Rough Draft

2020 Undergraduate Thesis Record NUM:
ETHIOPIA’S ECONOMICDEVELOPMENT INTHE21ST CENTURY
Major： International Economics and TradeCollege： School of International EducationStudent Number: 17190017
Student Name: Dagnew Jerusalem TazebachewSupervisor： Professor Liu Hongmei
HUBEI UNIVERSITY OF ECONOMICS
ETHIOPIA’S ECONOMIC DEVELOPMENT IN THE 21STCENTURY
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Abstract
Ethiopia is among the fastest progressing African nations and despite this fact is also amongthepoorest countries in the North African region with a per capita income of only $850dollars. However, the country has been on a development track for the last two decades andhasexperienced strong growth averaging 9.4 percent a year from 2010-2019. Despite positive growthand development in the country it has been facing some serious challenges that can inhibit itsgrowth and development. Among these challenges are sustaining the economic growthandtodevise methods for curbing the accelerating poverty. The country, like others all over the world, has been exposed to the economic and social impacts of the COVID pandemic, has faced theworst
locust invasion in the region which has seriously affected its food security and livelihoodofmillions of people. The country has underdeveloped private sector that inhibits and limits foreigninvestments and is exposed to a negative trade balance set off by increasing imports and decreasingexports. The country is in need of strict of policy and political restructuring and focusedreformsfor the development and for overcoming these issues. Keywords: Ethiopia, North Africa, Privatization, Trade.
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Table of Content
Abstract………………………………………………………………………………………………………………………………..iTable of Content…………………………………………………………………………………………………………………. iiList of figures……………………………………………………………………………………………………………………… ivList of Abbreviations…………………………………………………………………………………………………………….v1. Introduction……………………………………………………………………………………………………………………..11.1 Background of Study…………………………………………………………………………………………………………11.2 Problem Statement…………………………………………………………………………………………………………….31.3 Research Objectives…………………………………………………………………………………………………………. 31.4 Research Questions……………………………………………………………………………………………………………31.5 Significance of Study…………………………………………………………………………………………………………41.6. Limitation of Study…………………………………………………………………………………………………………..42. Literature review…………………………………………………………………………………………………………….. 52.1 Definition of Economic Development………………………………………………………………………………….52.2 Economic Development Concepts and Theories……………………………………………………………………52.3 Economic Development of Ethiopia…………………………………………………………………………………….63. Macro Development Performance by Ethiopia…………………………………………………………………..83.1 Gross Domestic Product (GDP)…………………………………………………………………………………………. 83.1.1 Concept of GDP……………………………………………………………………………………………………… 83.1.2 Components of GDP……………………………………………………………………………………………….. 93.1.3 Determining GDP…………………………………………………………………………………………………..103.2 Ethiopia’s GDP……………………………………………………………………………………………………………….113.2.1 Ethiopia’s GDP from 1970 to 2019…………………………………………………………………………..123.2.2 Ethiopia’s GDP from 2009 to 2019…………………………………………………………………………..133.2.3 Ethiopia’s Real economic growth rate……………………………………………………………………… 133.2.4 Ethiopia’s GDP Constant Prices……………………………………………………………………………… 143.2.5 Share Of Sectors In Ethiopia’s GDP………………………………………………………………………… 143.3 Balance of Trade (BOT)…………………………………………………………………………………………………..153.3.1 Components of BOT……………………………………………………………………………………………… 153.4 BOT of Ethiopia…………………………………………………………………………………………………………….. 163.4.1. Exports, imports, current account, current account to GDP, FDI and Public external debt
of Ethiopia………………………………………………………………………………………………………………. 17
