Macroeconomic Performance in Post-Derg Ethiopia Recent Publication/JNEA2005.pdf · macroeconomic...

Macroeconomic Performance inPost-Derg EthiopiaAlemayehu GedaAddis Ababa University

AbstractThis paper appraises macroeconomic performance in post-Derg Ethiopia,organizing its analysis along four thematic categories important inexplaining growth and macrodevelopment: (1) the political frameworkunder which analysis is registered, (2) the macrogrowth framework, (3)the market structures under which economic agents function, and (4)constraints to economic agents. The method employed is the before-afterapproach. The study revealed that although performance is very goodwhen judged in the context of the structural problems of the post-Dergperiod, sustainability of the results is highly questionable. The latter isthe result of the dependence of major macro variables on vagaries ofnature, especially a good rainy season, and external shocks that are accen-tuated by lack of structural transformation in the economy over the lastthree decades.

IntroductionThe modest objective of this paper is to make a brief appraisal of themacroeconomic performance in post-Derg Ethiopia. There have beenvarious attempts to review Ethiopia’s macro performance (see, e.g.,Eshetu and Mekonnen [1992] for the period 1974–1990; MEDaC[1999], EEA [2000], and Berhanu and Seid [1999], and various papersedited by Alemayehu and Berhanu (1999) for the period 1991–1999).This study focuses in the post-Derg period; the prereform performanceis given in Eshetu and Mekonnen (1992). It also differs from other

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recent studies in grouping the macro issues under thematic categoriesbelieved to be important factors in macro performance.

The paper organizes the major macro trends along four thematic cate-gories important in explaining growth and evolution of macro variables:(1) the political framework underpinning the macroeconomic perfor-mance registered, (2) the macro growth framework, (3) the market struc-tures under which economic agents function, and (4) constraints toeconomic agents.1 This analysis assumes that a positive record on indi-cators of these thematic issues and their sustainability may show thecountry is on a positive growth and development trajectory.

Some Notes on Method of AnalysisSince the 1980s, the World Bank and International Monetary Fund

(IMF), and increasingly the World Trade Organization, have inspiredprograms of liberalization in almost all African countries. Evaluatingpost-Derg macroeconomic performance is tantamount to evaluatingsuch structural adjustment programs (SAPs). There is serious disagree-ment about the effect of these programs in the literature (see Alemayehu2002). One major problem is the lack of an appropriate method to eval-uate such liberalization schemes.

There are at least five approaches employed in the literature: thebefore-after; the with-without; the actual-versus-target; the modeling/sim-ulation, and the econometric approaches (see Khan 1990; Pio 1994).Evaluation of liberalization programs is dominated by the before-afterapproach,2 which basically compares performance of the economy (ormajor macro variables) before and after the implementation of struc-tural adjustment programs. While easy to apply, it is fundamentallybased on the cetirus paribus assumption that all other factors remainunchanged. It is difficult to be certain with this method that the inde-pendent effect of the reform is captured (Khan 1990, 201), as it has nomechanism to filter out the effect of other factors, other than the reform,that might have a bearing on the outcome.

The with-without approach is designed to overcome the weakness of thebefore-after approach and hence serves as a supplement to it (Kahn andMontiel 1987, 305; Khan, Montiel, and Haque 1990, 201). The approachattempts to distinguish between the program and nonprogram countries

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and compares the outcomes. It assumes that countries with and without aliberalization program have identical environments, and therefore any dif-ferences observed in the program countries are attributed to the effect ofthe program.3 The major weakness of this approach is that countries withand without a liberalization program, however carefully they are chosen,are not identical. Moreover, as noted by Khan (1990), program countriesare not randomly selected; rather, they are adversely picked in the sense ofhaving relatively poor economic performance prior to the program period.Goldestein and Montiel (1986) suggested identifying and controlling thespecific differences in the initial position of the program and nonprogramcountries to help overcome this limitation. With this modification theycame up with modified control group approach.

The other strand in the literature is the actual-versus-target approach,which is not frequently used. This approach allows us to compare theactual outcome of major macro variables to their target set (see Pio 1994;Khan 1990). One of the major weaknesses of this approach is the biasthat may arise in evaluation because the targets might have been seteither below or above what could realistically be attained.

The modeling/simulation approach compares the outcome of differentpolices, such as liberalization, using an economy-wide (usually macro)model. It basically carries a counterfactual analysis. Comparativelyspeaking, this approach is theoretically neat4; the problem is that it isextremely demanding in terms of having an empirical model and is vul-nerable to what is called “Luca’s Critique.”5 The final approach cited inthe literature is the econometric approach, which makes use of regressionanalysis, after correcting for socioeconomic and external variables, toevaluate policy performance (Pio 1994, 299). The approach is similar tothe modeling/simulation approach, their difference being that the econo-metric approach is a partial equilibrium based analysis while the model-ing approach is closer to a general equilibrium analysis.

As noted above, all these approaches have advantages and disadvan-tages. This is partly the reason for obtaining a wide range of results,which often conflict. Ideally it would be illuminating to employ all themethods and explore their implications; neither time nor availability ofdata and models allowed me to do that in this paper, however. Thus, Iwill basically use the before-after approach.

Macroeconomic Performance in Post-Derg Ethiopia 161


The Political Economy Framework forthe 1992 Reform

Economic performance in Ethiopia is highly correlated with the polit-ical process.6 Ethiopia’s history is full of conflicts, drastic policy changes,and reversals. Before 1974, the macroeconomic policy was largelyinformed by a market-oriented economic system. The period 1974–1991witnessed a centralized economic system (socialism), where the stateplayed a significant role in all spheres of economic activity. The post-Derg period (since 1991) is again taking us back to the market-orientedsystem of the imperial regime. Such cyclical political processes andregime shifts are not only unpredictable but also violent. Economic inse-curity pervades the system as a rule of law, and enforcement of contractsand property right insecurity are configured on a shaky political base.The detrimental impact of such political processes on macro perfor-mance is obvious.7

Having this general picture, let us take up the political considerationsof the ruling party that may have informed the reforms conducted in thepost-Derg period. Such analysis is important because the evolution ofmacroeconomic outcomes cannot be understood in a political vacuum.Interest groups, through policy and institutions, do influence macroeco-nomic outcome so that it accords to their interest.8

In terms of macroeconomic policy, 1991 witnessed a marked depar-ture from the previous Socialist system—the Derg regime—in openlyadopting a market-oriented economic policy. In fact, many of the policiesadopted by the new government in Addis Ababa in 1991 were initiatedby the Derg virtually at the end of its reign. The interesting politicalquestion is, What were the political economy preconditions for the pol-icy shift? At least three fundamental political trajectories informed thepolitical basis of the 1991 reform.

