THE LEGATUM PROSPERITY INDEX™ 2019

Creating the Pathways from Poverty to Prosperity

Ethiopia

Ethiopian prosperity has improved markedly in the last decade, with the country rising three ranks to 150th in the world, and narrowing the gap with the prosperity for the sub-Saharan Africa region as a whole.

Ethiopia has fostered strong economic growth in the last two decades, with GDP per capita growth averaging 7.4% per annum since 2004, and labour productivity increasing by more than 45% in a decade. Three out of four of Ethiopia’s Open Economies pillars are stronger now than in 2009, with only the Economic Quality pillar slightly weaker. The country’s investment environment, although still heavily regulated, is showing strong signs of improvement, and reforms are growing the country’s presence as a destination for new businesses.

Ethiopians are enjoying higher standards of education, which is the second most improved pillar, alongside other improvements to quality of life such as reduced poverty and better health. Improvements in access to education are most visible in pre-primary and primary education, with enrolment rates increasing from 6% to 29% and 75% to 85% respectively, over the past decade. Rates of poverty at all levels have reduced, with the proportion of the population living on less than $1.90 per day now 10 percentage points lower than in 2009, at 27%.

Progress in the Open Economies and Empowered People domains are yet to be matched in the Inclusive Societies domain. However, governance reforms under Prime Minister Abiy have been a cause for optimism, and his Nobel Prize this year recognises recent achievements in achieving greater safety and security for Ethiopia. Despite two of four Inclusive Societies pillars now in a weaker position than in 2009, all four strengthened this year, and Ethiopia ranks eight places higher now for the Social Capital pillar than a decade ago.

Inclusive Societies

Political reforms

Ethiopia’s politics have been dominated by the Ethiopian People's Revolutionary Democratic Front (EPRDF) for close to 30 years. The situation in the country may be beginning to change, however. In the wake of mass protests, former Prime Minister Hailemariam Desalegn resigned in April 2018, with Abiy Ahmed taking over. Prime Minister Abiy has since undertaken a number of reforms, which, on the surface, appear to be taking Ethiopia in a new direction.

However, while many commentators believe Ethiopia’s transition from authoritarianism to democracy is now underway, the country has yet to demonstrate substantive improvements in its governance. Ranking 159th and 146th for the Executive Constraints and Political Accountability elements, respectively, there is a long way to go before Ethiopia can be considered an open democracy.

With elections scheduled in 2020, the first test of Prime Minister Abiy’s commitment to political reform lies ahead. In order for elections to be successful, Ethiopia will need to amend its electoral law and electoral board such that it is free from the influence of the EPRDF, and provide a credible means of challenging results should they be disputed. With opposition members returning to the country, things are very much in flux for Ethiopia.

At the same time, judicial independence is showing signs of revival, and the appointment of Meaza Ashenafi as the first female Chief Justice of the Supreme Court has raised hopes for reform of a traditionally corrupt institution. Corruption is less widespread than for other countries in sub-Saharan Africa, and Prime Minister Abiy has promised a crackdown on officials engaging in ‘economic sabotage’, be it from state-owned enterprises or the military.

Turning tide of freedoms

Since 1991, the ruling EPRDF has had strict control of the political and civil space in Ethiopia. Individual freedoms and basic legal rights have been highly restricted in the country, alongside controls on opposition movements. As protests throughout 2015 and 2016 were brutally put down by government forces, freedom of assembly and association deteriorated. This period was followed by a 10-month state of emergency in which more than 29,000 people were arrested.

Over the last 12 months under new leadership, however, there is a sense of tentative change. In 2018, Prime Minister Abiy implemented reforms, including freeing political prisoners, lifting media bans, and removing three opposition political parties from terrorist lists. With these changes, the Government is showing signs of opening up the political space in Ethiopia. Challenges to the administration’s new approach are evident, as demonstrated by an attempted coup in Amhara state in June 2019 that led to the deaths of army chiefs; but overall the positive direction of travel suggests that Ethiopia’s institutions, which are crucial for the country’s long-term prosperity, are seeking a new direction.

Open Economies

Expanding infrastructure

The Ethiopian Government’s 2003 Industrial Development Strategy was the country’s first long-term plan for mass public investment. Since then, Ethiopia has made huge investments in infrastructure, including roads, rail, airports, telecommunications systems, and hydroelectric plants. Communications and resources have strengthened significantly, with electricity capacity and the ease of connecting to the grid both growing considerably – for instance, nearly 80% of the country’s population lives within proximity of medium-voltage transmission lines. Looking ahead, the recent expansion of Addis Ababa’s Bole International Airport should see Ethiopia improve its air links, as passenger capacity has tripled across the country since 2010.

The UN Economic Commission for Africa has recommended that deeper regional integration be a priority for Ethiopia, and the Government has embarked on a strategy of increased trade with regional partners, largely through improving infrastructure. A railway line to Djibouti, a highway to Kenya, and the re-establishment of trade with Eritrea have all served as tangible access points for Ethiopia to neighbouring markets. The country is also looking to diversify its port access, with the Government investing in port development projects in Sudan, Kenya, and Somaliland.