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3.5 Ethiopia GDP Annual Growth Rate………………………………………………………………………………….. 184. Factor Analysis of Ethiopian Economic Growth……………………………………………………………… 194.1 Sectoral Contribution to GDP……………………………………………………………………………………………194.1.1 Agricultural Contribution……………………………………………………………………………………….. 194.1.2 Service Contribution to GDP………………………………………………………………………………….. 194.1.3 Industrial Contribution…………………………………………………………………………………………… 204.2 Political Factors Influencing Economic Performance…………………………………………………………..214.2.1 Openness To Trade…………………………………………………………………………………………………214.2.2 Corruption……………………………………………………………………………………………………………. 224.2.3 Governance Indicators…………………………………………………………………………………………….234.2.4 Terrorism………………………………………………………………………………………………………………254.3 Doing Business Index………………………………………………………………………………………………………264.4 Competitiveness Index……………………………………………………………………………………………………. 275. Challenges and Solutions to the Economic Development in Ethiopia………………………………… 285.1 Challenges…………………………………………………………………………………………………………………….. 285.1.1 Debt Burden…………………………………………………………………………………………………………. 285.1.2 Foreign Exchange Afflictions Stemming from Inadequate Sector……………………………….. 285.1.3 Fall In Remittances…………………………………………………………………………………………………295.1.4. The Pandemic and Drop in Economic Growth…………………………………………………………. 295.1.5. Deficit Balance of Trade……………………………………………………………………………………….. 295.2 Solutions……………………………………………………………………………………………………………………….. 305.2.1 Reduce Debt Burden……………………………………………………………………………………………… 305.2.2 Improve Foreign Exchange Afflictions……………………………………………………………………..305.2.3 Build Friendly Diplomatic Relations to Absorb More Remittances………………………………305.2.4 Revitalize the Economy During the Pandemic………………………………………………………….. 315.2.5 Make Domestic Companies More Competitive………………………………………………………….31Acknowledgment………………………………………………………………………………………………………………..33Reference………………………………………………………………………………………………………………………….. 34
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List of figures
Figure 1: GDP 1970-2019………………………………………………………………………………………………….. 12Figure 2: Ethiopia’s GDP From 2009-2019………………………………………………………………………….. 13Figure 3: Real Economic Growth Rate Of Ethiopia………………………………………………………………..13Figure 4: Ethiopia’S GDP Constant Prices 1981 – 2019…………………………………………………………. 14Figure 5: Ethiopia’S GDP From Agriculture Industry And Services (2009 – 2019)…………………… 14Figure 6: Ethiopia’s GDP Per Capita (1981 – 2019)……………………………………………………………….15Figure 7: Balance Of Trade 2009-2019…………………………………………………………………………………16Figure 8: BOT 2018-2020………………………………………………………………………………………………….. 17Figure 9: Ethiopia Economic Growth………………………………………………………………………………….. 18Figure 10: Agricultural Contribution To GDP Ethiopia…………………………………………………………..19Figure 11: Service Contribution To GDP………………………………………………………………………………20Figure 12: Industrial Contribution To GDP………………………………………………………………………….. 21Figure 13: Openness To Trade 2011-2019…………………………………………………………………………….22Figure 14: Corruption Index………………………………………………………………………………………………..22Figure 15: Rule Of Law…………………………………………………………………………………………………….. 23Figure 16: Regulatory Quality……………………………………………………………………………………………..24Figure 17: Government Effectiveness…………………………………………………………………………………..24Figure 18: Voice And Accountability………………………………………………………………………………….. 25Figure 19: Terrorism…………………………………………………………………………………………………………..26Figure 20: Doing Business……………………………………………………………………………………………….. ..26Figure 21: Competitiveness…………………………………………………………………………………………………27
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List of Abbreviations
BEA Bureau of Economic Analysis
BOT Balance of Trade
BRI Belt and Road Initiative
COMESA Common Market For Eastern And Southern African States
COVID Corona-virus Disease
DB Doing Business
FDI Foreign Direct Investment
GDI Gross Domestic Income
GDP Gross Domestic Product
HIPIC Highly Indebted Poor Countries
IGAD Intergovernmental Authority on Development
IMF International Monetary Fund
NBER National Bureau of Economic Research
NICB National Industrial Conference Board
NIPA National Income and Product Accounts
PPP Purchasing Power Parity
UK United Kingdom
US United States
USD United States Dollar
WGI Worldwide Governance Indicators
WTO World Trade Organization
YTD Year-to-date
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1. Introduction
1.1 Background of Study
It is an acknowledged fact that the economic structure and economic dependency of the countrydetermine its position in the global trade market. The economic dependencies make a wayfor theestablishment of economic relationships between different countries. Foreign or international tradecomes as a significant outcome out of this relationship. The demands and needs of the international