Firstly, there was a challenge to socialism both domestically and inter-nationally. Although the ideology of the EPRDF (Ethiopian People’sRevolutionary Democratic Front, which assumed power after over-throwing the Derg) was informed by socialism before it came to power,it had to confront domestic dissent toward socialism and the failure ofthat system in the international context following the collapse of the

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USSR. The political landscape left those in power no other choice thanto accept the reform that basically is the antithesis of socialism.9

The second political factor relates to the deep-rooted dichotomy inEthiopian elites’ politics about the nature of the country’s unity.10 Theruling EPRDF takes the position of “self-determination including cessa-tion” for regions organized along language and cultural lines,11 but manypolitical groups, including the majority of the inherited bureaucracy,oppose this framework. In this political landscape it was rational for theEPRDF to accept the reform not only to get external endorsements (inthe face of domestic opposition) but also to use macro policy instru-ments (such as expenditure reduction) to fight the hostile bureaucracy(witness the implementation of the retrenchment program under whichpublic sector employees were fired or forced to retire early).

Finally, a related issue to the second point above concerns one of thepackages of the liberalization scheme, decentralization, which theEPRDF was able to realize in an ideologically informed manner.Although decentralization was one of the policy items recommended bythe Breton Woods Institutions to Ethiopia, the particular form that it tookin Ethiopia was the EPRDF’s preference.

The government’s acceptance of the reform was informed not only bythese political factors but also largely by the fact that it inherited a shat-tered socialist economy with no foreign exchange reserve to speak of.Accepting reform directly addressed the latter (foreign exchange prob-lem) and promises to address the former (revitalizing the economy).Having accepted the reform, the government has implemented the typi-cal IMF/World Bank packages (albeit with minor bargaining power).The evolution of the major macro variables following this reform is thesubject of the next section.

Macro-Growth Framework

Gross Domestic Product and Sectoral Growth Trends

During the Derg period (1974/75–1989/90), the growth rate for grossdomestic product (GDP) decelerated to 2.3 percent (per capita growthbeing -0.4 percent)—a growth rate below the estimated population



growth of 2.9 percent. Various factors caused the poor performance dur-ing this period, as can easily be seen if we disaggregate this period intorather short time intervals. During the period 1974/75–77/78 thegrowth rate was 0.3 percent (per capita growth being -2.3 percent).Among other things, the instability induced by the emerging new policyas well as the war with Somalia could explain a good part of this dismalgrowth performance. From 1978/79 to 1982/83, a period characterizedby relative stability and good weather, especially in 1982/83, the growthrate increased to 4.6 percent (1.8 percent in per capita terms). In1983/84 and 1984/85, periods of severe drought, growth decelerated by5.7 percent and 9.1 percent respectively. The rate rose to an average ofabout 12 percent in the subsequent two years, mainly showing therecovery from the small base, only to fall back to no growth (-0.01 per-cent) in 1988–89. It is interesting to note that growth episodes areextremely irregular. This is strictly linked to agricultural growth, whichin turn is related to the vagaries of nature.

Such is the structure inherited by the EPRDF in 1991. Growth dur-ing the post-Derg period is quite good where real total and per capitaGDP on average grew by 3.7 percent and 0.7 percent per annum, respec-tively. This figure rises to 5.6 percent (and to 2.6 percent in per capitaterms) if one excludes the abnormal years 1990–92. Figure 1 belowshows this pattern of growth.

Figure 1. GDP and agricultural growth rates

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Figure 1 shows not only the rhythmic co-movement of GDP and agri-cultural growth but also the erratic nature of both. This is the directresult of the Ethiopian economy’s extreme dependence on rain-fed agri-culture. The GDP registers the highest figure when there is good rainand the lowest (sometimes negative) in dry years.12 An examination ofthe rainfall and GDP growth patterns corroborates the claim that rain-fed agriculture is the fundamental problem (see Figure 2). The drought(and hence rainfall shortage) in 1984/85, 1991/92, 1993/94, and1997/98 is accompanied by a sharp decline in output (see Appendix;Figures 1 and 2). On the other hand, a good outturn in rain in 1995/96and 2001/02 explains the bumper harvest where the GDP grew by over10 and 5 percent, respectively (see Figures 1 and 2).

Figure 2. Rainfall (deviation form mean), and agricultural andGDP growth (1967/68–2002)Source: MOFED (2004)

Dependence on rain-fed agriculture has direct implications for agri-cultural policy, and unless fundamental action is taken to decrease thedependence, good macro performance will not be sustained. The GDPgrowth rate in the year 1997/98 vividly illustrates this point. In this par-ticular year, the industrial sector grew by 10 percent, the distributivesector (trade, transport, etc.) by 8.2 percent, and other services (bank,insurance, public administration, and social service) by 7.9 percent.



While this record is impressive, total GDP grew only by 0.5 percentowing to the poor performance in the agricultural sector that registereda -7.6 percent growth rate.

Dependence on rain-fed agriculture also has a negative multipliereffect on production levels in subsequent years; that is, the shock in oneperiod is carried over into the next as the early years of the droughtdeprive peasants not only of current income but also of wealth (e.g., theymay sell or otherwise lose assets, in particular oxen). Thus, more auspi-cious weather during the next agricultural season may not see anincrease in harvest, as the farmers have been dislocated in terms of cap-ital and perhaps also physically if forced to migrate in search of food (seeAlemayehu and Befkadu 2002). As may be inferred by the above analy-sis, detailed research is needed to more comprehensively explain growthand relevant policy in Ethiopia.13

In terms of agricultural policy, the post-Derg period has witnessed amajor shift from the previous regime. Dismantling the marketing boardsand cooperatives and deemphasizing the state farms are cases in point.Various liberalization schemes have been implemented, although the for-mal market for land is still controlled. The new government has alsocome up with the Agricultural Development Led Industrialization(ADLI) strategy, which emphasizes raising the productivity of small-holder agriculture and the importance of labor intensive industrializa-tion. The policy toward the small farmers (who produce nearly all theagricultural produce) is to provide appropriate incentive structuresusing agricultural extension as a vehicle. Government documents claimthat this approach is yielding good results (see MEDaC 1999). The cen-tral problem of agricultural—rain-fed agriculture—is not squarely con-fronted in this strategy, however. The share of agriculture in therecurrent budget of the government, for example, was only 9.3 percentin 1997/98.14 Similarly, the share of agriculture in capital expenditurehas been fairly constant in the post-Derg period; in 1997/98, forinstance, that share stood at 8.8 percent. The comparative figure fortransport and construction sector (the highest share) is 21 percent. Toconclude, in the face Ethiopia’s cyclical growth, which is related to theproblem of dependence in rain-fed agriculture, it is imperative to designpolicies aimed at addressing this dependence on rain-fed agriculture.

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Another area of concern central for explaining sustainable macroeco-nomic performance is structural change in the economy. Figure 3 showsthe evolution of sectoral value added in gross domestic product in thepost-Derg period. Except for the service sector, it is reasonable to con-clude that the period under analysis does not show major change in thestructure of the economy.

