotiation, technical and managerial skill) as well as poor institutionalcapability of the Ethiopian experts in various ministries who are dealing withthe Chinese firms.15

He also noted that there are some groups that gain from this Ethio-Chinaengagement as there are others that lose from it. The former category includesconsumers, commercial traders who bring manufactured consumer goods fromChina for sale in Ethiopia, entrepreneurs engaged in establishing small scalefactories and service centers by buying machineries from China. The possiblelosers group includes small scale firms engaged in clothing and footwearsectors and their employees; traditional suppliers and contractors in the road,electric power and telecommunication sectors of the economy, which areinvariably firms from industrialized countries.Another key research in this vein is the one conducted by Gedion Gamora(…)titles, “Ethiopia and China Political and Economic Relations:Challenges and prospects after 1991” he analyzes post 1991 Ethio-Chinapolitical and economic relations as well as challenges and prospects.He came up with factoring in a number of variables that contributed for thegrowth of the bilateral relations. One, Ethiopia needs China for economicassistance; as an alternative source to the west and China’s development isgenerally considered as a role model for Ethiopia to follow. Two, China alsosupports Ethiopia on different international issues. On the part of China, thereare also several factors egging China to look towards Ethiopia especially interms of Ethiopia’s strategic importance and market potential. Three, Ethiopiacould be a commercial launch pad for Chinese companies and China is alsogetting diplomatic support from Ethiopia for its policy on Taiwan amongothers. Four, there are also common factors both from Ethiopia and China’sside which have enhanced the bilateral relations.He also noted major challenges including, one the balance of trade is highlyslanted in favor of China. Moreover, China is coming in as a donor and Ethiopia as16

a recipient much as it has been with the west. The scales are thus already tipped inChina’s favor making it difficult for Ethiopia to bargain a genuine partnership.While this might be slightly different from the traditional western domination, it isstill a form of domination. China’s stance on Ethiopia is likely to harden in the longrun, with more manipulation and exploitation and less benefit for the country. Thesoft stance remains as long as China is settling in.Second, dumping of low priced export goods such as textiles and clothing,industrial products, electronic devices and machines, which find a hugedemand, is particularly an acute problem for Ethiopia. It has forced domesticEthiopian producers out of business because they cannot compete on price.Third, China has become a major player in the field of infrastructure (roads,dams and power plants etc) and over 60% of all construction (roads ,dams etc)are undertaken by Chinese Companies who have won tenders. It has the effectthat the Chinese companies are underbidding local companies. This enablesChina to gain political influence, which often opens the doors to commerciallyor strategically more attractive business in other sectors too.Fourth, politically, one of the set of incompatible national interests in therelations between Ethiopia and China is the ideological variable. However, inthe current Ethio-China relations ideology is not a big deal unless there will beany new change in the future.In the same way, the bright prospect of the relationship could be explained bydifferent explanatory factors from Ethiopia; China and both sides.On the Ethiopian side: one, whenever Ethiopia sought Chinese aid, loan,investment and arms, the latter has responded positively by providing debtreduction and technical assistance to Ethiopia with no political strings attached.17

Two, Ethiopia considers China as an alternative trade partner to the West. Chinabecame the first trade partner for Ethiopia in the year 2006 and hence Ethiopiacalled China its most reliable trading partner.Third, Ethiopia takes China’s development as a role model. A very practical yetprofound reason for the appeal of China’s model to Ethiopia is its historicachievements in economic reform and national reconstruction and its successfulleap from a backward country to an economic power house. Moreover, all of thesehave been accomplished at an unprecedented pace.Fourth, Diplomatically China has always sided with Ethiopia at internationalforums like the UN and other economic forums.China has also important interests in Ethiopia and hence attached importance todeveloping its bilateral relations with Ethiopia for many reasons: Firstly, as thesource of the Blue Nile, the seat of the African Union and the meeting groundbetween predominantly Muslim North Africa and the Christian South, Ethiopia’sis situated at a strategic location and plays important role in African politics.Therefore a number of exchange and visits by high level delegations have beensuccessively conducted between the two since 1991.Secondly, the need for market: with a population of 81.5 million (according to UNpublications), Ethiopia offers potentially a very lucrative market for Chineseproducts, trading and investment opportunities.Thirdly, China’s interests in Africa and Ethiopia are guided primarily by economicimperatives using the two in general as a commercial launch pad. In this respectChinese engagement is little different from western multinationals. In the wake ofincreased diplomatic and commercial traffic between China and Ethiopia, the latter18

has become a favored testing ground in which aspirant Chinese multinationals cancut their teeth.Fourthly, the growing need for raw materials and oil to feed its double-digiteconomic growth: Ethiopia is one of the largest countries on the African continentof area and population and is believed to have significant natural resourcesalthough very few have been identified.Common factors also enhanced the bilateral relations between Ethiopia and China,post 1991: China and Ethiopia have cooperated closely and supported each otherin international affairs.Second, to support the African Union’s effort to strengthen unity and integrationon the continent, the PRC has demonstrated a commitment to strengthen itsbilateral relations with Ethiopia and, more broadly, in Africa. China-Africacooperation is another forum which has strengthened the bilateral relationsbetween Ethiopia and China.Third, Convergence on human rights: putting economic rights over political rightsand assigning the highest priority to the right to development is one of thecommon factors which enhanced the bilateral relation. Consequently, it can beargued that the relations between Ethiopia and China have progressed well since1991, after EPRDF came to power, in various fields.M o n i k a T h a k u r(2009), has conducted a study titled :Chinese Engagement inEthiopia, and come up with the following conclusions. Overarching judgments asto whether China’s engagement is a blessing or a curse for Ethiopia are stillunclear. What is certain is that the country can derive much from China’seconomic engagement. Ethiopia must seize the enormous opportunity that China’sincreased engagement presents, and it will need to effectively invest its proceeds inits own development, including improving agricultural production, expanding its19

manufacturing and services sectors, and generating sustainable economic growthover the medium and long term. This will enable the country to help alleviatepoverty and create equitable social development. As a ‘developing’, buteconomically robust country, China has limited resources to invest abroad — areality that the Ethiopian government realises. Therefore, China is not necessarilyviewed as a panacea for Ethiopia’s economic and social development problems.However, China can serve as both an appealing economic model and a potentialcatalyst for socio-economic development through its focus on and investment ininfrastructure development.He emphasized the importance of taking note that China’s activities in Ethiopia,and in Africa in general, are part of its continuing emergence as a global power,and as such are no different from what major powers traditionally have done,although the rhetoric of a political discourse based on ‘solidarity’, noninterference,sovereignty and anti-imperialism adds a nuanced dimension totraditional great power strategies. Also, in its relations with Ethiopia (and othercountries in the continent), China is pursuing multiple objectives; and therefore itcan no longer be expected to subordinate its commercial and strategic interests, asWestern countries have done and continue to do. Nevertheless, it should be notedthat China’s and the international community’s lack of censure of the currentEthiopian regime’s stalling of the democratisation process, human rights violationsand closing up of the political space could have troubling long-term politicalimplications.Mwangi Wa Githinji (2007) showed the extent of competition that Chinese andIndian exports give Ethiopian exports to the world. And what has been thedirection of change .i.e., are exports of Ethiopia becoming more dissimilar orsimilar to those of china and India. Export similarity index measures used tocompare the degree of similarity between exports from two countries20