market structure often strengthen or weakens the economic relations between the trader andimporter country (Ashebir, Yirtaw, & Godana, 2015). The international market structure is directlylinked with the country’s domestic market as the good export rate increases the capacity of import
and thus facilitates the domestic market when it needs. Despite of this smooth trade system, manycountries especially underdeveloped countries often face negative balance of trade whichis calleda trade deficit. The higher import rate and limited export leads may often lead towards economicdownfall. Ethiopian international trade in such regard is also not an exception. The country is amongthefastest-growing economies of Africa and the country has been on a development trackfor asignificant period. The Ethiopian economy experienced strong growth averaging 9.4 percent ayearfrom 2010-2019 (Group, 2020). However, the development of the country is facing considerablechallenges and the main concerns of the country currently are sustaining the economic growthandaccelerating reduction in poverty (Dejene & Cochrane, 2019; Desta & Enice, 2017). The countryisexposed to the economic and social impacts of the COVID pandemic, has been home to theworst
locust invasions disrupting the food security and livelihood of the agricultural sector, anunderdeveloped private sector that transcends into increasing external borrowing andpolitical
disruptions (Tekalign, 2021). These challenges remained the part of various scholarly discussionsand need to be curbed in order to sustain the growth of the country. As stated earlier, Ethiopia faced some of the trade-related issues in the last fewyears. The countryalso experienced trade deficit several times in the past. Ethiopia’s trade deficit denotes totheunequal trade terms between capital goods and agriculture commodities. The country’s majorexport relies on the agriculture commodities; therefore, the agriculture related challengesareobserved as one of the major factors in unbalancing the trade. In order to have a healthytradebalance, Ethiopia implemented various strategies in the past years. These strategies include import
protection from fresh Ethiopian industries, a comprehensive state-managed trade system, andmost
recently market-oriented trading approach which was heavily supported by international financial
institutions (Ashebir et al., 2015). Many of the trading policies stress on reducing the export
dependencies on crops and coffee. Ethiopia’s trade deficit is also approached positively bymanyscholars, this perspective stresses on the fact that the Ethiopian import value indicates the growth
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of domestic economy, and productive ability of the country’s internal market. However, duetothevarious negative outcomes, the huge gaps between export and import value are alarmingfor thecountry and require some other financing sources. Ethiopia is observed as a significant case study as its economic developments experiencedrapidgrowth in the past few decades. The agriculture activities account for almost 41%of the country’sGDP. The existing body of literature on the trade relations between Ethiopia and other countriesindicates that this African region is becoming the primary trade interest of many countries. Asoneof the most important market economies in Africa, Ethiopia is very attractive to Chinese enterprises. China is Ethiopia’s largest trading partner and its largest foreign investor. In 2000, Ethiopiawasconsidered to be the second most populated country in Africa and was ranked as the thirdpoorest
country in the world, however, presently it is among the third fastest growing countries withpopulation of 100 million or more (Group, 2020). The period of rapid growth rate in Ethiopiaismarked by the strengthening of Ethiopia and China’s economic relations. It has been observedthat
the trade between two countries is exerting a positive impact on both of them. Due to the mutual
benefits, China is becoming the biggest import and export partner for Ethiopia. After the gradual