The share of agriculture in GDP declined from 52.5 percent in1973/74 to 43.6 percent in 1989/90. In contrast, the share of industryduring these two periods rose from 15.1 to 16.6 percent, the remindershare being for services (see Eshetu and Mekonnen 1992). In light ofthese figures, it can be seen that although the latter sector shares fluctu-ate within a very narrow band, they are fundamentally unchanged in thelast four decades; thus, the macro performance still hinges on the fragileagricultural sector with no structural change in the overall economy.

Figure 3. Structure of values added by gross domestic product(GDP) in the post-Derg periodSource: Own computation based on MOFED (2004)

To understand Ethiopia’s structural change over the last fourdecades, Alemayehu and Befekadu (2002) and Alemayehu (2004) usedthe Chenery-Syrquin type cross-country regression as a benchmark(Chenery and Syrquin 1975; O’Connell and Ndulu 2000). This method



provides an idea of what the level of those sectoral shares should be,given Ethiopia’s initial income and population in each half-decade ana-lyzed. The results reveal that the agricultural GDP share was above whatwould be expected given the country’s initial conditions compared tothose of other developing countries throughout the three differentregimes (Imperial, Derg, and EPRDF), while the service sector per-formed below expectations. On the other hand, industrial sector perfor-mance was above expectations in all the periods except for the 1990s.The study also noted that the structural change or lack thereof is basi-cally smooth, with no noticeable episode worth discussing. This wasgenerally the case across the three periods and shows how stagnant theeconomic structure in the last four decades has been. The macro policychallenge is to bring about structural change, which can best be done bybringing about meaningful change within the agricultural sector.

Positive and sustainable macro performance depends on investmentand its financing. Figure 4 shows the evolution of these aggregates in thepost-Derg period.

Figure 4. Trend of gross fixed capital formationSource: Own computation based on MOFED (2004)

There are two important facts that emerge from Figure 4. First, theimmediate period before the reform witnessed a downward trend of

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gross capital formation, reflecting the deteriorating condition of theeconomy during the last days of the Derg. This downward trend hasincreased during the post-Derg period (witness the rift associated withviolent political change). It should be noted, however, that the level ofinvestment, which in both periods did not exceed 20 percent, is verysmall even by African standards. The second important point aboutinvestment during the post-Derg period is the increasing importance ofprivate investment, which is the direct result of the liberalization poli-cies pursued. Still, public investment is crucial in the post-Derg period.

The next important question that follows from the above analysis iswhether this growing level of investment is financed domestically.Figures 5, 6, and 7 throw light on this issue.

Figure 5. Evolution of gross domestic saving (percent of GDP)Source: Own computation based on MOFED (2004)

Some comments are in order about the data in Figure 5. GDP at mar-ket price and gross domestic saving (GDS) data are taken from MOFED(2004). Government saving (GDSg) is defined as the difference betweencurrent government revenue (including grants) and current expendi-ture. Private saving is derived as residual; thus, the private saving figureis highly restrictive because the gross domestic saving itself is derived asa residual (as the difference between GDP and consumption) in theNational Accounts Statistics.



The data show that all types of savings have drifted since 1990/91 andprivate saving has steadily declined. Public saving, which sharply declinedwhen the EPRDF came to power in 1991 (to about -2 percent of GDP),showed a recovery in the 1990s (to about 8 percent of GDP in the secondhalf of the decade) but again sharply declined following the outbreak ofwar with Eritrea (1999–2000). Following the war, all types of savingbegan to collapse and aggregate saving became negative. Recovery hasbegun following the cessation of hostilities, however. Apart from “exter-nal” factors such as the war with Eritrea, the government’s fiscal policy inthis area was promising.15 Total saving, however, is far below the level ofinvestment which itself is the lowest by African standards, resulting a gov-ernment deficit of about 10 percent of the GDP per annum (see Figure 6).

The government has registered a modest achievement in terms of fis-cal policy chiefly by raising revenue, but whether this result can be sus-tained is highly questionable given the regional insecurity (including thewar with Eritrea) and natural disasters that often strike the country.The deficit also points to the country’s dependence on externalresources. This is more apparent in the financing of government capitalexpenditure than anywhere else, as shown in Figure 7.

Figure 6. Government revenue, expenditure, and deficit (percentof GDP)Source: Own computation based on MOFED (2004)

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Figure 7. Financing of capital expenditure (percent of totalfinancing)Source: Own computation based on MOFED (2004)

External assistance is largely used to finance capital expenditure.Current government expenditures are financed largely by its revenues,which is an interesting fiscal policy success. For example, external assis-tance constituted an average of only 8 percent of the total recurrentexpenditure from 1985/86 to 1990/91. This figure rose sharply to 12percent in 1991/92 and then dropped to an average of about 3 percent inthe last decade. On the other hand, the external sector share in financ-ing capital expenditure (see Figure 7 and Appendix), around 38 percentin terms of loan and around 13 percent in terms of assistance, droppedto about 20 and 4 percent, respectively, in 1995/96; and increased to 35and 13 percent, respectively, in 2000/01. An interesting developmentduring this period is the sharp rise in the treasury financing of capitalexpenditure, which rose from around 50 to 70 percent between 1990/91and 1995/96, and in 2000/01 slid back to about 50 percent. On average,this is a commendable achievement (see Figure 7).

Notwithstanding Ethiopia’s fiscal policy success, the dependence onexternal financing for capital expenditure needs closer attention. Oneimportant implication of a fiscal policy that relies on external financingis a debt problem. In Ethiopia this problem is acute because it is coupled



with military-based debt. The debt data in Ethiopia is problematic;16 bethat as it may, as a result of the growing resource gap both the debt stockand the debt to GNP ratio have increased steadily since the 1980s. Thismakes Ethiopia one of the sub-Saharan African countries that have atotal debt exceeding their GNP, having debt to GNP and debt to exportratios of 159.0 and 962.3 percent respectively in 1997 (see Table 1).17

This has resulted in accumulation of arrears on debt beginning in the1980s. Prior to this period, there had been almost no interest arrears andprincipal arrears were negligible. Interest and principal arrears that hadbeen 0.3 percent of exports (or 0.02 percent of GNP) reached a peak of547 percent of exports (or 90 percent of GNP), chiefly owing to debtcancellation, but declined to 66 percent of exports (or 10 percent ofGNP) in 2001. This rising level of arrears is due to resource constraintsthat hindered timely debt-service payments; that is, meeting the debt-service obligation on schedule could only be accomplished by furtherdebt rescheduling. This has worsened the situation, as it resulted in aneven larger arrears accumulation in recent years. Recently, this problemhas been at least temporarily alleviated following debt cancellation.

In general, the increasing debt to GNP and debt to export ratios, inaddition to interest and principal arrears, show an unprecedentedincrease in the country’s debt level. The indicators listed above revealthat the total debt is well above the nation’s GNP and more than 12times the total export levels in 1996, implying that the debt burden, ascompared to the country’s capacity, is too great to resolve itself.Similarly, the debt service ratio (the ratio of total amortization and inter-est payments to total export of goods and nonfactor services) that wasaround 3 percent per annum during the period 1973–1983 jumped to 28percent in 1985 and 40 percent in 1989. It dropped to 19 percent in 1995and increased to a staggering 42.2 percent in 1996, only to drop to 9.5percent in 1997 and again rise to 19 percent in 2001. This trend islargely attributed to the rise in exports, rescheduling possibilities, anddebt cancellation (see Alemayehu and Zerfu 1999).

