Ethiopia: The Anchor Economy of the Horn of Africa

by Berhanu Abegaz*

The Horn of Africa (comprising roughly Eritrea, Ethiopia, the Sudan, South Sudan, Djibouti, Somalia and Kenya) is a distinctive geographic, historical, and cultural area of some 250 million people. It is a diverse agro-economic region of highland, semi-arid and arid sub-regions with a surface area equivalent to a third of the United States. The Horn also boasts a high level of livelihood, religious and ethnic fractionalization. Native speakers of Amharic, Arabic, Swahili, and Oromiffa collectively account for some two-thirds of the population. The three-way Christian: Muslim: Indigenous split is roughly 50%:45%:5%.

Livelihood is dominated by mixed farming with a significant presence of agro-pastoralism and trade. The Horn’s poorly-integrated regional economy is $360 billion—roughly equal to the combined market sizes of Egypt and Morocco. To put it another way, the Horn accounts for a quarter of the population, oneeighths of the GDP, and half the per capita income of Sub-Saharan Africa.

The stylized facts from the region show significant cross-country variations. Per capita incomes range from $600 for Somalia, $1400 for Ethiopia, and $2250 for Kenya. The Gini Index for income ranges from a low of 35% in Ethiopia and the Sudan to 47% in Kenya and South Sudan. The multidimensional poverty index (MPI) ranges from a depressingly high of 88% for Ethiopia to 48% for Kenya and 27% for Djibouti. Sadly, the region is also a net exporter of scarce human capital and billions of illicit financial capital.

The anchor state of the Horn, Ethiopia, boasts some 40% its people, 75% its average income, and 35% of its gross regional product. For the past ten years, the Ethiopian economy has been growing at twice the rate for the Horn.

The persistence of unacceptably high structural poverty and endemic political instability together suggest that a robust growth engine remains elusive. The highly respected Spence Commission on Growth has recently identified the most notable attributes of those developing countries which managed to achieve sustainably high and inclusive growth. If we use their metric, we obtain the following economic snapshot:

1. The first attribute of successful growers is good leadership and governance which includes enduring peace, adequate state capability, and inclusiveness. The Horn sorely lacks this attribute with Kenya, Ethiopia and Djibouti making some headway.

2. The second is respect for market-led resource allocation with government planning playing a complementary role by correcting market failures, maintaining the social contract, or making up for missing markets. Again, few governments have a healthy respect for market fundamentals and for their fledgling modern private sector. Kenya, Sudan and Ethiopia come close being functioning market economies albeit with regimentation and cronyism.

3. The third quality is future orientation as evidenced by a high rate and quality of long-term investment to underwrite an industrial drive. To ensure a healthy 7% GDP growth rate for two decades or more, successful growers invest at least 25% of GDP—a level achieved by Ethiopia only since 2002.

4. The fourth attribute is openness to the global economy in order to access a bigger market for exportables and to benefit from a rapid diffusion of productivity-enhancing knowledge. With the exception of Kenya, the Horn countries have yet to meaningfully engage the world with a diverse basket of exports. The two Sudans are overly dependent on oil exports; Eritrea, Somalia and Ethiopia rely heavily on remittances and aid; and Ethiopia seems to mistake a selective export drive for a strategy of broad-based employment generation.

5. The fifth quality is macroeconomic stability that is undergirded by sustainable fiscal and trade deficits. Once again, only Kenya and Ethiopia have had a respectable record of macroeconomic management.

6. What is missing from this list is a foundational attribute of success which cannot be taken for granted in this case. I have in mind political stability which elsewhere is undergirded by an inclusive political and civic space for all fundamental interests in such diverse societies, and the replacement of the current hostility by rent-seeking state elites by an enlightened partnership between the public sector and the legitimate private sector.