growth, sudden increase in China-Ethiopia trade is witnessed after 2002. The trade relationsexperienced sudden downfall after 2015 when China had just a share of 2.4%with Ethiopia. However, the trade rate rose to 11.1% in 2012 which indicated the smooth trade flowbetweentwocountries (Chakrabarty, 2016). Despite the fact that, Ethiopia is an agricultural exporter, it grabbedthe attention of various Chinese financial officials and foreign direct investment. Chinese FDI isproved hugely beneficial for the internal economic structure of Ethiopia. However, the increasednumber of external financial borrowing is leading the country toward some serious economicissueswhich requires the sudden attention in both financial fields and research platforms. As far asthetrade deficit and China-Ethiopia trade relations are concerned, the trade balance is hugelydisruptedby the Ethiopian foreign economic relationships. In the fourth quarter of 2012, Ethiopiawasrecorded to have a trade deficit of 2366 Million USD (Chakrabarty, 2016). Many of the researchstudies indicate that the Ethiopia’s trade balance is in deficit due to the limited exported productstoChina and high import capital goods from it. The trade relations thus depict that the economictiesbetween the two countries have mutual benefits however, concerning the trade balance, Ethiopia’strade balance is negative while on the other hand, China’s trade balance is on the positiveside(Venkataraman & Gofie, 2015). Keeping the context of China-Ethiopia relations, the present studyexamines the current challenges of the Ethiopian economy. The research study will significantlycover the gap of previous studies that only worked on exploring the Ethiopia-China trade relationsand its implications on Ethiopia’s economy (Desta & Enice, 2017). Also, there is a limitedamount
of literature that focuses upon the development of Ethiopia and studies the factors that havecontributed to its growth and also the factors that are inhibiting the country fromachievingfurtherdevelopment. The findings from the present study can be utilized for formulation of effective
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policies for its government, trade policymakers, and agriculture authorities also to make their tradeoperations more competitive with the aim of enhancing their sustainable GDP growth- orientedrelationship with foreign traders and focus upon the growth and development of its economy. 1.2 Problem Statement
The existing literature bodies on the China-Ethiopia relation indicate that the country is apprizingthe preferential trade relations. However, many of them also took into account the trade capacitiesof the both the countries and how these differences determine the trade balance of that country. Due to the issues of transparency and predictability, the bilateral trade requires significant concernto continue the trade relations between two different countries on international level. The tradingrelation thus becomes problematic despite of the multiple advantages. The issues, therefore, needsto be addressed in order to protect the internal economic structure of a country. After the critical
evaluation of the background study, it becomes clear that there is a need to critically exploretheimportance of Ethiopian economic development and identify the factors inhibiting its development
and competitiveness. It is common knowledge that the developing countries have been strugglingwith raising funds for financing their own budget and in this scenario, Ethiopia is an exceptionasit went from one of the poorest countries of the world to the fastest growing economy inAfrica. However, there are some developmental challenges that might pose detrimental to the sustainablegrowth of the country. Thus, the challenges like political disruption, external borrowing, negativetrade balance and food security challenges need to be studied for recommendation of policiesfordevelopment. 1.3 Research Objectives
The main objectives of the present study are as follows:  To examine how the economy of Ethiopia has developed by the use of both the GDPandthebalance of trade figures.  To indicate how the economy has been experiencing trade deficits due to a large number ofimports coming in the country.  To provide solutions to the challenges that Ethiopia faces in economic development. 1.4 Research Questions
The present study is based on following research questions:  How has the economy of Ethiopia developed in the 21
st century? How have the GDPandbalance of trade influenced the economic development of Ethiopia?  What is the reason for the trade deficit in Ethiopia?  How can the challenges being faced by Ethiopia be resolved?