Regarding net transfer of debt, there was an increasing and positivetrend until very recently (except in 1994/95, when Ethiopia recorded anegative inflow of -74.6 million birr). In general, the figure computed forthe whole of Africa shows that there is a net resource outflow beginning

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in the 1980s. For example, the net inflow to Africa was -1.71 billion, -4.41 billion -4.68, -7.47 and -6.75 billion U.S dollars in 1985, 1990, 1992,1996, and 1997 respectively (see Alemayehu 2003 [2003a or b?). Theaggregate net resource flows on debt in Ethiopia (which is the sum of netresource flows on debt, foreign direct investment (FDI), portfolio equity


Table 1. Indicators of debt burden

*Includes debt owed to the former USSR estimated at around 4 to 5 billion US$.Source: World Bank (2003)


flows, and official grants excluding technical cooperation) have exhib-ited an increasing trend, even if there was almost no FDI, exceptingMIDROC Ethiopia PvLtd Company’s (the dominant company) invest-ment, and portfolio equity flow. This is mainly due to the rising level offinancial grants (see Table 2).

Table 2. Net resource and aggregate resource flows (in million ofdollars US)

*NRFD = loan disbursed minus principal repayments**NTD = NRFD minus interest payments***ANRF = NRFD plus FDI, portfolio equity flows, and financial grantsSource: World Bank (2003)

Most financial flows come from official creditors (i.e., multilateraland bilateral sources). Private creditors such as supplier credit constitutea small fraction of the total financial flow (less than 10 percent in theperiod 1987–1994). Out of the total outstanding debt (DOD), the aver-age share of the multilateral and bilateral lenders during the period1973–1990/91 was 45 and 55 percent, respectively. During the post-Derg period there has been a shift toward multilateral lenders as majorsources of external finance, owing to structural adjustment relatedfunds. In the period 1991/92–1994/95, from the total loan and grantsextended to Ethiopia, 46 percent has been mobilized from multilateralsources, 53 percent from bilateral sources, and 8 percent from U.N.agencies. Among the multilateral lenders, the World Bank group isEthiopia’s main creditor. Breaking down the total share of bilaterallenders into OECD (Organization for Economic Cooperation andDevelopment) and CMEA (Council for Mutual Economic Assistance)

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countries reveals that during the period 1973–1980 CMEA countriesheld 7 percent of the total bilateral flows, while the OECD countries’share was 87 percent. Subsequently, CMEA’s share rose, for obviouspolitical reasons, reaching 37 percent of the bilateral flows during theperiod 1981–1991/92. This share sharply declined, owing to the politi-cal winds of change, to 18 percent in 1994/95. OECD’s share remainedfairly stable at around 51 percent in 94/95 (see Alemayehu and Zerfu1999 for details).

The terms and conditions of this debt creating flow are given in Table3. In general, borrowing terms in the post-Derg period have been good;thus, the average interest rate, compared to 1970, had declined by about80 percent in 2001, the grace period increased from 7 to 12 years, and


Table 3. Average terms and conditions of all creditors

Source: Global Development Finance (2003)

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the grant element rose from 45 percent to 80 percent during these twoperiods. In terms of institutional category, loans from official creditors,in particular those from multilateral lenders, are often softer (i.e., hav-ing more generous repayment terms) than those from private lenders.The rising share of the dollar in the currency composition of Ethiopia’sdebt is also a favorable trend, as most of Ethiopia’s export earnings (fromwhich it pays its debt) are earned in that currency and thus are insulatedfrom currency fluctuation related costs.

Grants, which may take the form of financial flows or technical coop-eration, have also increased in the post-Derg period, and relief and reha-bilitation grants are also very high (see Table 4). It is interesting to note

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Table 4. Development related grants (in millions of dollars US)

Source: Global Development Finance (2003)


from Table 4 that the total grants from both multilateral and bilateralsources in the period 1985–2001 total ETB 11.3 billion, of which thetechnical cooperation grants account for about 25 percent. In sum, theanalysis in this section reveals the serious debt problem Ethiopia is fac-ing. The country does qualify for the World Bank’s Highly Indebted PoorCountry Initiative (HIPIC), which promised to cancel debt owed by poorcountries provided they strictly follow Bank/IMF recommended policies,and recent debt cancellation and rescheduling reflects this realization.18

Markets and the Growth Process“Market” in the context of this study may refer to either internal or

external markets. The latter fundamentally analyzes the export andimport structure of the country and its impact on the growth process. Inparticular, examining the sustainability of growth in the context of theexternal market (which includes the rules of the game such as WTO andSAP provisions) is very important. Internal markets are also crucial indetermining macroeconomic outcomes; thus, I will examine below thefinancial market and the related issue of monetary policy as well as theexternal market from a macro perspective.

The Money Markets and Monetary Policy

In terms of monetary policy, as could be inferred from the moneysupply, the post-Derg performance is commendable, in particular inmaintaining a fairly stable M2/GDP ratio—pursuing gradual monetiza-tion of the economy. Domestic liquidity (broad money) by 2002/03 wasabout 30 billion birr, showing a growth rate of about 10 percent over thepreceding year (see NBE 2004). Such annual growth fairly characterizesmoney supply growth in the post-Derg regime. Notwithstanding, Figure8 below shows a distinct pattern between narrow (M1, the sum ofdemand deposits and currency outsides banks) and broad money (M2,the sum of demand deposits, currency outside banks, and saving andtime deposits) in some years. The M1 diverges from M2 growth in someyears, chiefly due to the growth of currency in circulation in 1991,growth of both demand deposit and currency in circulation in 1994/95,and growth of demand deposit in 1997. The 1991 jump in currency incirculation perhaps points to the possibility that the then-new govern-



ment (the EPRDF) must have printed a large amount of money when itseized political power. Quasi money (saving and time deposits) becamefairly stable except in 1992/93 and 1994/95, when it registered a hugejump, in particular in the latter period.

Figure 8. Evolution of the money supplySource: Own computation based on National Bank of Ethiopia Data (NBE 2004)

Inflation. Save for sporadic swings relating to the occurrence ofdrought, price levels are generally stable in Ethiopia. In the pre-reformperiod, this is partly attributed to the regulated nature of market prices.Post-reform period price stability, which is remarkably low during thewhole post-Derg period as can be seen from Table 5, is attributedchiefly to the conservative monetary and fiscal policy and the perfor-mance of the agricultural sector.19 The latter is particularly important,as the food item weight in the Consumer Price Index (CPI) is nearly 60percent. Table 5 reveals an interesting relationship between the growthof seven major cereal crops and the level of inflation (the former some-times having a one-period lag effect on prices).20 Obviously, this lowlevel of inflation is accompanied by some abrupt changes such as theyear 1990/91, when there was a change of government and general dis-ruption in economic activity as well as a hike in the money supply (dis-cussed above), and years such as 1994/95 and 2002/03 where therewere poor harvests.