Political order in the region certainly suffers from delegitimized states, weak rule of law, and little accountability to citizens. Nevertheless, meeting these six development challenges seems to be predicated on the degree of state capability along with a policy mindset of hard-headedness in fostering innovation and soft-headedness in providing an affordable safety net until the majority poor transition to sustainable livelihoods. Overall, the weak states of the Horn, Ethiopia and Kenya, have the best economic

performance. They are followed by the two fragile states–the Sudan and Djibouti. The worst performers, predictably, are the failed states of Eritrea, Somalia, and S. Sudan.

Because of the tight fusion of the political and the economic in the Horn countries, conventional development advice does not seem to have much to offer here by way of explanation or strategies of escape. We observe, for example, that ambitious elites in the region who lack an autonomous economic base have a strong incentive to capture the political kingdom and convert it into economic power. This inevitably has produced a brazen rigging of both the economic market and the political market as well as the narrowing of peaceful civic engagement in the region.

Let me make the point a bit more specific. The TPLF of Ethiopia and the PFDJ of Eritrea converted political power into economic power by creating party-states and party-owned business empires. The National Islamic Front of the Sudan did it the other way around by first mobilizing economic support from the Islamist business class and using this support as a stepping stone to capture the exclusionary Sudanese state.

Kenya’s state elites compete to control the state by mobilizing their ethnic constituencies while Somalia and South Sudan provide tragic cases of hyper-ethicized contests which have destroyed the prize itself. As they say, the grass gets trampled whether the Hippos are fighting or making love. How to motivate the ambitious youth to favor wealth creation over wealth distribution, and how to neutralize the destabilizing impact of proxy civil conflicts, many of which are funded by myopically security-seeking or resource-seeking geopolitical actors (Arab, European, American, and now Chinese) are two monumental challenges with which we will continue to grapple for some time to come.

The Achilles Heel of economic transformation in the Horn is, therefore, the structural insecurity of person and property which has prevented an understandably risk-averse merchant class from transitioning into an industrial class. In this region, poverty eradication requires building up the assets of the poor (through secure titles to land, investment in human capital, and productive safety nets), boosting agricultural productivity by supporting the market-oriented segment of the smallholder class (not just mega farms), supporting off-farm business formation, and linking non-subsistence agricultural production more tightly with urban and export markets as well as budding industrial clusters.

Furthermore, there are hopeful signs that universal primary education and rural electrification appear within sight, and tertiary education (despite the low quality) is expanding rapidly—especially in Ethiopia, the Sudan and Kenya. Through this multifaceted economic diversification, expanded gainful employment opportunities can be generated for the burgeoning ranks of the politically volatile youth.

Another hopeful sign is the Ethiopia-led infrastructure building program for regional airports, highways, railroads, harbors and power lines. These risky, supply-push and high-modernist mega projects will hopefully produce a deep enough regional market connectivity to render unthinkable the self-limiting practices of mutual destabilization and rule by managed conflict. If these initiatives gain traction, we may be able to credibly imagine such things as a regional division of labor in the location of industrial production based on comparative advantage, pacts for orderly trans-border migration especially for pastoralists, and even a common market.

Economic integration will also facilitate political cooperation in many areas, including equitable sharing of international rivers, common border security, prevention of ever-present inter-communal conflict especially in the lowlands, regional human rights organizations to put a minimum restraint on powerholders, regional ICT connections, and even shared research institutes to do local-specific research on tropical soils, diseases, animal health, new crops, and afforestation.

Needless to say, we must dream big in order to make the Horn a peaceful and prosperous neighborhood. Just as importantly, we need to have a deep enough understanding of the nature of the seemingly intractable economic and political traps. We need to figure out how to facilitate the necessary transition from clan-based rule to cohesive polities in the lowlands, from fragmented polities to cohesive nations in the highlands, and finally, from competing nations to a robust multinational and legitimate state in each of the Horn countries. Finally, we badly need to shore up our knowledge of the appropriate menu of development strategies to enhance the freedom of choice for the long suffering people of the historic Horn under the twin evils of tyranny and debilitating poverty.
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(*) Professor of Economics, The College of William & Mary. Remarks made recently at the Symposium on “State, Economy and Society in the Horn of Africa,” Elliott School for Int’l Affairs, George Washington University.