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1.5 Significance of Study
The present study evaluates the development of Ethiopian economy and allows the researcher inevaluating key aspects of the economic development like the trade deficit, key tradingandinvestment partners of the country, contribution of economic sectors in the overall gross domesticproduct of the country. Thus, this study will be a valuable addition in the academic literatureondeveloping countries and aid fellow researchers’ new methods and directions for the evaluationofcountry development. Also, as the study uses authentic data for illustration of the trend andtangent
of development, its reliable data will be re-used by upcoming scholars in their literature review, discussion, and hypothesis development purposes. In short, this dissertation will give anewdirection of research along with exploring the authentic ways to upgrade the economicdevelopment of Ethiopia and also evaluate the current issues being faced by the economy. 1.6. Limitation of Study
The present study follows a descriptive format and is structured in a neat way. The study examinedthe economic development and economic challenges of the Ethiopian international trade. Thetraderelations between China-Ethiopia are the primary concern of the researcher. Moreover, thestudyalso focused on the macro development and performance in Ethiopia which include all thecomponents that are contributing in the country’s GDP. Using graphs and existing numerical data, the economic structure of Ethiopia is studied. There are numerous ways to study the economictrade relations, but the present study uses the statistical trade data and employed descriptiveanalysis method in order to analyze the factors behind trade deficit of Ethiopia. Furthermore, among the list of various economic challenges, the sector of economy, trade institutions, institutional quality, and openness of trade are discussed in the studied. The role of political
disruption in determining the trade relation is also analyzed in the present study. There are variouscountries which are going through trade deficit, among them Ethiopia is selected as the casestudyfor present research. The study deviates from the traditional modes of study and yields significant
findings in the respective field.
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2. Literature review
2.1 Definition of Economic Development
Economic development can be defined as the enhancement of economic facilities over a certainperiod of time (Chappelow, 2019). It can also be defined in terms of improved quality andstandardof living (Wolf-Powers et al., 2017). It plays a vital role in increasing developmental activities inacountry and increasing the national income. Ghodbane et al. (2020) Highlighted that inorder toincrease economic growth of a country, it is important to effectively use its resources. Economicgrowth of a country also leads to improving the business outlook (Mitchell, Boyle, &Nicholas, 2020). There are many difficulties faced in the measurement of economic development but still thecriteria’s have been developed to determine the economic well-being. These may include thelifeexpectancy, infant mortality rates, and literacy rates. Other measures of per capita incomecaninclude the nutritional status or the number of beds in a hospital or teachers in the school etc. economic development can simply be defined as the “the process by which a nation improvestheeconomic, political, and social well-being of its people”. 2.2 Economic Development Concepts and Theories
There are various economic development concepts and theories present in past literature. Herewediscuss two such models. The first model is by an American economist Walt Whitman Rostowthat
was presented in 1960 (Rostow, 1960). According to this model, countries move throughfivestages for the purpose of reaching an economic growth point. These stages were definedasatraditional society stage, pre-conditions for take-off, take-off of economic growth, Drivetomaturity and age of mass consumption. In the first stage, the economy of the countries wascommonly based on basic sources such as agriculture, farming, etc. but it is not systematic andlivestock is also limited. In the next stage, i.e., pre-condition stage, agriculture became more organizedand trade increases. Moreover, growth in personal savings and investment is observed, eventhoughnational income is small. In the take-off stage the manufacturing and production industrybecomesmore important, even though small in number. Moreover, political and social development is alsoobserved. In maturity stage, diversity increases at industry level and improvement in areas liketechnology become common. From being dependent the state moves to more improved innovationfor increase in per capita income. In the last stage, increase in trade and sustainable growthat