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Table 5. Trend of prices and exchange rates

*Based on the new country level general Consumer Price Index (base year1995/96)Source: Alemayehu (1999a); MEDaC (1999); National Bank of Ethiopia,Annual Report (NBE 2004)

Interest Rate, Exchange Rate, and the Interbank Money Market. Thepre-reform period was characterized by discriminatory interest rates,foreign exchange as well as credit allocation policies. The interest ratewas deliberately set at a very low level (repressed), and depending on thedegree of socialization, different sectors did face different interest rates.Currently the interest rate is fairly liberalized and the NBE has set onlya floor for deposit rate, leaving all other rates to be determined by mar-ket forces. Moreover, pursuant to the strategy of gradualism, the NBEhas implemented this policy step by step. Details about interest rates aregiven in the annex (see also Alemayehu 1999c and Alemayehu and Seife2001, and Table A2 for details).



In the pre-reform period, all foreign exchange earnings were surren-dered to the National Bank of Ethiopia (NBE), which rationed this lim-ited supply of foreign exchange to sectors accorded priority in thenational plan. In general, priority is given to the socialized sectors—theprivate sector being the least preferred. Ethiopia had a fixed exchangerate of 2.07 birr/$US for nearly two decades before the 1992 reform. Atthe beginning of the reform period, it devalued its currency to 5 birr/$USand subsequently introduced an auction-based exchange rate system.

When the auction-based exchange rate was introduced in 1993, it wasconducted on a biweekly basis as a “Dutch auction” (discriminatoryprice), where the marginal rate, which clears the market, is taken as theruling rate for the subsequent two weeks. The supply of funds for thismarket comes from export earnings, loans, and grants. The auction-based exchange rate system initially worked side by side with the officialexchange rate. A committee composed of the NBE, the Ministry ofFinance, the Ministry of Economic Development and ExternalCooperation (MEDaC), and two representatives of the private sectoroversee the system.

In the course of its implementation, more liberalization efforts (suchas reducing the bid cover requirement, abolishing the negative importlist, and the ceiling on demand for foreign exchange) were made.Moreover, after the eighty-sixth auction (in July 1996), the NBE intro-duced a weekly auction. By August 1995, the official or fixed exchangerate (used for importation of fertilizer, petroleum, and pharmaceuticalproducts, as well as Ethiopia’s contribution to international organiza-tions and external debt-service payments) was unified with the auctionrate. The NBE has also replaced the retail auction system with a whole-sale auction system where banks are taken as wholesale bidders (seeAlemayehu 1999c for details).

Currently the exchange rate is determined through an interbank for-eign exchange market on a daily basis, a clear indication of the govern-ment’s policy of gradualism toward liberalizing the exchange ratemarket. Since the introduction of the auction-based exchange rate sys-tem in 1993 (discussed at length in Alemayehu 1999c), the exchangerate is showing remarkable stability. Table 5 shows that the parallelmarket (unofficial, or illegal but tolerated market rate) exchange rate

180 Alemayehu Geda


premium is increasingly declining. These annual figures actually hidemany details. A more elaborated data shows that there are periods ofalignment between the two parallel and official rates. In general, theexchange rate policy pursued is quite satisfactory.

A related monetary policy is the introduction of interbank foreignexchange and money markets. The establishment of this market is pri-marily motivated by a recognition that the foreign exchange supply byNBE through the auction system is not sufficient to satisfy the demandby banks. The “interbank foreign exchange market” (IBFEM) is awholesale market where the amount traded is large and the spreadbetween buying and selling rates is narrower than the norms for com-mercial transaction. It is an exclusive market for banks to trade foreignexchange with each other. The establishment of the “interbank moneymarket” (IBMM) is designed to facilitate borrowing and lending offunds among banks, micro-financing institutions, and nonbank finan-cial institutions at interest rates that are freely determined by borrowersand lenders themselves. The directive issued to establish this marketspecifies how this market should function.21

The Financial (Banking) Sector. In terms of the financial sector, the1992 reform brought in private sector players. The government not onlybegan to serve the private sector, which hitherto had been demonized,but it also allowed the establishment of new private financial institu-tions. Equally, the role of Ethiopia’s central bank needed to be reformu-lated. In undertaking this task, the post-Derg government adopted astrategy of (1) gradualism—gradual opening up of private banks andinsurance companies alongside public ones and gradual liberalization ofthe foreign exchange market, etc.; and (2) strengthening domestic com-petitive capacity before full liberalization—restricting the sector tonationals, strengthening the regulatory and supervision capacity of theNBE, providing autonomy to banks, and opening up interbank moneyand foreign exchange markets. In line with this strategy, various procla-mations and regulations have been passed since 1992 (see Alemayehu1999c, 1999d; and Alemayehu and Seife 2001).

In the banking sector, the Commercial Bank of Ethiopia (CBE) is thedominant bank, followed by the Development Bank of Ethiopia (DBE).



Before the 1992 reform, on average CBE alone comprised more than 90percent of total deposit (while DBE’s share was 1.3 percent) and 71 per-cent of the total loans advanced (DBE’s share being 16 percent). Duringthis period, NBE was actively involved in direct control of all financialinstitutions by fixing interest rates, by directly controlling the foreignexchange and credit allocation in a discriminatory manner, by favoringthe public sector, and by directly financing the government deficit. Banksupervision/regulation has been largely limited to on and off inspectionon a few branches (see Alemayehu 1999c).

Proclamation No. 84/1994, which allows the private sector to engagein the banking and insurance businesses (though owners must beEthiopian nationals), marked the beginning of a new financial sector inEthiopia. Following this proclamation, the country witnessed a prolifer-ation of private financial institutions, and today there are six new pri-vate banks and 90 insurance companies in operation. All this took placein only four years. Despite the proliferation of such privately ownedcompanies, their relative share remaines extremely small, however (seeAlemayehu 1999c; Alemayehu and Seife 2001).

CBE still holds the dominant position, though increasingly it is losingground to the emerging private banks. Private banks are catching up par-ticularly fast in the disbursement of loans. Disaggregating the disbursedcredit by institutional category also reveals the increasing role of the pri-vate sector, which can be attributed chiefly to the ongoing liberalization(see Appendix). Among the new private banks, the biggest in terms ofcapital is the Bank of Abyssinia, followed by Awash International Bankand Dashen Bank. In terms of deposit mobilization, Dashen Bank leads,followed by Awash International Bank and Bank of Abysinia. Clearly,the share of the private banks both in deposit mobilization and lendingcould increase significantly in the years ahead.