While the ESI correctly shows that there is little similarity in the export structure ofchina and India and Ethiopia , as one would expect given that Ethiopia exportsmostly primary commodities and china and india exports more manufactured andprocessed goods. The modified index shows that Chinese and Indian exports to theworld provide significant amount of competition to the Ethiopian exports.However the competition from china is less severe than the competition fromchina.Since china is growing so much more rapidly than the African countries we wouldexpect the similarity index to become at least slightly less similar. In fact the case isquite the opposite. Between 1995 and 2003 Ethiopia faced more competition for itsexports from both china and India.Imports from the world or China are almost 100 percent similar while Importsfrom the world or indie is 75.7 percent similar. In 2003, however, in 2003 thesimilarity for china has decline by about 12 points while that of India has slightlyincreased by about 1.6 (table 3).Table 3.2 : Export and Imports Similarity indices1995 2003 Change(1995-2003)A. Export similarity index1. Exports to world compared with china36.56 71.49 34.931. Exports to world compared to India96.84 99.57 2.73B. Import Similarity Index1. Imports from the world compared to China99.76 87.81 -11.952. Imports from the world compared to India75.72 77.33 1.61Source: Mwangi Wa Githinji, (200721

III. Sino-Ethiopian and Indo-Ethiopian Cooperation3.1 The Evolution of Cooperation3.1.1 Diplomatic Relationsi) ChinaBoth China and Ethiopia are countries with long history, ancient civilizationand splendid culture. The exchanges and friendship between the Chinese andEthiopian people can be traced back to ancient times. According to historicaldocuments, since the Chinese Qin and Han dynasty, which is about 1st centuryA.D., ancient China had already established some indirect contacts with Axumkingdom and other African civilizations through the Balkh in Eurasia andParthia in the Persian Plateau.In the 1930th, the Chinese people provided political and moral support andsympathy to the Ethiopian people for their fight against aggression of theItalian Fascist and struggle for the national independence. The then ChineseGovernment issued a statement to express its support.During the Second World War, China and Ethiopia recognized each other. TheChinese Government had been rendered with precious support and sympathyfrom Ethiopia in her struggle for recovering the legitimate membership in theUN. Since 1963, Ethiopia had repeatedly voted to support China in the UNGeneral Assembly sessions.In 1964, though without diplomatic ties, Chinese Premier Zhou Enlai visitedEthiopia. That successful visit further enhanced the mutual understandingbetween the two countries and peoples.22

On November 24th, 1970, the People’s Republic of China and the FederalDemocratic Republic of Ethiopia established the formal diplomatic ties. Afterthe establishment of the diplomatic relationship, the two countries have beendeveloping friendly cooperative relations smoothly on the basis of mutualrespect, equality and mutual benefit. Withstanding changes of the times anddomestic situations in each country, the bilateral relations keeps developingand advancing sound and smoothly.After the setting up of the diplomatic relations it has seen an overall goodrelationship between the two countries. During the period from 1977 to 1982,the relations of the two countries once went deteriorated. And by and by itcame to be normal after 1983. In recent years, the relations between the twocountries maintain a healthy and continuous development tendency withceaseless mutual visits at high levels and increasing intercourse of personnel.Since the Ethiopian People’s Revolutionary Democratic Front (EPRDF) cameinto office in 1991, the two countries have broadened and intensified themutually beneficial cooperation in various fields, thus bringing the bilateralrelations on a rapid, all-around and healthy developing track.Since establishing diplomatic ties, the two countries have witnessed closepolitical exchanges and frequent high-level visits. The exchange visits of themain leaders from both sides have promoted bilateral relations to a new high.According to China’s Africa policy which is published in January 2006, theChinese government focuses on the following fields: expanding Africa’sinfrastructure; contributing to agricultural development and the modernizationof agricultural production; supporting social development in the health andeducation sector;- contributing to peace keeping missions in Africa under the23

mandate of the UN and/or the AU, and consolidating the cooperation in theUN framework.ii) IndiaHistorically inter country relationship between Ethiopia and India beganduring 4 th century BC, with the economic and commercial relationships.During this time, the Ethiopian kingdom was well established at Axum,northern part of the country, have the ruling right over some parts of today’ssouth Yemen and Saudi Arabia. The Greeks, the Romans, the Arabs andIndians traded with the Axumite Kingdom. The ancient Indian traderelationship and civilization link had shown growth to modern economic andpolitical relations and counts the 60 years of formal diplomatic relationsbetween India and Ethiopia. The recent higher officials of the two countriesvisit, bilateral agreements and fastest economic growth strengthen the linkagebetween India and Ethiopia in a multi dimensional sense.3.1.2 Bilateral Agreementsi) China and EthiopiaAgreements between the two countries include Agreement for Economic andTechnological Cooperation (1971, 1988 and 2002); Trade Agreement (1971,1976); Trade Protocol (1984,1986,1988); Agreement for Trade, Economic andTechnological Cooperation (1996) and Agreement for Mutual Promotion andProtection of Investment (1988) 2 .2 China's ties with Ethiopia on a higher level: China's top legislator". The Africa Monitor.November 11,2008.http://www.theafricamonitor.com/news/ethiopian/november2008/111108/china.htm.Retrieved 2009-07-28.24