country level is experienced. Schumpeter’s theory of economic development is another economic theory that appointsadominant role to innovation and entrepreneurship in the process of economic development. Thistheory examines the changes in economy in terms of the surrounding social structures intheenvironment providing a political and social aspect to the theory in addition to its being economic
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(Schumpeter, 2017) and provided immense importance to economic sociology. Accordingtothistheory, change in the economy is a consequence of innovative activities and entrepreneurship(Witt, 2016a, 2016b). while this theory of economic development is important for understandinghowtechnology changes can lead to affect economy, according to Dosi, Napoletano, Roventini, andTreibich (2017) it is an incomplete framework for explaining how innovation translates intoeconomic growth and needs more work and research. Other theories of economic development orgrowth include mainly the Mercantilism, Classical theory by Adam Smith, Neo-classical-theory, Endogenous growth theories, Keynesian demand-side and Limits to growth theory. Mercantilismisnot a theory rather it was used in old times to determine the growth of a nation as which nationhadmore gold and abundant trade was considered to be more developed. The classical theory addressesthe increasing the trade, labor, specialization. It was developed by Adam Smith. The Neoclassical
theory is based on the fact that development in a country is dependent on its productionof labor, factor inputs and the size of its workforce (Shiozawa, 2016). It states that in order to increasethedevelopment we need to increase the GDP and technological productivity of a nation. Theendogenous growth theories states that the development of economy in a country is highlyaffectedby the human capital and rate of technological innovation. The Keynesian demand-side (Jahan, Mahmud, & Papageorgiou, 2014) stated that there must be emphasis on the demand whichplayanimportant role in the long-term development of the economy and it must be highlighted. Accordingto the limits to growth theory, economic development is causing constrain to the environment asit
is causing global warming and degrading the natural resources (Stokey, 1998). This theoryisinaccordance with the Malthus theory (Svizzero & Tisdell, 2014). 2.3 Economic Development of Ethiopia
Ethiopia was once one of the largest undeveloped African country which has witnessedatremendous economic growth trend. Ethiopia’s economy is of mixed and transition type combinedwith large impacts from the public sector. It has a priority to convert the state owned businessesinto private organizations but major sectors like banking, telecommunication and transportationsectors are highly dominated by the government of Ethiopia. The economy of Ethiopia startedtogrow in mid-1990’s and it became one of the most rapidly growing economy in the last decadewith its Gross Development Product rate of growth at 10% per annum at an average (Bruijl, 2017;
Cuesta, Negre, Revenga, & Silva-Jauregui, 2020). According to the Five- Year GrowthandTransformation Plan (GTP) of Ethiopia, that was rolled out by its government in 2010, the countryaimed to attain a lower middle-income status by 2020 (Getaneh & Sailaja, 2017; Ybabe, 2019). Economic growth experienced by Ethiopia is miraculous as the GDP rate of growth is almost
double from 2003/04 (Wossen et al., 2017). According to Asmare (2017), the government ofEthiopia has strongly focused on infrastructural development and on the improvement of thefundamental services and development of private sector. Tis focus of the government iscontributing strongly to the economic growth of the country. Mostly, the manufacturingand
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service industries of Ethiopia are more responsible for its economic development insteadofagriculture industry. For economic maintenance, the government is working to reduce povertyfrom Ethiopia in both urban and rural regions and this development is responsible for a remarkablegrowth both in job formation and better administration (Gebreeyesus, 2016). As for donors andinvestors in the country, instead of the traditional donors like World Bank, IMF etc., countries likeChina, India, Thailand, etc. are more interested and investing in the country in terms of FDI andother types of investments. China is the biggest investor in the country and both ChinaandEthiopia evoked the rhetoric principles of strategic partnership, win-win cooperation, andmutual
benefits to use their relationship to their benefits (Endaylalu, 2018). China has been the majorinvestor for not only Ethiopia, but other counties as well. As for Ethiopia, it has been a countrythat
has faced severe famines, droughts, crisis of all kinds but in recent years, it has shownmuchimprovement because of the aid and investments schemes. Therefore, there is a need to studyhowEthiopia has built its infrastructure and how it has boosted its economic growth.
