There was a time when Ethiopia was synonymous with destitution. Yet the East African country now boasts a growth rate over 7 percent, and the government is aiming for optimistic but achievable double-digit growth. Funny what a little bit of economic liberalization can do.
The country’s ambitious reform program has included letting the currency float in mid-2024 on a market-based exchange rate system; allowing foreign banks to apply to operate for the first time; and launching the country’s first stock exchange of the modern era.
Perhaps nothing has been more significant than an ambitious privatization effort. The selling spree began last year when the government sold shares in Ethio Telecom, the communications monopoly. This year the state is looking to reduce its role in other key assets like banking, insurance, electricity and shipping.
It’s a remarkable turn. During the 1970s and ’80s, the country was run by an avowedly Marxist-Leninist military junta known as the Derg, which nationalized all private companies, banks and land. Collectivization and state control led to economic collapse and famine. Backed by the Soviet Union, Ethiopia became a poster child for the failure of Marxist economics in Africa.
The Derg was overthrown in 1991 but kept in place much of the old Marxist economic structure. Ethiopia managed to grow at double-digit rates for much of the 2000s and 2010s under a state-led model that poured money into big infrastructure projects and boosted agricultural output. But state-directed growth eventually runs out of gas, especially when it builds up debts, inefficiencies and dependencies on government spending — something China is now discovering now on a larger scale.
Ethiopia’s boom was dealt a double blow by the covid-19 pandemic and a savage war in Tigray. The long expansion came to a halt, prompting the recent turn to free market reforms. Some outside economists refer to the latest pro-market moves as the country finally exorcising Marxism once and for all.
At the same time, Ethiopia remains one of the most politically repressive countries on the continent. Despite impressive growth, the country also remains one of the world’s poorest countries, with a per capita GDP of just $1,134 in 2024.
Ethiopia’s debt, currently an estimated 34.4 percent of gross domestic product, has been labeled “unsustainable” by the World Bank. The privatization spree can help raise capital to service that debt and shift risk toward the private sector.
But impressive gains could still be undone by another upsurge in violence over the Western Tigray region or a conflict with neighboring Eritrea.
The state asset sell-off may also go slowly. Foreign investors may be lukewarm to pour in cash while the country remains rife with conflicts and oppression. Few overseas banks have yet made the move to start consumer branches. Opening up the economy is only the beginning, but it can help make everything else easier for a country that has failed to live up to its potential for far too long.
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