In May 2007, China's Assistant Minister of Commerce Wang Chao visited AddisAbaba and signed a debt relief agreement worth US$18.5 million 3 . In February2008, the Chinese minister of construction met his counterpart in Addis Ababa,and reemphasized the commitment of the two governments to cooperation.In May 2009 the two countries signed an agreement to eliminate doubletaxation, expected to boost trade and investment 4 .ii) India and EthiopiaA Trade Agreement between the Government of India and Ethiopia was signedon March 6, 1997 at New Delhi.Moreover, during the India-Africa Forum Summit, the Prime Minister Dr.Manmohan Singh announced the Duty Free Tariff Preference Scheme (DFTP)for LDCs. Ethiopia was among the first countries that has acceded to the DFTPScheme (embassy of India)To create favorable conditions for fostering greater investment and recognizingthe need to encourage and protect investments by the investors of both thecountries Bilateral Investment Promotion and Protection Agreement (BIPA)3 ^ "Ethiopia, China sign debt relief agreement". Ministry of ForeignAffairs, the People's Republic of China. 2007-05-30.http://www.fmprc.gov.cn/zflt/eng/zxxx/t324405.htm. Retrieved 2009-07-28.4 ^ "Ethiopia, China sign accord to abolish double taxation". The Reporter. 23MAY 2009. http://en.ethiopianreporter.com/content/view/1116/1/.Retrieved 2009-07-28.25

was signed during the visit of H.E. Mr. Pranab Mukherjee, Minister of ExternalAffairs, India in July 2007.3.2 Development Cooperation3.2.1 Development AssistanceThe amount of development assistance that has been flowing per annum in theform of aids from both China and India has been so far negligible.Since the two countries established diplomatic relations in 1970, China hasoffered Ethiopia various economic assistance is estimated at 1 billion RMB,among which RMB 590 million are interest-free loans and more than RMB 343million are grants. With the support of the above-mentioned assistance, a totalof 14 complete sets of projects, such as Sino-Ethiopian Friendship road , a largescalevocational training institute equipped with advanced teaching facilitiesand the Gottera Bridge, have been finished, and 4 complete sets of projects areunder way including and Agricultural Demonstration Center. In 2001 and 2007,Chinese government wrote off Ethiopia 2 debts to the total amount of 364million RMB.China has been supporting Ethiopia in various fields, from 1974 to 2002, Chinasent a total of 12 batches of medical team to Ethiopia (suspended during theperiod of 1980 - 1985) with each batch consisting of 15 medical personnel. In2000, the ministries of agriculture and education of the two countries reachedagreements for developing vocational education and training. Since June 2001,China has sent batches of teachers for vocational education to be employed byEthiopia for the short-or-long-term training of its backbone teachers andstudents. Now there are 49 Chinese teachers specialized in rural vocationaleducation and 23 Chinese teachers for urban vocational education teaching in26

Ethiopia. Starting from 1988, every year China provided 10 scholarships forEthiopian students to study in China. Up to the year 2002, the Ethiopianstudents studying in China numbered 69 in all according to the informationfrom the Chinese Foreign Ministry in October 2006. Recently, this has beenscaled up and in the year 2007 alone over 50 teachers have gone on scholarshipto China [Alemayehu, 2008).3.2.2 LOANSAccording to MOFED (2008), among bilateral creditors the share of china andIndia has reached together 37.5 percent in 2007/08. China has also providedlarge concessional loans (loans with a grant element of over 25%) to Ethiopia,although these are often tied to construction projects to be undertaken byChinese state-owned or state-controlled enterprises.Table 3.1 : Credit Disbursement by China and India , in million USDBilateral Creditors 2003/04 2004/05 2005/06 2006/07 2007/08China 1.6 5.32 6.79 10.58India 13 32.13Other BilateralCreditors 1.13 1.07 134.43 60.23 71.13Total BilateralCreditors 1.13 2.67 139.75 80.02 113.84Share in %China 0 59.9 3.8 8.5 9.3India 0 0 0 16.2 28.2China and India 0 59.9 3.8 24.7 37.5Source: MOFED, Public Sector External Debt, Statistical Bulletin, Bulletin No 1.November 2008.In July 2009, Ethiopia signed further agreements with China for the Sino HydroCorporation to build 2,150 megawatts of hydro-electric capacity with the Gibe27

IV (Omo River) and Halele Werabesa dams, in a deal worth US$2.67 billion.China will cover 85% of the project costs through preferential buyer's creditand concessionary loans. The environmentalist Richard Leakey has expressedconcerns about the possible impact of the Omo river dams on Lake Turkana.According to information from Indian embassy, credit amount of USD 65million was disbursed by India to support rural electrification program in 2006.In 2007 also USD 640 million is disbursed to support the Ethiopian sugarindustry, the largest Indian credit overseas. The agreement, which mainlytargeted Tendaho and Fincha at the moment, enables Ethiopia to boost its sugarindustry in the next two years. India will give the loan in the next five years tosupport Ethiopia’s sugar industry.MOFED signed an agreement with EXIM Bank on 4.10.2007 for release of US$122 million, representing the first tranche of US$ 640 million LOC. [Source:Engineering Export Info-Bulletin, Vol. 10, Issue No. 9, Indian embassy]IV.Trade and Investment Flows4.1.1 Exports to China and India4.1.1.1 Trends in Exports and RankEthiopia has been trading with many countries across the globe since timeimmemorial. Due to the structure of its economy Ethiopia has been exportingprimary agricultural commodities to the rest of the world, mainly Europe.28

Although Ethiopia’s major trading partners has remained more or less stablefor long, shifts in ranks are taking place since recently.Among countries rising from bottom to top rank, China is the major one. In2000/01, for instance, the rank of China among Ethiopia’s export destinationcountries was calculated at 12 th taking less than 0.5 percent of the country’sexport, in 2004/05, nonetheless, it has improved to 6 th place taking 5 percent ofEthiopia’s exports and in 2005/06 it has managed to achieve 1 st place in taking13.4 percent of the country’s export. The dramatic performance registered in2005/06 was mainly due to a huge jumping in the receipts from sesame exportwhich increased from Birr 17.3 million in 2004 to Birr 531.3 million receipts in2005 depicting unprecedented growth rate of about 2971 percent. After2005/06, however, China failed to maintain its 2005/06 status and forced toslide to 7 th place in 2007/08 taking only 4.3 percent of the country’s exports (seetable 4.1). This can serve as evidence to the fact that China has not dependabledestination of Ethiopia’s export. China usually increases the amount ofcommodity imports from Ethiopia whenever the production of the same fails inchina due to drought or other reasons.Table 4.1 Exports by Destination, Share in Exports and RankCountry2000/012001/022002/032003/042004/052005/062006/072007/08Djibouti 16.0 7.0 7.0 7.4 4.9 5.7 4.2 3.6Rank 1 4 3 4 7 5 9 10Sudan 0.2 0.0 1.9 1.6 2.0 2.5 4.4 3.7Rank 10 10 8 9 10 10 8 9U.A.R 0.5 0.5 1.6 1.5 3.1 2.9 2.6 3.8Rank 8 9 9 10 9 9 10 8Germany 10.3 11.3 8.5 11.1 14.6 10.1 11.8 10.3Rank 2 1 1 2 1 2 1 1Italy 8.3 10.1 4.4 5.4 5.2 5.5 6.3 4.929