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3. Macro Development Performance by Ethiopia
The overall competitiveness of a country is dependent on its economy and macroeconomics hasasignificant role to play in it. Macroeconomic development cannot enhance the country’sproductivity on its own but without it a country’s economy may face a greater downfall. As seeninthe previous economies of the European community, their downfall was because of the hugedebtsalong with more interest payments on it. This disabled them from providing efficient services. Also, when the inflation rates become out of control, the organizations become insufficient toworkeffectively. In brief we can say that a stable macro environment can lead to a stable economicgrowth of the country. The apparatus used for the deportment of macroeconomic policyof eacheconomy of a country us called the helmsman. Prior, the helmsmen was used to give different
amounts of services relating to macroeconomic (Chattopadhyay & Bose, 2015). These servicesmay include; a larger level of GDP per capita or the low inflation rate or a greater employment rateor a more suitable balance of trades etc. So, these parameters are considered as essentials for theevaluation of macroeconomic development performance of a country with the help of helmsmen(Wang & Le, 2018). 3.1 Gross Domestic Product (GDP)
3.1.1 Concept of GDP
According to the Bureau of Economic Analysis (BEA), the definition of GDP is as follows; “Grossdomestic product (GDP) is the value of the goods and services produced by the nation’s economyless the value of the goods and services used up in production”. GDP can also be explainedasthecombination of individual consumption expenses, total private domestic investment, government
consumption expenditures and gross investment and the net exports of services and goods. Theregular estimates of GDP began to be published in the 1940s by the U.S. Commerce Department
(Syrquin, 2011). This framework of GDP calculation by the US Commerce department was basedon the Simon Kuznets method initially used for the calculation of national income intheyear1929-1932 beneath the support of National Bureau of Economic Research (NBER). Inthenext
decade, the work of Kuznets’s was further published by two volumes written by NBERin1920which basically provided an estimate for the national income of the country. Other countries alsostarted to focus on their national economies from this perspective. In 1920s, the ConferenceBoardor previously known as the National Industrial Conference Board (NICB) also started topublishtheir estimates of the national income at regular basis. A British economist and statistician named Colin Clark also worked on similar grounds regardingthe measurement of aggregate economy of the UK (Coyle, 2014). Basically GDP is the output
measure of the NIPA (National Income and Product Accounts). It is a big set of data relatingto
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economics of the country that defined its economic activity. Another description of GDPgivenbyBureau of Economic Analysis is regarding its calculation through the expenditure approach. According to this approach GDP is the sum of consumption, investment, government spending, and net exports which are basically its main components discussed in the later section. Whiletheother approach towards the calculation of GDP is the income approach according to whichGDPincludes all the incomes made via production and the other different types of income fromthenational side also into the definition of GDP. So, GDI or the Gross Domestic Income is basicallythe income part of the GDP. 3.1.2 Components of GDP
There are four basic components to GDP are consumption, investment, government expenditureand net export as explained below. 3.1.2.1 Consumption
Consumption can be assumed to have been derived from the series of standard national accounts. It
can be referred to as containing both the expenditure and the services given to the household. Consumption determines aggregate savings, because saving is defined as the portion of incomethat is not consumed. due to aggregate saving feeds through the financial systemto createthenational supply of capital, it follows that aggregate consumption and saving behaviors hasapowerful influence on the economy in long term productive capacity. 3.1.2.2 Investment
During a particular set of time, the addition of physical stock of the assets or the capitals is referredto as investment. The aggregate value is known as the Gross Private Domestic Investment or theGPDI. Investment can contain the construction of different buildings for offices or factoriesortheir inventory of goods etc. The depreciation of fixed capital goods is basically the processinwhich the intermediate goods that are utilized in the making of the capital goods and becauseofthat they get exhausted. So, depreciation can be defined as the loss in the value of a current capital
stock because of its consumption or utilization during the production of the output. Investment caneither be gross or it can be net. Gross investment contains the value of depreciation while thenet
investment is the deduction of depreciation value from the total or gross investment. 3.1.2.3 Government Expenditure
The government expenditure is the government’s spending on the goods and the serviceforexample the purchase of the intermediate goods and the salaries or the wages of labor that aregiven by the government. The government measure of output is done by the purchases of thegovernment. So, these purchases by the government are taken as the final product. The payment oftransfers that are done by the government to the organization or household are not takenasthe
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GDP because they are also considered in the consumption or investment of the payment oftransfers, and this may double the counting. 3.1.2.4 Net Export
Net export is the difference between the domestic spending that is done on the imports or theforeign goods and the spending that is done on the exports or the domestic goods. This differencebetween imports and exports is termed as Net Exports. (X) represents the exports and(M)represents the imports. So net export is given as (X-M). So, it can be concluded that GDPiscalculated by dividing it into smaller sub divisions. