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Economic Development in Ethiopia

Updated on November 29, 2011

Each year the world community pumps billions and billions of dollars into Africa, trying to pull the poorest and most underdeveloped continent in the world out of poverty. So why isn’t it working? Blindly throwing money at Africa will never help develop Africa and wastes tons of money. Each country in Africa has unique characteristics, so I will focus on one of the poorest countries in Africa: Ethiopia.

Ethiopia Background

Ethiopia is an especially poor country, and in 2001, it qualified to receive international aid under the Heavily Indebted Poor Countries initiative. Although Ethiopia receives this aid, it does not mean that Ethiopia is growing economically. There are many different aspects that Ethiopia needs to work on in order to successfully grow its economy and maintain that growth. However, I have three crucial recommendations that Ethiopia must follow in order to begin the process of sustaining positive economic growth. First of all, Ethiopia needs to fix its judicial system and provide its people with a valid rule of law. Secondly, Ethiopia needs to settle its border dispute with Eritrea and thus be able to decrease defense spending. Thirdly, Ethiopia needs to develop and expand its industrial sector.

Rule of Law

Rule of law is so important to economic growth and reducing poverty because it provides opportunity, empowerment, and security through the legal system. Without a rule of law, entrepreneurs will not be motivated to pursue business ideas because of the many grave risks. For example, if an inventor spends much time, effort, and money into developing a new product and a rule of law cannot protect the rights to his idea, the inventor will fail to earn economic profit because other firms will steal his idea. Also, foreign investors will not view Ethiopia as an attractive nation to invest in because they will not feel like the Ethiopian government can provide them adequate security through the legal system. According to the World Bank, a valid rule of law is established when “the government itself is bound by the law; every person in society is treated equally under the law; the human dignity of each individual is recognized and protected by law; and justice is accessible to all.”

Currently, Ethiopia does not have an established rule of law. One reason is that the Ethiopian Constitution allows states to establish courts based along ethnic and religious lines. Also, Ethiopia traditionally followed a legal structure similar to the French legal system; however, with recent adoption of commercial law, the Anglophone common law system made its way into Ethiopian law. Moving along, the dissemination of legal information throughout Ethiopia is very poor. All three of these problems can lead to inconsistencies in the application of the law throughout Ethiopia, which is a major reason why Ethiopia has failed to establish a rule of law. Also, according to the World Bank, Ethiopia does not have a “credible and competent judicial bench to apply and administer laws.” The horrible conditions of the judicial branch must be fixed before Ethiopia will be able to establish a rule of law.

In order to establish a valid rule of law, the Ethiopian government should take the following steps. Firstly, all judicial courts in the country should be dissolved and re-established in districts created according to population size and not along ethnic or religious lines. Further, every court should only use the Anglophone common law system, and information on the laws of Ethiopia and procedures of the new court system must be delivered to every district community center in the country. Also, Ethiopia should place every justice through the same Ethiopian law program and hold every justice to a strict set of regulations. To do so, the government needs to create a judicial regulatory commission that adequately monitors justices and punishes those who break the judicial regulations. Finally, the Ethiopian government should establish several “traveling” courts that would conduct sessions in remote villages on a regularly scheduled basis.

Settle Border Dispute

Ethiopia has been in constant tension with Eritrea for several decades. The border demarcation issues have drained a lot of Ethiopia’s resources and manpower. From 1961 to 1991, Eritrea fought a long and deteriorating war of independence against Ethiopia. The exact delineation of their borders was never settled, and the territorial dispute continued from 1998 until 2000. The intense fighting caused civilian casualties and deaths on both sides of the border displacing thousands of people and destroying key components of infrastructure. Both countries had already spent several hundred million dollars on the war upsetting the whole region in the Horn of Africa. The economies of these countries are the world’s poorest and became even weaker as a result of decades of war, civil war, and drought. The conflict exacerbated these problems, resulting in food shortages. Prior to the war, much of Eritrea’s trade was with Ethiopia, and much of Ethiopia’s foreign trade relied on Eritrean roads and ports.

In a country of war, uncertainty reigns causing several shortcomings in the economy. A high proportion of the gross domestic product (GDP) is allocated to national defense taking away potential resources from other sectors of the economy. The army’s growth decreases the labor force that could be more productive doing something else. The destruction of cities and villages as a result of the conflict creates an environment of fear and uncertainty, which discourages foreign investment and causes Ethiopia’s own population to move away from the border area. Dragging on the tension just deteriorates both economies and does not benefit either of them. Easing tensions will allow Ethiopia to decrease its defense spending, obtain a port to the Red Sea, reestablish commerce with Eritrea, and bring back stability in the region.

Developing the Industrial Sector

Ethiopia is a nation that relies too heavily on agriculture and has much room for improvement and growth in its industrial sector. Agriculture has the highest contribution to Ethiopia’s GDP of 43.8% and employs almost 85% of Ethiopia’s workforce. Without diversifying its economy, Ethiopia has become a slave to weather conditions, which either support or impede the agricultural industry each year. Also, since Ethiopia’s labor force is mostly unskilled, labor will be cheap in Ethiopia, so expenditures will be lower for the industrial sector of the country than in other places around the world.

In order to grow the industrial sector in Ethiopia, the Ethiopian government should offer tax incentives to new manufacturing startups, provide subsidies for manufactured goods, and create a program that provides incentives for foreign direct investment. By offering tax incentives to manufacturing startups, Ethiopia will incentivize investors to create new firms, which will help promote economic growth. As for the manufacturing subsidies, Ethiopia will make its exports more competitive in the world market and help existing manufacturing firms grow. However, in order for this plan to work, Ethiopia must also set up a plan that slowly weans manufacturing firms off subsidies. This weaning off of subsidies is essential so as to not create dependency and decrease the incentive to increase productivity.

As for increasing direct foreign investment to grow Ethiopia’s industrial sector, an example program is one that allows foreign companies to come into Ethiopia and train workers in exchange for a guarantee that the newly trained Ethiopian workers will work for the company for a given amount of time. Relatively cheap labor in Ethiopia should allow firms to reduce expenditures and incentives them to invest in Ethiopia. Also, in order to quell the fear that foreign companies may have in Ethiopia, aid money can be used to set up an insurance plan for these foreign companies in case of political instability in Ethiopia.

Conclusion

Ethiopia, and more generally, Africa, will never develop unless policy changes. The world is not getting a “bang for its buck” when it comes to providing aid to Africa, and until the world helps Africa change the way it operates, that aid money will not be effectively used. The recommendations in this article are only a starting point for economic development; however, they are crucial to start the development process.

References

“Ethiopia Economic Structure.” Economy Watch. http://www.economywatch.com/world_ economy/ethiopia/structure-of-economy.html (accessed February 18, 2011).

“Ethiopia: Legal and Judicial Sector Assessment.” The World Bank. 2004. http://siteresources. worldbank.org/INTLAWJUSTINST/Resources/EthiopiaSA.pdf (accessed February 16, 2011).

“Ethiopia and Eritrea: War or Peace?”, Africa Report N 68, September 24, 2003. http://www.crisisgroup.org/ (accessed April 28, 2011).

“The Search for Peace: The Conflict between Ethiopia and Eritrea.” July 6-7, 2006. http://www.fafo.no/pub/rapp/20014/20014.pdf (accessed April 28, 2011).

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      Habesha 4 years ago

      I like your article keep in touch.

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      danielabram 5 years ago

      Do you think it was beneficial or harmful that Ethiopia was never colonized?

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      Wiztwins 5 years ago

      Nice work,, on.