Rank 4 2 6 6 5 6 2 6Netherlands 1.2 1.4 3.4 15.5 3.5 3.9 4.8 6.2Rank 7 8 7 1 8 8 7 5U.S.A. 3.2 4.3 8.2 5.2 5.3 4.8 5.0 6.7Rank 6 6 2 7 4 7 5 3China 0.4 2.4 0.5 1.8 5.0 13.4 5.0 4.3Rank 9 7 10 8 6 1 6 7Japan 9.8 7.6 4.5 10.7 7.6 7.8 6.1 6.3Rank 3 3 4 3 2 3 4 4Saudi Arabia 7.6 5.9 4.4 6.6 6.0 6.1 6.2 7.3Rank 5 5 5 5 3 4 3 2Rest of the World 42.4 49.3 55.5 33.3 42.8 37.3 43.7 42.8Source: National Bank of Ethiopia and NBE and Authors ComputationExport to India though shows some fluctuation in the period 2002-08, it hasbeen growing on average by 12 percent (see figure 4.1). However, India has notyet managed to join the top 12 export destination countries of the country dueto low initial base.Figure 4.1 : Trends in export receipts from India, in million birrSource: ECA and Authors Computation4.1.1.2 The Composition of Exports to China and India30

Attempt is made here to examine the composition of exports to China andIndia. According to analysis of raw data from Customs Authority, vegetablesproducts, raw hides and skins and leather products, and mineral products arethe top three export commodity categories finding their way into China, onaverage, accounting for about 98 percent of the total exports to China, in theperiod 2002-2008(figure 4.2). Within the vegetable products export category,the lion’s share (over 90 percent) is due to sesame export. Of the hides and skin,on average about 55 percent is tanned/crust skins of goats and sheep (wetblue)over the last three years (2006-2008). Of the mineral products export, onaverage about 92 percent has been Titanium ores and concentrates over sameperiod.With regards to India, among export commodity categories, vegetablesproducts, hides and skins and leather products, textile and textile articles andmetal and articles of base metals are the major four export categories over theperiod 2002-08. These categories altogether account, on average, for over 99percent of the total exports to India (figure 4.3). Within the vegetable productsexport, the lion’s share (over 90 percent) is due to sesame export. Of the hidesand skins and leather products, about 57 percent was due to exports of pickledskins of sheep or lambs without wool, not tanned. With respect to textile, onaverage, about 90 percent was due to exports of cotton, carded or combed.With regards to metals and articles of base metals , on average, 59 percent wasdue to exports of copper, aluminum and zinc wastes and scraps over 2006-7, in2008 however, significant share (44 percent ) was due to exports of semifinishedproducts, of alloy steel (excl. stainless).Figure: 4.2 Exports to China, Share of major Exports31

Source: ECAFigure: 4.3 Exports to India, Shares of major ExportsSource: ECAIf one scrutinizes the composition of exports of Ethiopia to both countries andChinese and Indian strategic interest in energy and industrial raw materials fortheir growing economies, it is unfair to consider Ethiopia as a strategic sourceof critical commodities to these economies.4.1.2 Imports from China and India32

4.1.2.1 Trends in Imports and RanksStarting from the year 2002/03, China has started to take first and at leastsecond place among Ethiopia’s trading partners as import origin. The share ofEthiopia’s import from China which was lower than 4 percent before ten yearshas reached 16.6 percent in 2006/07 and slightly lowered to 15.6 percent in2007/08. In both years, however, China stood first among trading partners asorigin of imports (table 4.2).Though not yet in the top ten, imports from India has been dramaticallygrowing from time to time. The value of import has been growing, on average,by about 40 percent over the period 2002-08(figure 4.4).Table 4.2Imports from China, Share in total Imports and RankCountry1998/992000/012001/022002/032003/042004/052005/062006/072007/08Sudan 0.0 0.1 0.0 0.4 1.4 0.4 1.0 2.1Rank 9 9 9 9 8 9 8 8U.A.R 1.1 0.9 6.9 9.5 6.1 6.7 5.2 9.8Rank 7 7 4 3 4 4 5 3Germany 4.9 5.3 4.3 3.8 3.3 3.9 3.7 3.3Rank 5 5 7 7 7 6 7 7Italy 7.7 8.9 6.9 10.7 4.2 5.8 7.7 5.2Rank 1 3 3 1 5 5 3 4Russia 1.0 0.4 1.4 1.0 1.2 0.8 1.0 1.5Rank 8 8 8 8 9 8 9 9U.S.A. 5.1 9.6 6.0 8.6 10.6 8.4 3.8 4.4Rank 3 2 6 4 3 3 6 6China, P. Rep. 3.9 7.1 8.4 9.3 10.3 11.5 13.2 16.6 15.6Rank 8 2 4 1 2 2 2 1 1Japan 5.0 3.5 6.5 4.5 3.3 3.4 6.2 4.933

Rank 4 6 5 6 6 7 4 5Saudi Arabia 4.0 13.6 8.2 8.4 17.0 14.9 15.1 13.2Rank 6 1 2 5 1 1 2 2Rest of the World 51.4 36.9 37.3 31.5 32.9 33.9 32.8 36.3Source: National Bank of Ethiopia (NBE), staff ComputationFigure 4.4: Imports from India, in million birrSource: ECA4.1.2.2 Composition of Imports from China and IndiaThe major commodity categories imported from China includes; one,machinery and mechanical appliances; electrical equipment; parts thereof; two,textiles and textile articles; three, base metals and articles of base metal; four,plastics and articles thereof; five footwear, headgear, umbrellas and sixth,vehicles, aircraft, vessels and associated transport equipment registering 2002-08 period average share of 35 percent, 25 percent, 10 percent, 6 percent, 5percent and 3.5 percent, respectively(figure 4.5).The share of textile and textile articles’ imports from China has been decliningover time. It has declined from constituting about 41.3 percent of the totalimports from China in 2002 to about 10 percent in 2008. The share of foot wearimports has also sharply dropped from about 10 percent in 2002 to below 234

percent in 2008. This was due to reduced domestic demand for Chinese textileand shoe products which, in turn, was attributable to quality related problems.In contrast, machinery and mechanical appliances imports share has picked upfrom about 18.7 percent in 2002 to about 55.2 percent in 2008 (figure 4.3).Of the plastic and rubber imports from china, the majority (38 percent)constitutes new pneumatic tires, of rubber of a kind used on buses or lorries.Of textile and articles of textile the majority (38 percent) constitutes otherwoven fabrics of synth'c yarn >=85% textrd/non-textrd polystr filmnt. Of basemetals, iron/steel bars & rods, hotrolled, twisted/with deformtns from rollingproc takes lion’s share. Of machinery and mechanical appliances, the importantelements are imports for the reception, conversion & transmission orregeneration of voice, image.With regards to composition of imports from India, the major commoditiesincludes; one, base metals and articles of base metal; two, machinery andmechanical appliances; electrical equipment; parts thereof; three, products ofchemical and allied industries; four, plastics and articles thereof and five pulpof wood of other and six textiles and textile articles in order of importance inthe period 2002-08(figure 4.6).The figure depicts that imports of base metal and articles of base metal andtextile and products of textile has been declined in the period 2002-2008. Whilemachinery and mechanical appliances imports has been increasing over sameperiod.(see figure 4.6).Of plastic and rubber, the major one is new pneumatic tyres, of rubber of a kindused on motor cars. Of base metals , the major one is flatrollediron/steel,wid.>=600mm,zinc plated/coated(exc.electroplated)nes. Of35

machinery and mechanical appliances , transformers, nes, power handlingcapacity 16-500kva are vthe major one.Figure: 4.5. Composition of Imports from China, Share in %Source: ECAFigure: 4.6. Composition of Imports from India, Share in %Source: ECA36

Imports from both China and India, in general, comprise finishedmanufactured goods. Looking over time, the proportion of imports ofconsumer non-durables (textile, shoe and the like) has been declining whilethat of consumer durables and capital goods has been increasing. The recentperiod’s composition of imports from both countries seems to pose less threatto the development of domestic manufacturing industries since the laterconcentrate on the production of consumer non-durables. However, it mayseverely affect the speed of domestic industries’ transition to the production ofcapital goods in the future.4.1.3 Trade BalanceAvailable trade statistics shows that the value of imports from China has beengrowing faster than the receipts from exports of Ethiopia to China therebygiving rise to unbalanced trade balance in favor of China. The negligible tradedeficit in 1997/98 has started widening wildly since 2005/06 due to increasedimports of capacity building machineries (figure 4.7). The widening deficitsinfavour of china need due the attention of the government so as to sustain thetrade relationship between the two countries.Figure: 4.7 Export, Import and Trade balance, China Value in ‘000 BirrSource: ECA37

Similarly, imports of Ethiopia from India have been growing faster than theexports of Ethiopia to India thereby giving rise to widening trade deficit. Thedeficit started widening wildly since 2004/05(Figure 4.8). As figure 4.8 shows,the export revenue generated from India covers less than 4 percent for themajority of the years except for the years 2000, 2001, 2002 and 2003(Figure 4.9).The widening deficits in favor of India need due the attention of bothgovernments so as to sustain the trade relationship between the two countries.Figure 4.9: Exports, Imports and Trade Balance, IndiaValue in ‘000 BirrSource: Ethiopian Customs Authority (ECA), computed4.2 Investment Flows from China and India4.2.1 Chinese Private Investment in Ethiopia4.2.1.1 Licensed ProjectsThe number of Chinese private investors interested to invest in Ethiopia hasbeen increasing from time to time and reached 1829 in 2008 registering acapital of Birr 8.8 billion and employment to be generated 82,478 (32,800permanent and 49, 678 temporary) workforce(table 4.3). Investors have gotlicensed does not mean that they all move to implementation and operationphase. This is because for some, getting a license is an end by itself for theywant it with the aim of taking advantage of incentives related with it includingduty free imports, land and other benefit. Thus, one cannot tell about the actual38

FDI by looking at the number of licensed projects for the ratio of operational tolicensed projects are drastically low.4.2.1.2 Operational ProjectsOut of the licensed 1829 Chinese projects in the period 1992- January 2009 only195(10.7 percent) has gone operational in the same period investing capital ofbirr 2.1 billion (23.8 percent of registered) and generating employment of13394(40.8 percent of registered) for permanent and 16514 (33.2 percent ofregistered) temporary workers (table 4.3).Table: 4.3 Licensed and Operational Chinese Private Investment in Ethiopia(July 1992-January 2009)Number ofProjects Capital ETB (000) Perm Emp. Temp Emp.Source: EIALicensed projects1829 8,845,671 32,800 49,678Operational projects195 2,108,087 13,394 16,514Operational/licensed (in %)10.7 23.8 40.8 33.24.2.2 Indian Private Investment in Ethiopia4.2.2.1 Licensed ProjectsSimilarly, the number of Indian private investors in Ethiopia has beenincreasing and reached 311 in December 2008 having registered a capital of birr33.4 billion and employment generation capacity for 58149 (24008 permanentand 34, 141 temporary) workforce (table 4.4). The number of licensed Indianinvestors increased, the increase is so dramatic since the last four years startingfrom 2005, and this is the year when Ethiopian government offered betterinvestment incentive for foreign investors, including improving access credit.39

Comparisons of projects at license and operational levels indicate that Indianprojects to be more capital intensive (with respective capital to labor ratio of211.3 thousand and 99.6 Thousand birr) than Chinese one (with respectivecapital to labor ratio of 107.2 thousand birr and 70.5 thousand birr).4.2.2.2 Operational ProjectsOut of the licensed 311 Indian investors in the period 1992- December 200887(28 percent) has gone operational in the same period investing capital of birr1.3 billion (3.8 percent of registered) and generating employment of 5495(22.9percent of registered) for permanent and 7210 (5.4 percent of registered)temporary workers (table 4.4). Although it was difficult to obtain workers bynationality, one can safely assert that the majority of employment, especiallythat require less skill has been to Ethiopians.Investors register project capital and the size of employment that their projectsgenerate by simple conjecture without conducting prior assessment- the figuresare usually overstated. The inflated employment figure is meant to win thehearts of the government, whose challenge has remained reducingunemployment. Overstating capital has got something to do with bankborrowings.No ofprojectsTable 4.4: Licensed and Operational Indian Private Investmentin Ethiopia(July 1992- December 2008)capital, in millionPermemp Temp. empLicensed311 33414.4 24008 134141Operational87 1265.8 5495 7210Operational/licensed share in %28.0 3.8 22.9 5.4Source: EIA40

It is possible to make comparison between Chinese and Indian privateinvestors in Ethiopia. In terms of the number of registered investors chinaexceeds far higher than India nonetheless with regards to the amount of capitalregistered and employment expected to be generated Chinese figures fell farshorter than the Indian investors. With respect to projects moving tooperational phase, Indians have fared better than Chinese one with respectiveoperational/license share of 28 % and 10.7 % in the period 1992-2008.4.2.2.3 Sectoral Focus of Chinese and Indian private investmentsAttempt was made to depict the sect oral concentration of Chinese privateinvestment in Ethiopia in the period 1992-2008. According table 4.5, of the totalactual Chinese projects 58(29. 7%) are engaged in the construction andconstruction related sectors. Of the total capital invested in the different sectorsin Ethiopia by Chinese, the share of the sector is about 55.5 percent. This sectoralone has actually generated about 55 percent of the total permanentemployment and 73 percent of the temporary employment that Chinese privateinvestors hired in Ethiopia in the period 1992-2008. This sector is followed bytextile and garment subsector comprising about 11.3 % of the project. in spiteof the country’s potential in the production and export of agriculturalcommodities, Chinese investors far from being engaging in the sectors. Chinesefocus is on producing commodities that has been otherwise imported fromabroad, .i.e., import substituting rather than producing for export (table 4.5).41