In terms of disbursement of loans, the share of private banks hasincreased from 6 percent in 1996/97, to 17 percent in 1997/98, and to57 percent in 2002/03. The available data also shows that the share ofcredit extended to the private sector has jumped from 72 to 87 percentbetween 1995/96 and 2002/03, while that of the public sector hasdeclined from 15 to 5.5 percent during the same period (the share ofcooperatives remaining fairly stable at about 13 percent except for the 7

182 Alemayehu Geda


percent level observed in 2002/03). This is a clear demonstration of theimpact of the liberalization policy pursued by the government (seeAppendix and Alemayehu 1999c for details). Notwithstanding this; thebanking sector in general has excess liquidity. This may relate to theproblems of access to credit that may relate to risky avert nature of thebanking sector in the face of the growing level of nonperforming loans.

The External Market: Imports, Exports, and Terms of Trade

An examination of the external trade policy of the three successiveregimes in Ethiopia (pre-1974, 1974–1991, and post-1991) reveals thatthe country’s external trade policy has moved from a free trade policy toa controlled trade policy regime and back to a free trade policy. Before1974, various measures aimed at improving the quality and quantity ofimports and exports as well as facilitating trade both by the public andprivate sector were made. Imports of capital goods and raw materialswere free of duty, while others were taxed (see Alemayehu 1999b). Theperiod 1974–1991, on the other hand, was characterized by a centralizedeconomic system, where the state was dominant in the external sector.The period was characterized by attempts to:

1. control the participation of private capital in trade and strengthenthe state’s role in both export and import trade;

2. closely monitor the price, quantity, and distribution of goods;3. emphasize external trade sectors deemed essential for economic

growth and the trading of medical equipment and goods to ensure thehealth and security of the population; and

4. diversify the type and destination of goods externally traded, espe-cially from developed capitalist countries toward socialist countries(see Alemayehu 1999b).

The post-Derg government’s foreign trade policy is designed to:

1. ensure private sector participation;2. manage the sector through foreign exchange and import-export regu-

lation;3. design and provide adequate incentives to the export sector;



4. replace quantitative restriction with tariffs;5. encourage diversification of exports and minimize illicit trade; and6. carry out restructuring of state-owned trading enterprises.

To realize these objectives, the government has designed and imple-mented various policies and institutional measures, the primary onesbeing:

1. liberalization of the exchange rate market using the auction system,which will provide foreign exchange both to the private and the pub-lic sectors;

2. a greatly simplified licensing procedure;3. supportive services to private exporters in the areas of transport,

package training, overseas market research, etc.;4. a simplified tariff structure and foreign exchange retention scheme, as

described below (see Alemayehu 1999b).

In addition, various incentives, including fast and cheap access tofinance, have been implemented for those engaged in the export-ori-ented production sectors.

In relation to point (4) above, most goods that used to be importedduty free and those with specific duty rates have been replaced by ad val-orem rates. Goods dutiable or not are given a tariff code and classifiedon the basis of their type and characteristics into 21 sections and 99chapters. These chapters contain 5,291 goods classifications, of which169 are duty free, 5,119 have ad valorem rates from 5 to 50 percent, and3 have specific rates (worn clothing, worn textiles, and rags). Currently,the weighted average tariff rate is about 25 percent; the smallest tariffrate is 5 percent and the maximum is 50 percent. These rates used to beas high as 230 percent in the previous regime. Apart from customs duty,there are sales and excise taxes on imported goods. The sales tax rangesfrom 5 to 12 percent of the value of goods, depending on the nature ofthe good. Similarly, the excise tax varies from item to item, ranging from10 to 200 percent (see Alemayehu 1999b).

With regard to exports, an attempt to facilitate the export licensing pro-cedure is being made. Currently there is no export duty on major export

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items. The amount of customs duty on coffee at the outset of the reformprocess was 15 birr per 100 kg. There was also a transaction tax of 2 per-cent and a cess tax of 5 birr per 100 kg. A surtax is also collected on cof-fee based on the daily surtax rate of the international coffee market prices(see Alemayehu 2003b for details). The post-Derg government also estab-lished two types of duty incentive schemes: “duty draw back schemes” forthose who wholly or partially or occasionally engage in export sector and“duty free importation schemes” for those wholly engaged in supplyingtheir products to foreign markets. Moreover, exporters have the right toretain 50 percent of their export earning and remittance in foreign cur-rency in a retention account. Of this 50 percent, the account holder mustoffer 40 percent for sale no later than 21 days from the date of entry tocommercial banks at negotiated rates, or to the auction market throughtheir banks. The remaining 10 percent is used by the account holder forimport of goods and services, export promotion, and any other paymentspecifically approved by the National Bank (see Alemayehu 1999b).

In general, there has been a major policy shift since 1991, essentiallyfrom a controlled regime to a more liberalized one. It is interesting toexamine the impact of this shift on exports and imports.

Exports. As can be seen from Table 6, the export sector is characterizedby over-dependence on a few commodities such as coffee, which on theaverage constitutes nearly 65 percent of export earnings, followed byhides and skins. On average the combined share of six major exportitems constitutes more than 85 percent of total exports. Recently thecontribution of chat came to be very important; it is now the secondhighest export item next to coffee.

In view of the high demand for foreign exchange discussed above,one sustainable source of financing is growth of the export sector. Ascan be seen from Table 7, exports as a percentage of GDP were in thevicinity of 15 percent, which is a good performance compared to about8 percent in the years just before the 1992 reform. However, importsjumped from an average of 16 percent in the five years immediatelybefore the reform to about 34 percent by 2000/01; thus, exports financeless than half the imports, which has obvious implications for financ-ing and hence indebtedness.



Table 8 shows the annual growth rate of major exports. The growthrates are characterized by an extreme fluctuation as shown by a greatdiscrepancy between the (simple) average and the linear regression (ontime) based growth rates. This is aggravated by the concentration ofexports in relatively few commodities. This pattern is the major factorbehind export earning instability in the country, which in turn hasimplications for capital formation instability. Various factors are respon-sible for such performance, including poor weather conditions, produc-tion and marketing problems, and the impact of the world market.22

186 Alemayehu Geda

Table 6. Share of major exports in the total value of exports (in percent

Source: Computed from data obtained from the Customs Authority, MEDaC(1999), and the National Bank of Ethiopia (NBE 2004)


In terms of the destination of exports, the bulk of Ethiopia’s exportsare to industrialized countries (Germany, the United States, Italy,France, the U.K., Japan, and Saudi Arabia), a pattern unchanged overthe past ten years. The only exception may be the increasing importanceof Asian countries (in particular, Japan and Saudi Arabia). It can also benoted that a few countries such as Germany, Japan, Italy, and recentlySaudi Arabia are increasingly important export destinations. The share of African countries, especially Djibouti, is also increasing. Table 9


Table 7. Export and import goods and nonfactor services (percentof GDP)

Source: MOFED (2004)


shows the need to increasingly diversify the destination of exports so asto avoid overdependence on a few countries.

