Ethiopia: Africa’s New China?

As cliché as it may sound, the expression ‘looking like a construction site’ is arguably the most accurate description of Addis Ababa. The Ethiopian capital, long considered Africa’s political capital, is going through a rapid phase of modernization. Sites of older dilapidated buildings being bulldozed into heaps of rubble and promptly being replaced by seven or more stories of concrete and brick are not uncommon.

Besides buildings, transport infrastructure is also being overhauled in the Ethiopian capital. In fact, Addis Ababa’s $475million metro rail has drawn to completion barely three years since construction began in 2012. The metro rail, which is expected to carry 60,000 passengers a day, is the first of its kind in Sub-Saharan Africa outside of South Africa. Meanwhile, Kenya, Ethiopia’s close neighbor, is still stuck in the planning stage of its own metro rail even as Nairobi loses Sh50 million ($520k) daily in lost productivity due to traffic jams.

The feverish pace at which construction is taking place in Addis Ababa is aimed at aligning the city’s infrastructure to the rate of growth of the country’s economy. A report on South Africa’s Daily maverick acknowledges that “over the last decade, Ethiopia has emerged as one of the fastest-growing – perhaps THE fastest-growing – economies in Africa.” Its number of millionaires has also expanded commensurately.

Number of millionaires in Ethiopia has grown commensurately to economic growth

Government control

But Ethiopia is not like other African economies. Whereas Africa’s recent boom derives from mineral resources, Ethiopia’s growth has been primarily driven by manufacturing, agriculture and transport. This has led some to draw parallels between Ethiopia’s journey and China’s success narrative

Ethiopia’s economic journey, particularly its success in manufacturing, brings into focus the similarities between the African nation and China. Like China, Ethiopia has a huge population, at least when compared to other African countries. There are approximately 94 million people in Ethiopia, making it the second most populous country in Africa after Nigeria. Ethiopia also has a very young population—44 percent of its population is under 15 and 73 percent under 30.

A huge working population, coupled with heavy government control that limits unionization, has made labor very affordable in Ethiopia. Just like China, Ethiopian government maintains heavy control on the economy, including the labor market.

With a similar demographic profile and policy framework to China, Ethiopia’s manufacturing sector has been able to clock strong growth in the past years. Mr. Zhang Huarong, the chairman of Chinese shoe manufacturer Huajian said that “Ethiopia is exactly like China 30 years ago.” Huarong, whose company has set shop in Ethiopia with a workforce of 3,500, was speaking to global business news agency, Bloomberg.

Beer manufacturers have also poured into Ethiopia. UK giant, Diageo, as an example, purchased formerly state-owned Meta Abo Brewery in 2012 for $225 million. Dutch heavyweight Heineken also entered the market in 2011 after acquiring state-owned Harar and Bedele Breweries. These entries suggest that the fundamentals on the ground support domestic manufacturing as opposed to importation. This speaks to the country’s favorable conditions for manufacturing—cheap labor and cheap electricity. The country is currently constructing Africa’s largest hydropower plant, the Grand Ethiopian Renaissance Dam, which Ethiopian officials claim will be financed by the country’s own finances and not foreigners. Increased power supply should lower power bills for large consumers such as manufacturers, leading to expanded investments in the manufacturing sector.

Necessary price

Ethiopia seems to have followed after China—and with great success. Like the case is in China, the Ethiopian government is actively involved in ensuring that labor remains cheap, infrastructure projects are completed in record time, and foreign ownership is limited in key sectors (state financing of Renaissance dam and restriction of foreign companies from finance sectors are good examples). While this approach has produced measurable results, it has also produced the same set of challenges that China has had to grapple with, most prominently criticism from human right groups.

Heavier government control naturally leads to less liberties and freedom. This relationship is basic and elemental to any political system. China best exemplifies this, with the Communist Party of China maintaining strict control, sometimes with violent persuasion, on media and all facets of the state. In Ethiopia, the same situation seems to be unfolding. Journalists are routinely jailed and questions are not encouraged, ensuring that government is never probed exhaustively in its dealings.

Meles Zenawi the late prime minister of Ethiopia previously said that there was no relationship between development and democracy

But after considering what Ethiopia has been able to achieve in a span of 25 years, one can’t help but question whether the tradeoff between democracy and economic development is a necessary price to pay. The late Meles Zenawi famously said that “There is no connection between democracy and development”. And there could be some truth to Zenawi’s observation in view of the strides that China and Ethiopia have made. Both came from the trenches and have emerged as economic powerhouses in their individual capacities, despite adhering to an unconventional interpretation of democracy.

While the relation between democracy and development is another argument altogether, it is almost uncontestable that a greater degree of government control gets major projects off the ground much faster, especially in developing countries. Neil Ford, associate editor at pan-African business publication, African Business, writes that: “historically, the introduction of major public transport schemes has been fraught with difficulty and has historically been most easily implemented in non-democratic societies.” The speed with which the metro rail in Ethiopia has been constructed lends credence to this observation, suggesting that the pace at which infrastructure development takes place in developing countries is directly relatable to the degree of state control on business.

Perhaps the rest of Africa can borrow a cue from Ethiopia, and to a greater extent, China. While this does not necessarily imply upending the prevailing model of democracy across Africa, certain modifications can be made to give the state greater latitude in mega projects that, without heavy state control, would be stalled by court cases and politics.

State control in the economy, as Ethiopia and China have shown, is not necessarily a bad thing. “The idea is a state with a sense of mission,” said Dereje Feyissa Dori, Africa research director at the International Law and Policy Institute, who is based in Addis Ababa. He was quoted on The New York Times.

Sourced here  http://moneymattersafrica.com/business-and-finance/ethiopia-africas-new-china/