Table: 4.5 Sectoral distributions of Chinese operational investmentssectorsNo of projectsCapital in000 birrpermemploymenttempemploymentAgriculture 1 8800 100 200Construction 56 1079336.9 4060 11781Assembly of cars, cycles, andmachinery 11 66317 259 357Furniture 7 38700 160 175Garment and textile 22 86457.38 1672 558Comforts and blanket 7 18947.9 81 72Shoes leather and plasticfactor 8 34257 327 347Hotels and restaurants 15 29909.99 185 143Food manufacturing 2 7035 56 10Education 1 530 6 4Health and related 7 16157.2 81 34Consultancy and otherservices 21 34615 440 734Other manufacturing 37 687023.47 5967 2099Total 197 2108086.84 13394 16514Source: EIA, staff sortingThe focus Indian investor is a bit different from Chinese one. Indians havefocus on the manufacturing of plastic and plastic related products, provision ofwater drilling activity and cut flower if ranked in terms of the number of actualprojects. However, due to the capital intensity of the flower industry, it claimedabout 35.7 percent of the total actual investment of Indians in Ethiopia. Plasticindustry’s capital share in the total Indian investment is about 23 percent, bothsectors accounting for more than 58 percent of the total actual investment ofIndians in the period 1992-2008(Table 4.6)42

Table: 4.6 Sectoral distributions of Indian operational investmentsSectorsNo ofprojectsCapital in ‘000birrPermemploymentTempemploymentConstruction 7 55200 284 483Flower 9 455566.69 966 2715Agriculture 2 45870 235 1620Water well drilling 10 58527.3 177 126Plastic manufacture 15 294686.53 1945 1621Textile 6 105464.48 491 254Assembly 7 24542.5 171 61Hotels 1 1000 20 15Education 1 7931.7 62Consultancy 6 7634.3 59 38Leather 1 4430 25 20Health 1 1200 5 10Other manufacture 21 211792.87 1076 235Total 87 1273846.37 5516 7198Source: EIA, staff sorting4.2.2.4 Chinese and Indian workforces in EthiopianAccording to Atlas(2006) 5 , it is assumed that approx. 1 million Chinese live inAfrica in 2006, the figure for Ethiopia has increased from below 300 in 2001 to2000-3000 in 2006. This is an estimate on the low side, according to officialMOFA information, the number of Chinese tourists entering Ethiopia isincreasing from time to time and has passed 12000 in 2008 (figure 4.10). These‘tourists’ will stay here in the country and engage in some kind of business or isemployed in Chinese run projects and business in the country.Public construction works executed by Chinese companies are mainlyundertaken with Chinese workers. Many Chinese immigrants compete directlywith contractors. Some are engage in small electronic equipment maintenance,namely mobile maintenance, shops which are not open for foreigners.5 Atlas de l’Intégration Régionale en Afrique de l’Ouest. December 2006.43

Figure 4.10 Number of Chinese tourists arriving EthiopiaSource: MOFAAccording to Indian embassy, at one time there were more than 9000 familiesin Ethiopia. Presently, the Indian community numbers are approximately 2000nationals, comprising mainly of business persons, representatives of Indiancompanies, Indian teachers in Universities, Colleges and Technical Institutionsand professionals working in UNECA, World Bank, UNDP and otherinternational organizations.4.3 Chinese and Indian Companies’ in Infrastructure DevelopmentLack of adequate infrastructure is regarded as a major constraint in Ethiopia’sdevelopment. In the past 7-8 years, the Ethiopia has taken various initiativesand embarked on undertaking major projects in roads, power,telecommunications, and water resource development.44

4.3.1 RoadRoad sector is among major sectors that is given due attention in PASDEP. Inthis regard, the country has been performing very well in the last decade.Despite the presence of huge unbridled road demand, the domesticconstruction capacity is so limited. As a result, a number of foreign companiesespecially Chinese are involving in the business.The table 4.7 shows that the percentage of road projects taken by Chinesecompanies in the new, rehabilitation, upgrading and maintenance has beenincreasing overtime. From 2008 onwards all new road constructions wereoffered to Chinese companies. This is mainly due to lower bid price offered byChinese companies compared with other bidders.According to information from ERA, IRCON International Indian companiesand SMS have secured contracts for road construction. IRCON was awardedcontract for Dera-Chole-Magna road construction which is located in southeastpart of Ethiopia with total project cost of US 31.3 million dollars.Table: 4.7Road Development Projects, Share of Chinese CompaniesRehabilitation, Upgrading andNew ConstructionChinaMaintenanceChinayear Total(inno.)China(in %) Others TotalChina(in no)(In%) Others1995 2 0 2 3 0 31998 1 0 11999 12 5 41.7 72001 3 1 33.3 22002 1 1 1002003 1 1 1002004 2 2 1002005 1 0 1 5 4 80 145

2006 3 2 66.7 1 4 2 50 22007 1 0 1 10 6 60 42008 3 3 100 7 4 57.1 32009 4 4 100 6 4 66.7 2Source: ERABesides physical construction works, undertaking of socioeconomic studies,design and supervision works are critical for the road sector. In this regard,European based companies have still significant stake. Contrary toconstruction, Chinese companies’ involvement in this line of business is almostinexistent. This is partly due to the prohibition of making both supervision andactual work for companies coming from same country. Indian companies’however, haves increasing participation. The major Indian companies whichhas been engaged in consultancy services include Consulting EngineeringServices (India) Limited, International Consultants and Technocrats Pvt. Ltd.,RITES, SPAN Consultants, and LEA Associates South Asia Pvt. Ltd., which areexecuting various road consultancy projects(table 4.8).Table: 4.8Study, Design and Supervision works conducted by Indian companiesYearTotalIndian inno. India (Share in %) Other countries1997 13 1 7.7 121998 6 0 61999 15 1 6.7 142000 6 0 62001 7 2 28.6 52002 10 0 102003 6 0 62004 15 3 20 122005 3 1 33.3 22006 24 9 37.5 1546