Imports. Ethiopia’s imports are characterized by imports of capitalgoods, fuel, and raw material as well as semifinished products. Theseitems accounted for about 53 percent of total imports in 1986. The com-parable figure for 1996/97 was 79 percent and about 64 percent in1998/99,23 a reflection of the country’s inability to produce capitalgoods. The country also imports a considerable amount of consumergoods (26 percent in 1987/88 and 28 percent in 1998/9). Compared to

188 Alemayehu Geda

Table 8. Annual growth rates of export items (selected years, volume)

Source: Computed from data obtained from the Customs Authority and NationalBank of Ethiopia (NBE 2004)


the late 1980s, however, the share of capital goods (in total exports)declined in the early 1990s mainly because of increased imports of non-durable consumer goods (see Table 10). In late 1990s, the share of capi-tal good imports began to rise, however.

Terms of Trade. There are various approaches to measurements ofterms of trade. Table 1 presents the simple net barter terms of trade com-puted using export and import unit price indices. The deterioration ofthe terms of trade of developing countries is a widely documented issuein international trade literature. The excellent data compiled by Grilliand Yang (1988) is also tested using the new time series econometrics.The available evidence suggests that the famous Prebisch-Singer hypoth-esis—that the terms of trade of primary commodities vis-à-vis the price


Table 9. Share of total exports by destination (1989–2003)

*Other Europe: USSR, Yugoslavia, and the Netherlands (over 90 percent ofwhich is the Netherlands)

**Only Japan and Saudi Arabia, which have nearly equal shares.***Refers to Djibouti, Kenya, and Sudan (over 90 percent of which is Djibouti)Source: Computed from data obtained from the National Bank of Ethiopia (NBE

2004)


of manufactured goods exhibited a secular deterioration over the first 50years of the twentieth century—is still valid; however, the magnitude ofdeterioration is not as strong as was claimed in the initial study (seeAlemayehu 2002). Ethiopia’s terms of trade as given in Table 11 supportthe Prebisch-Singer hypothesis. Except in 1976/77, which is associatedwith the coffee price hike, the terms of trade are continuously deterio-rating, especially starting from 1987, reaching its historic low of 61 in

190 Alemayehu Geda

Table 10. Share of selected import by end use (in percent)

*Share of development or investment goods (1+2+3+4+5+6)Source: Computed from data obtained from the Customs Authority


1991. This trend is attributed both to the rising (and declining) import(export) prices, especially of coffee.

In sum, this deterioration of terms of trade, combined with instabilityin the price of exportable goods, is making the external market anextremely binding constraint for positive development of macro aggre-gates in Ethiopia.


Table 11. Evolution of the terms of trade

The data from 1987–2001 are based on price indices of import and export ofgoods and services given in the African Development Indicator (World Bank2003) adjusted to fit the 1970–1992 data. The latter is based on World Bank,World Tables (Electronic-STARS).


Private Agents, Labor Market Issues, and MacroDevelopment: A Brief Note

Political processes, macroeconomic development, and the nature ofmarkets largely influence economic agents’ behavior. An interesting exam-ple in Ethiopia is that the private sector was virtually excluded from par-ticipation in economic activity for about two decades during the Dergregime. By examining the historical process (conflict among interestgroups), the politics of policymaking, as well as overall macro and marketdevelopment, it is possible to shed light on the impact of these factors oneconomic agents’ behavior that in turn affects growth performance.24

Thus, in explaining macroeconomic development it is imperative to exam-ine the constraints faced by rural and urban economic agents. “Rural eco-nomic agents” refers to household (which are units of production andconsumption) behavior in rural areas and mainly focus on agriculture. Onthe other hand, industrial growth is largely an urban phenomenon andunderstanding of agents’ behavior is needed at this level.

An economy characterized by frequent wars and periodic civil unrestcould have a detrimental effect on agents’ behavior. It is hypothesized bysome economists (e.g., Collier and Gunning 1999) that economic agentscould be uncertain about their investment decisions in the prevailingAfrican economic environment, which may have a detrimental effect ongrowth. Examining these issues in the Ethiopian context is an importantexercise. A related issue is to examine the role of private foreign invest-ment in the growth process. Recent data show a rise in the flow of for-eign direct investment to Ethiopia (MIDROC’s share being nearly 75percent). Explaining this relatively (relative to the previous period) highlevel of foreign direct investment and its impact is very important. Thiscould be complemented by analysis of the private and public sector inter-action (such as the issue of crowding out/in). Finally, the macro andmicro evidence needs to be compared and synthesized. This, it is hoped,will provide comprehensive information on the constraints and oppor-tunities the private sector faces and their growth performance. However,such analysis is constrained by lack of relevant information. Suffice tosay that this is an important area that needs in-depth study.25 A closelyrelated issue is the need to understand the labor market in the country.

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Labor market issues are another gray area in Ethiopia’s macroeco-nomic study, partly because of inconsistent and incomplete informationin the area. It is, however, central for understanding one major macropolicy objective–employment. Although unemployment is a seriousproblem in the country, it is hard to read that from existing data becausein most government documents the rural area is implicitly assumed to beat or near full employment levels. Since the economically active popula-tion (both in rural and urban areas) has grown by an average of 5.2 per-cent in the last decade (see MEDaC 1999), it is implicitly assumed thatemployment has grown by this rate in rural areas, which in turn impliesthat unemployment is considered largely an urban phenomenon.

The Central Statistical Authority (CSA) data shows that the unem-ployment rate in rural areas has increased from 0.4 to 0.7 percentbetween 1984 and 1994 (the two periods of census). The comparable fig-ures for urban areas were 8 and 22 percent, respectively (MEDaC 1999).The latter figure is based on the 1994 censuses, and it is more than tenyears old. It is safe to assume that things did not improve, if they did notbecome worse, since then. In fact, using household survey data (of about1500 households) Krishna, Gebre, and Dercon (1998) estimated theurban unemployment rate in 1997 at about 29.9 percent. The recentnational labor force survey (1999) puts the total unemployment rate at8 percent, with the urban and rural unemployment rate being 26.4 and5.14 percent, respectively. Thus, open unemployment is largely an urbanphenomenon. This is one of the areas where the post-reform period reg-istered no success and needs closer attention. A related policy directionis to design appropriate labor market-related policies that will focus onthe informal sector, which employs 50.9 percent of the economicallyactive population26 (see MEDaC 1999).

ConclusionThe objective of this paper is to briefly appraise macroeconomic per-

formance in post-Derg Ethiopia. The study has attempted to organizethe analysis of the macroeconomic performance along four thematic cat-egories that are important in explaining growth and macro development:(1) the political framework under which macroeconomic performance is



coached, (2) the macro growth framework where issues of outputgrowth and its structure as well as major determinants are discussed, (3)the market structures under which economic agents function, and (4)possible constraints to economic agents. The method employed is thebefore-after approach. Since a modest evaluation and appraisal is givenin each section, I have deliberately avoided repeating that analysis herefor the sake of brevity. In general, the study reveals that although themacro performance in the post-Derg period is very good when judged inthe context of the structural problems confronted during the period, thesustainability of the results is highly questionable. Moreover, it is alsonoted that the performance is not balanced, and hence some sectors haveperformed better than others. This imbalance is primarily related to thedependence of macro performance on agriculture, which itself dependson the vagaries of nature and is accentuated by a weak external sectorand low saving and investment performance.

