publication May 16, 2019

Ethiopia’s Steady Economic Growth Leads to Poverty Reduction

Latest Issue: 
  • May 2019

World Bank Group


STORY HIGHLIGHTS

  • In its seventh economic update, the World Bank Group highlights strengths of and challenges to Ethiopia’s economy as it tackles poverty and the transition to a more market-oriented model
  • According to the report, key economic challenges in Ethiopia include limited competitiveness, creation of jobs, and increase of exports
  • To spur the economic growth, the report suggests the country resolve constraints to growth particularly in the private sector and tackle rising external imbalances

ADDIS ABABA, May 16, 2019 – Ethiopia’s economic performance in the 2016-17 financial year was robust, albeit slower than in the previous years, and it is set to continue along positive path leading to further poverty reduction, according to the latest World Bank Group economic update.

The seventh Ethiopia Economic Update, Poverty and Household Welfare in Ethiopia 2011-2016, finds that the government has performed credibly despite headwinds that were occasioned by slowdown in growth in manufacturing and agricultural sectors. The economy was also affected by inflation—which has since stabilized, although still in double-digits—decreased revenue collection and rising external imbalances.

Ethiopia’s economic performance last year was led by the services sector which also accounted for half the total exports, according to the report. In contrast, the manufacturing and agricultural sectors grew at a slower pace leading to a decline in export of goods. The report notes that this could change if large-scale investment projects become operational, leading to lower transaction costs and growth in exports. A merchandise exports recovery could address the foreign exchange shortage in the medium-term, the analysis states, while moderate fiscal deficits and prudent monetary policy are expected to reduce inflation.

The impact of fast economic growth is reflected in the improvement in the monetary welfare levels of Ethiopian households. Based on the most recent Household Living Standards survey, Ethiopia’s poverty levels fell by around 20% between 2011 and 2016 although they remain high especially in the rural areas and for the bottom 40% of the population. Greater economic growth is key to reducing poverty, the report notes.

“Ethiopia needs to put in place and implement policies that lead to faster and greater economic growth to be able to make further substantial dents on the poverty levels,” said Nora Carina Dihel, Senior Economist and co-author of the report. “The country is on the right track and it should accelerate its efforts given the magnitude of the problem."

According to the report, among the key economic challenges is limited competitiveness, which may constrain the development of manufacturing, creation of jobs, and increase of exports. External debt sustainability is also a rising risk that may impact Ethiopia’s access to external finance.

Ethiopia’s reform agenda is expected to support growth that is projected to be slightly below or above 8% in the near term. Economic reform incorporating private sector is expected to help the economy grow faster. Ethiopia’s new prime minister has promised to jumpstart serious economic reforms. The pursuit of sound, private sector-led and export-oriented economic policies is critical to achieving Ethiopia’s economic and social ambition.

Perspectives on Poverty Reduction

The report observes that in the context of land scarcity, the labor market will become increasingly important as a transmission mechanism between aggregate growth and poverty reduction.

On poverty reduction, the report makes the following observations:

  • Because the report on poverty is largely descriptive only a tentative way forward for poverty reduction in Ethiopia is suggested.  The upcoming Assessment will provide a deep analysis and make some links to public action
  • Although improvements in agriculture have driven poverty reduction over the past 15 years, the reduction strategy may have missed the poorest of the poor in rural areas
  • Overall, given the median years of education obtained by rural youth it will be a hand climb to improve the living standards of today’s poor children. Despite the government’s large investments in education, few youths in the rural areas of Ethiopia complete primary school.
  • In the context of increasing land scarcity, the labor market will become increasingly important as a tool for poverty reduction
  • Linked to the employment challenge are related issues of high fertility and population growth. The report recommends investments in human capital, especially education, by proactively taking measures to reduce school dropout among the rural poor, to boost their chances of gainful employment later in life in the process breaking the intergenerational transmission of poverty.   The challenge is daunting in the face of rapid growth in the number of the working age population.