Security Scenarios And The Global Economy

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NS4301 Summer Term 2015 The Ethiopian Miracle

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Overview I

Robert Looney, “Ethiopia’s Economic Miracle is Running out of Steam,” Foreign Policy, April 16, 2015 Thirty years ago a major famine in Ethiopia However over the last decade, country has averaged a growth rate of better than 10% per annum Dominant political party, EPRDF, continues to focus on high growth strategy Goal is to make the country a middle-income country by 2025 Country has already met or close to meeting its Millennium Development Goals Country’s poverty rate fell from 44% in 2000 to 30% in 2011 Unemployment has been coming down Number of Ethiopian millionaires has increased faster than any other country

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Overview II

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Problem – success has come at a price Government obsession meeting growth targets at any cost has resulted in widespread anger

• Much discontent along regional and ethnic lines • Land grabs have been common – leasing out large acreages to international agri-business has not produced good results – have caused • Human rights violations

Abuses of power Growing resistance may be difficult to overcome without major reforms

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Development Strategy I

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Country’s development strategy conceived by Meles Zenawi – revolutionary who became prime minister in 1995 Believed as did Singapore’s Lee Kuan Yew – prosperity essential before democracy could take root Adopted “authoritarian developmentalism” model Prioritizes state-directed economic growth over human rights or political pluralism Model has paid off, but unlikely success cannot be sustained much longer Even assuming government can control unrest – country’s limited financial capacity poses a major problem

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Development Strategy II

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Ethiopia’s public investments in infrastructure, state enterprises, and human capital have averaged 19% of GDP – third highest in world Outrunning country’s financial capacity Government’s hope of achieving goals will depend on willingness to scale back control of economy

• Let private sector fill the gap • Will require democratic reforms

Some selective governance and economic reforms have already begun

• Corruption fallen sharply in recent years • Major civil service reforms have increased ranking in government effectiveness 5

Voice and Accountability

55 50 45 40 35 30 25 20 15 10 1996 2000 2003 2005 2007 2009 2011 2013 Legend Uganda Kenya Tanzania Mozambique Ethiopia

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Political Stability/Absence of Violence

55 50 45 40 35 30 25 20 15 10 1996 2000 2003 2005 2007 2009 2011 2013 Legend Uganda Kenya Tanzania M ozambique Ethiopia

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Government Effectiveness

55 50 45 40 35 30 25 20 15 10 5 1996 2000 2003 2005 2007 2009 2011 2013 Legend Uganda Kenya Tanzania M ozambique Ethiopia

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Regulatory Quality

60 55 50 45 40 35 30 25 20 15 10 5 1996 2000 2003 2005 2007 2009 2011 2013 Legend Uganda Kenya Tanzania M ozambique Ethiopia

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Rule of Law

50 45 40 35 30 25 20 15 10 1996 2000 2003 2005 2007 2009 2011 2013 Legend Uganda Kenya Tanzania Mozambique Ethiopia

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Control of Corruption

55 50 45 40 35 30 25 20 15 10 5 1996 2000 2003 2005 2007 2009 2011 2013 Legend Uganda Kenya Tanzania M ozambique Ethiopia

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Total Governance

45 40 35 30 25 20 15 10 1996 2000 2003 2005 2007 2009 2011 2013 Legend Uganda Kenya Tanzania M ozambique Ethiopia

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Overall Economic Freedom

70 65 60 55 50 45 40 1995 2000 2005 2010 2015 Legend Uganda Kenya Tanzania Mozambique Ethiopia

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Trade Freedom

90 80 70 60 50 40 30 20 1995 2000 2005 2010 2015 Legend Uganda Kenya Tanzania M ozambique Ethiopia

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Development Strategy III

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Limited progress in other areas Hardly any political opposition in House of Representatives Very low scores in voice and accountability and political stability/absence of violence Since 2005 experienced an almost continuous decline in economic region – now last in the region Government points out it took East Asian countries several decades to deliver on their socioeconomic goals

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Development Strategy IV

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However revenue shortfalls forcing government to finance some major projects with loans from China, India and World Bank Domestic financing is adding to inflation – reached 40% in 2011 IMF has identified the country’s financing trade-offs Excessive borrowing from financial system could cause inflation to jump again

• Hits low-income ethnic groups and regions very hard • Likely to cause social discontent and turmoil

Alternative external borrowing eases inflationary pressures but adds to country’s debt burden

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Assessment I

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IMF recommends – stay within safe limits domestic credit and external debt Means Ethiopia will have to scale down growth targets to more achievable levels Could be good – other countries that have tried to maintain high growth over time have run into harmful side-effects Problem more fundamental Even slower growth may be a moot point State led development model is starting to hit diminishing returns Also unlikely government has capacity to further expand the rates of public investment needed to sustain growth and overcoming growing resistance of large segments of

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the population.

Assessment II

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Only realistic alternative is to scale back state control of economy enabling private sector to drive further growth To be viable the private sector will need

• Secure property rights • Impartial third party contract enforcement • Increased economic freedom

All cornerstones of democracy If EPRDF unwilling to relinquish control and enact necessary reforms – country will probably not achieve a viable functional democracy Instead will default to a “transitional democracy” Neither fully democratic nor fully authoritarian Not often associated with sustained growth and development

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