AcknowledgmentsMy colleague and friend Elias Kedir of Addis Ababa University

deserves thanks for his excellent assistance in the course of writing thispaper.

Notes1. This idea is adopted from the African Economic Research Corsortium

(AERC) project on explaining growth in Africa (see www.aercafrica.org).2. According to Goldestein and Montiel (1986) and Khan (1990), the first

study to use this approach was by Rechmann and Sillson in 1978.Goldestein and Montiel also cite studies by Killick (1984), Zulu andNsouli (1985), and Poster (1987).

3. The with-without approach was first used by Donovan (1981, 1982).Later works using this approach include Loxley (1984), Gylfason (1987)and Pastor (1987) (all cited in Khan 1990).

4. According to Khan (1990), it has three advantages. First, one can draw onthe wider body of adjustment/liberalization experiences. Second, since thepolicy simulations can be specific, one need not worry that incompleteimplementation of the policies will blur the result. Finally, the approach byits very nature focuses on the relationship between policy instrument andpolicy targets (Khan 1990, 207).

194 Alemayehu Geda


5. The so-called Lucas critique maintains that since economic agents havenearly perfect foresight, they may anticipate the implications ofannounced policy. Hence, parameters of the predicting model may changealong with policy change/simulation.

6. This was noted and analytically described at the turn of the last centuryby the famous Ethiopian economist Gebrehiwot Baykedgne (seeAlemayehu 2002 for his model).

7. A preliminary assessment can be made using the quantifiable dimensionof the impact of political process. For instance, defense budget was nearlyhalf the total recurrent expenditure during the Derg regime, but thisdropped dramatically in the post-Derg period. Ethiopia recently has beenat war with Eritrea, and thus the defense budget has shot up again. Haile(1997) used a model-based simulation to quantify the impact of militaryexpenditure. He found, for instance, that manufacturing, agricultural, andtotal output would have increased over the sample period by about 0.3, 0.1,and 0.75 percent per annum, respectively, if the size of the armed forcesand the ratio of military expenditures to total output had been maintainedat their 1973 levels. In terms of its social impact, his simulation shows thatexpenditures on education and on health would have increased, on aver-age, by about 94.1 percent and 86.5 percent, respectively, over the simula-tion period (see Haile 1997 for other simulation results).

8. See Alemayehu (2004) and Alemayehu and Befekadu (2002) for details.9. The only issue EPRDF seems to win (in light of its ideology) is the ques-

tion of land.10. This political factor implicitly addresses the so-called Eritrean question,

where the EPRDF opted for Eritrea’s independence while many otherpolitical groups opposed it.

11. In Ethiopian politics (especially of the ruling party) these groups arereferred to as nations, nationalities, and people without any conceptualbasis for distinction.

12. The poor growth performance in 1984/85 with the decline of real GDP bymore than 9 percent (the highest in the last four decades), and the highgrowth rates in GDP in 1986/87 (14 percent), 1995/96 (10.6 percent), and2001/02 (about 5 percent) are achieved due to good harvests, which inturn are the result of good and timely rainfall and recovery from a verysmall base.

13. To my knowledge there is no comprehensive empirical study that attemptsto explore the growth process in Ethiopia. The only exceptions areNetsanet (1997) and Seyoum (1997), which both attempted to estimate anaugmented Solow growth model. The nature of the augmented model usedis informed by the interests of the authors (human resources in Netsanet’scase and pure choice of the model in Seyoum). Their regression result



shows the importance of labor (in particular the level of education). Thisis found to be insignificant in Seyoum, however. Capital has little impactin either study (see Alemayehu 2004 for a critical appraisal).

14. This might be compared with the general services share (defense and oth-ers) of 45 percent and the social services share of 24.3 percent. These fig-ures are preliminary, but the pattern is fairly similar to the preceding years(see MEDaC 1999).

15. A simple regression suggests the possibility of crowding-in in Ethiopia.16. See Alemayehu and Befekadu (1999) and Alemayehu and Zerfu (1999),

where this issue is discussed at length.17. About 80 percent of the debt owed to the former USSR (about $4.8 billion

US) was recently cancelled. Multilateral lenders have also followed suit bycanceling about $1.9 billion US in the context of the HIPIC initiative, thusreducing the stock of debt by half—to about $5 billion US (see Table 1).

18. See Alemayehu and Zerfu (1999) for details of the HIPIC initiative in theEthiopian context and Alemayehu (2003a) in the African context.

19. Very low levels of inflation need not necessarily be taken as policy success(as is usually presented in government reports) because possible publicexpenditure, and hence employment and service provision, might havebeen unnecessarily sacrificed.

20. This suggests the importance of the structuralist theory in explaining thephenomenon of inflation in Ethiopia.

21. The specific regulations and their evolution are discussed in detail inAlemayehu (1999c and 1999d).

22. Readers interested in details of the impact of liberalization on the coffeesubsector and its implication for food security may consult Alemayehu(2003b).

23. The production of import data usually has a lag of about two years.24. This analysis conveniently could be classified under the three distinctive

regimes discussed in this paper and provided in detail in Alemayehu(2004).

25. Alemayehu (2004) is an ongoing research study along this line.26. This figure shows an interesting sectoral variation. The informal sector’s

share is the highest for agriculture and related activities, 70.1 percent, fol-lowed by community and perusal services (68.3 percent) and manufactur-ing (62.9 percent).

AppendixSimilar, more detailed data can be found in Alemayehu (1999c).

196 Alemayehu Geda


Table A1. Interest rate developments (post-1991; in percent)

*During 1998–2000/01 the lending rate was fully liberalized, while deposit ratefloor was set at 6 percent. Between 2002 and 2003 the latter was reduced to3 percent.

Source: National Bank of Ethiopia, Quarterly Bulletin 13, no. 1, first quarter1997/98, and Annual Report 2002/03 (NBE 2004)



Table A2. Private banks and insurance companies

*For comparison, the total capital of the Commercial Bank of Ethiopia (CBE),Development Bank of Ethiopia (DBE), and CBB (Construction and BusinessBank) are 1498, 417, and 79 million, respectively.

198 Alemayehu Geda


Table A3. Percentage share of different types of deposits

DD = Demand DepositTD = Time DepositSD = Saving DepositCBE = Commercial Bank of EthiopiaDBE = Development Bank of EthiopiaCBB = Construction and Business BankPrivate Banks = All Private banksAlemayehu (1999c) and National Bank of Ethiopia, Annual Report 2002/03

(NBE 2004)



Table A4. Deposit mobilization by commercial banks (in millionsof birr)

*Includes United Bank (Br. 331.3) and Nib Bank (Br. 588.1)Alemayehu (1999c) and National Bank of Ethiopia, Annual Report 2002/03(NBE 2004)

200 Alemayehu Geda


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