Burgeoning investment environment

Ethiopia’s investment climate has improved significantly in the last 15 years, with financial systems strengthening and contract enforcement improving. The proportion of businesses reporting access to finance as an obstacle has reduced by more than half since 2006, from 44% to 20%, which now compares more favourably than the rest of the sub-Saharan African region.

However, Ethiopia’s business environment remains highly regulated by the state, which has a reputation for being bureaucratic, risk-averse, and reticent to open the banking sector to international investors. Access to credit from the private sector remains low in comparison to African peers, as the state-owned Commercial Bank of Ethiopia carries out most lending to public infrastructure projects. Nonetheless, a recent trend of maturing government bonds and higher deposit rates have pushed banks to excess liquidity, which, whilst good for those looking for credit, has forced banks to find alternative schemes in which to invest.

Foreign exchange shortages in Ethiopia have led to a requirement for permits for all payments abroad, and foreign exchange transactions can be undertaken only through authorised dealers supervised by the National Bank of Ethiopia. Private sector businesses have struggled in the wake of this shortage, and the business impact of foreign direct investment rules has been significant. Nonetheless, the Government recently eased limits of foreign exchange accounts for the Ethiopian diaspora, and the country retains relatively few restrictions on financial transactions.

Empowered People

Community education

Educational improvements in the country, mainly in primary and secondary education, have been a large contributor to the rise in Ethiopian prosperity, with Ethiopia gaining seven ranks on the Education pillar in the past decade. Ethiopia’s success in primary and secondary education is based on the country’s 1994 Education and Training Policy. The reforms association with the policy included decentralising school administration, shifting to local languages as the language of instruction, and focussing on women and girls’ education. Other reforms have included abolishing school fees, increasing the amount of teacher training, and introducing school feeding programmes. As a result of these, Ethiopia has seen significant improvements in education over the last decade, with primary enrolment increasing from 76% to 85% since 2009, and access to quality secondary education rising according to expert assessments.

Ethiopia is a strong performer for pre-primary education within Africa. The Government has made significant progress towards providing universal access to education at the earliest stages of development, including launching a National Policy Framework for Early Childhood Care and Education in 2010. This focussed on parental education and early child health up to the age of three, and then early learning through community-based preschools, privately run preschools, preschools attached to primary schools, and faith-based preschools for children aged four to six. The importance of involving the local community in improving standards of education is significant, as children are more able to access education when there is a sense of local ownership in the success of students. Consequently, pre-primary enrolment rates have risen from 6% to 29% in 10 years.

Despite the country’s large budget allocations to the education sector, there remain stark disparities in rural and urban access to education. Though secondary enrolment in the capital, Addis Ababa, is close to universal, fewer than 10% of children in the sparsely populated Afar region have access to that level of education – a challenge which will take more than increased funding to solve. To address the disparity, the Government has started to roll out alternative, low-cost education to children in rural areas, including evening classes and school calendar adjustments, as well as cash or in-kind incentives for children to remain in school. In addition, radio and television broadcasts are used to supplement education programming, with initiatives such as STEMpower reaching around five million viewers weekly with its ‘STEM-TV Series’.

Extending healthcare

With a notable lack of adequate facilities and just one doctor for every 40,000 citizens in the country, Ethiopia’s healthcare infrastructure was chronically weak at the turn of the millennium. In 2003, the Government opted for a community-led solution, launching its landmark Health Extension Programme. The programme, which trained and paid female community health workers to meet basic medical needs within their local areas, has proved to be a great success. By 2016, 38,000 health extension workers were providing health interventions in 15,000 villages across Ethiopia. Consequently, 95% of Ethiopia’s population now have healthcare resources within 10km of home. The proportion of births attended by skilled staff has risen from 6% to 28% in a decade, significant improvements have been made in maternal and child health, the rate of communicable diseases has fallen, and hygiene and sanitation standards have improved.

Preventative healthcare has also benefitted immensely from the community-led approach. Ethiopia instituted a national immunisation plan in 2013 to tackle vaccine-preventable diseases, which has had significant impact. Immunisation rates are up by almost 20 percentage points on average, while tuberculosis treatment coverage is now well above the African average, having risen from 51% to 68% since 2009. Coverage of antiretroviral treatment has also increased from 32% to 71% of those living with HIV.

As a result of these improvements, life expectancy in the country has risen by 10 years since 2004, and the country’s Health pillar rank has risen from 145th to 130th in just a decade, delivering the biggest impact on Ethiopian prosperity.

Conclusion

Ethiopia’s rise in prosperity has been driven primarily by the significant improvement in the lived experience of its population, with education and health seeing particularly strong improvement. In addition, Ethiopia’s economy is more open than it was in 2009, due to strong economic growth, but burdensome regulation is holding back further improvement. Encouraging signs are also emerging following the recent political and democratic reforms, witnessed by all four of the Inclusive Societies pillars seeing an improvement since 2017. If this trend can be sustained, further progress can be made across the social and economic domains leading to further improvement in Ethiopia’s prosperity.