Source: ERA2007 13 1 7.7 122008 12 4 33.3 82009 16 4 25 124.3.2 TelecomEthiopian Telecommunications Corporation (ETC) has undertaken extensivemeasures and drawn ambitious programs to increase the number of subscribersand improve quality of service. To this end, a number of projects have beendesigned and is under implementation by various companies, mainly Chineseones.Since recently, projects in the Telecom sector have remained Chinese tenure. Inthe period 2007-2009, for instance, telecom project having an off shore cost ofUS 1.5 billion Dollars project and on shore project cost of birr 6.3 billion areoffered and is underway by Chinese companies, altogether amounting over US2 billion Dollars (table 4.9).Table 4.9: Telecommunication Corporation and ZTE transaction, off andonshoreYearoff shore in000 USDin 000 Birr2007 646854.316 2,761,349.082008 841649.57 1,924,782.542009 307.277 1,638,294.03total 1488811.16 6,324,425.64Source: ETCon shoreannualaverageexchange rateon sharein USDtotal in USDIndian companies have insignificant share in the total telecom budget.Telecommunications Consultants India Ltd. (TCIL), a Government of Indiaenterprise, has been active in Ethiopia in executing turnkey projects in this47

sector. During February 2001-June 2004, it completed 10 contracts for the ETCvalued at US$ 18 million. In 2005, it provided short-term training in technicalcourses to ETC officers at ALTTC, Ghaziabad. It is executing project to supplyVSAT antenna, solar power systems, and collaborating with other companieslike Ericsson and Huawei for GSM projects, towers in telecommunicationprojects. It has also been awarded contract to supply equipment like digitalsatellite receivers and IDR modems.TCIL is the designated agency from India to execute the Pan-African e-Network Project for tele-medicine, tele-education and VVIP connectivity in allcountries of Africa. Ethiopia is the first beneficiary of this programme. TCILhas signed a Memorandum of Understanding with the Ethiopian Informationand Communication Development Agency (EICTDA) signed on 12th January2006 in Addis Ababa to start a Pilot Project for tele-medicine and tele-educationin Ethiopia. The total cost of US$ 2.13 million will come as a grant fromIndia. The pilot project is already under an advance stage of implementation.Addis Ababa University and the Black Lion Hospital will be the nodal centersfor tele-education and tele-medicine respectively, with remote centers locatedat Alemaya University and Nekempt Hospital.4.3.3 PowerAs per the available data, almost all Electric power generation andtransmission projects has been undertaken by Chinese companies since the lastfew years. In the period 2002 -2008, Chinese companies have taken 6 hydroelectric power generations and 11 transmission projects amount birr 25.77billion. The projects are financed by loans from Chinese government/companies. Of the 16 UEAP projects having budget of birr 1.05 billion , birr763.2 million costing projects are undertaken by Indian companies which48

themselves finance. Indian companies finance projects that Indian companiesunder take and Chinese companies undertake projects that their companyundertakes (Table 4.10).Table:4.10 EEPCO's Power Projects Undertaken by Chinese CompaniesNoAProject NameHydropower generationContractAmount InETHB1 Tekeze Hydroelectric project 3,171,590,835.592 Finchaa Amerti Neshe Multi Purpose 1,219,116,398.003 Beles Hydroelectric power project 613,320,577.314Genale Dawa(GD3) HyderoElectric PowerProject 5,770,655,641.595 Chemoga-Yeda Hydroelectric Power Project 7,100,448,000.00Harena Messobo & Adama Nazreht Wind6 power project 3,198,400,000.00CommencementDateCompletion Date26-Jun-02 30-Nov-09BGeneral Project TotalTransmission21,073,531,452.491 Tekeze Indasilassie-Humera 150,000,771.6724-Aug-072 Tekeze Indasilassie-Humera 211,508,296.263 Bedele-Metu Power Transmission project 115,000,771.674 Bedele-Metu Power Transmission project 94,570,997.215678910Bahir Dar -Debre Markos -Addis AbabaPower Transmission project 410,544,213.50Bahir Dar -Debre Markos -Addis AbabaPower Transmission project 388,807,492.76Bahir Dar -Debre Markos -Addis AbabaPower Transmission project 609,695,596.07Gibe III -Addis Ababa Transmission LineProject 933,777,695.42Finchaa -Gedho-Gefersa power TransmissionProject 135,000,061.80Finchaa -Gedho-Gefersa power TransmissionProject 246,758,572.6113-Jun-08 13-Dec-0917-Oct-08 17-Apr-1017-Oct-08 17-Apr-1049

11 Koka -Dire Dawa Power Transmission Project 1,111,541,574.89CTransmission TotalU.E.A.P. Total (16 projects)Grand Total(A+B+C)4,407,206,043.861,051,660,514.1926,532,398,010.54Indian companies have secured several projects related to power transmission,distribution and sub-stations. KEC International Limited is the leading Indiancompany in power projects. It had earlier completed two power projects of 66kV-130 kV transmission lines in 1996 in Mekelle, and in 2000-03 in Jimma.Since August 2004, it has been awarded several power distribution andtransmission projects worth US$ 157 million, including six projects awardedsince April 2005. Bharat Heavy Electricals Ltd. (BHEL), a Government of Indiaenterprise, was awarded a contract by EEPCO in August, 2005 for a 230 kVsub-stations. It has also shown interest in the areas of hydropower, coal and gasbased power generation. IRCON has been awarded contract for 66 kVextension of 9 substations in different parts of Ethiopia in 2005. In October 2005,Kalpataru Power Transmission Ltd. was awarded a power transmission projectfor the Alamata-Combolcha-Cotobe-Kaliti 230 kV overhead transmission line.Jyoti Structures Ltd. has executed three 132 kV turnkey projects for powertransmission. Mumbai-based M/s Enercon India Power Development wasinvited by EEPCO for a wind-based power project. Kirloskar Oil Engines hassupplied generator sets of varying capacity to Ethiopian TelecommunicationsCorporation, Ministries of Education and Health, Oromia Water Resources etc.50

5. Impacts of the Global crisis on the growing Relationship 6The global financial crisis has already caused a considerable slowdown ineconomies of most developed and developing countries. Governments aroundthe word have been trying to contain the crisis.What are the channels through which the crisis could spread to developingcountries and how are the effects being felt in developing countries?The relationship between OECD GDP and Africa’s GDP has weakened as aresult of the emergence of countries such as China, as well as structuralchanges in African economies. According to the IMF World Economic Outlookreport in April 2008, a decline in world growth of one percentage point wouldlead to a 0.5 percentage point drop in Africa’s GDP, so the effects of globalturmoil on Africa (via trade, FDI, aid) would be quite high. The correlationbetween African GDP and World GDP since 1980 is 0.5, but between 2000 and2007, it was only 0.2. As there have been significant structural changes (and amove into services that were able to withstand competition much better) aswell as the rise of China, African growth has temporarily decoupled fromOECD GDP.There have been also signs of a slowdown in Asia, the engine of recent worldgrowth. In the space of a couple of months, the Asian Development Bank hasrevised its forecast for Asian countries downwards by 1-2 percentage points.The IMF growth forecasts have been revised significantly, especially for the UK(-1.8 percentage points down from the last forecast for 2009), but also India (-1.16 This section heavily draws on the works by Dirk Willem te Velde, The globalfinancial crisis and developing countries Which countries are at risk and what can bedone?51

percentage points down to 6.9% real GDP growth), and China and Africa (bothdown by -0.5 percentage points to 9.3% and 6.3% respectively).The economic downturn in developed countries may also have significantimpact on developing countries. The channels of impact on developingcountries include:• Trade and trade prices. Growth in China and India has increased imports andpushed up the demand for copper, oil and other natural resources, which hasled to greater exports and higher prices, including from African countries.Eventually, growth in China and India is likely to slow down, which will haveknock on effects on other poorer countries.• Remittances. Remittances to developing countries will decline. There will befewer economic migrants coming to developed countries when they are in arecession, so fewer remittances and also probably lower volumes of remittancesper migrant.• Foreign direct investment (FDI) and equity investment. These will comeunder pressure. While 2007 was a record year for FDI to developingTable 5.1: World Economic Outlook projectionsProjectionsDifference fromJuly 2008 WEOprojectionsWorld 2006 2007 2008 2009 2008 2009USA 5.1 5.0 3.9 3.9 -0.2 -0.9Euro area 2.8 2.0 1.6 0.1 0.3 -0.7China 7.4 8.1 7.0 5.5 -0.7 -1.8India 11.6 11.9 9.7 9.3 - -0.5Sub-Saharan9.8 9.3 7.9 6.9 -0.1 -1.1AfricaSource: IMF52

The financial crisis that affects China will also affect many low-incomeeconomies, whose recent growth has in part been stimulated by China’sdemand for commodities and intermediate inputs, and its expanding overseasinvestments.China’s financial institutions are relatively well insulated from the directimpacts of crisis. Its export dependence has however resulted in a sharpdownturn in the real economy.The main direct channels of economic influence are trade, investment and, to alesser extent, aid, all of which have increased significantly in recent years.These are closely related and, particularly in the case of Africa, reflect China’spolitical and strategic interests as well as long-term economic objectives. It istherefore unlikely that there will be any significant downturn in China’s directengagement with Africa, at least in the short to medium term.In terms of trade, China’s inelastic demand for natural resources, combinedwith a heavily infrastructure-focused stimulus package, should maintaindemand for key commodities such as oil, cotton and copper at a time ofotherwise falling global demand and deteriorating terms of trade.By contrast, those countries providing intermediate products for China’s exportmanufacturing (particularly in South East Asia) will see demand fall. In 2008total China-Africa trade increased by 45 per cent to US$107 billion, exceedingthe US$100 billion target set in 2006 when trade was US$55 billion, and givingAfrica a trade surplus for the first time. Given this past growth, China’s exportsto Africa may shrink, but African demand for light industrial and consumerproducts is unlikely to be seriously affected. Potential problems arising fromthe increased value of China’s currency should be offset by a corresponding53

drop in the price of Chinese imports. So trade in the next three years willprobably continue to increase but at a slower rate than over the past two years.In terms of investment, there is little reason to expect significant reduction inChina’s public and private investments in Africa, and hence ethiopia. Stateenterprises are clearly taking advantage of opportunities created by the crisis toincrease investments, especially in the energy sector. New deals are beingmade, and China is seeking investments in commodities that are important forits long-term food and energy security, and growth.Private sector investment in Africa is driven primarily by competition betweenfirms in China’s domestic market. Increased competition during a downturnmay accelerate investment in AfricaAid flows to Africa will remain stable or may even increase. China hasreiterated commitments made at the Forum on China-Africa Cooperation(FOCAC). During his recent visit to Africa, President Hu Jintao announcedincreased assistance and a reduction or cancellation of debts. Furthermore,Chinese aid is provided on a multi-annual line of credit of at least three years.While aid has increased significantly and may be important to some Africancountries, it remains small as a share of China’s GDP. It is valued for associatedpolitical relationships and economic opportunities. China is therefore likely totake this chance to increase its influence in the region and secure its long-terminterests (IDS, 2009).Since Ethiopia does not have remittance and aid flow from China and India,The Channels of impacts from these countries materialize through mainly tradeand FDI.Trade and commodity prices: Growth in China and India has increased importsand pushed up the demand for primary commodities, which has led to greater54

exports and higher prices, however due to slow down growth in China andIndia due to crisis, which will have knock on effects on Ethiopia.Foreign direct investment (FDI): This has come under pressure due to the creditcrunch in these countries making difficult for Chinese and Indian basedcompanies to obtain fund to invest in Ethiopia.Loans: Aid and loan budgets are under pressure because of debt problems andweak fiscal positions in these countries. Since both countries are not significantsources of aid and loans for Ethiopia, the impact is so minimal.55

6. CONCLUSIONS AND POLICY IMPLICATIONS6.1 Conclusions6.2 Policy ImplicationsReferencesSource; T. N. Srinivasan*(),China and India: Economic Performance,Competition and Cooperation, An Update of Srinivasan (2002),http://www.econ.yale.edu/~srinivas/C&I%20Economic%20Performance%20 Update.pdf ].Wayne M. Morrison(2008), China and the Global Financial Crisis:Implications for the United States, CRS Report for congress, November 13,2008,IMF Survey Magazine: What the Numbers Show, October 17, 2007.Gedion Gamora, "Ethiopia and China Political and Economic Relations:Challenges and prospects after 1991"..http://www.afrology.com/pol/pdf/gamora.pdf. Retrieved 2009-07-28.Quoted in Wikipedea , retrieved September 14, 2009L’Afrique et la Chine. Atlas de l’Intégration Régionale en Afrique de l’Ouest. December 2006.]IGD and SAIIA (2006)China in Africa mercantilist predator, orpartner in development October 2006, South AfricaM o n i k a T h a k u r(2009), has conducted a study titled Chinese Engagementin Ethiopia, South African Institute of International Affairs(SAIIA) occasionalpaper no 3856

IDS (2009), China and the global financial crisis: implications for low-incomecountries. IDS, in focus policy briefings, issue 07 policy responses to the globalfinancial crisis March 2009.Mwangi wa githinji, (2007)Is that a dragon or elephants on your ladder:the potential impact of china and India on export led growth in Africancountries,57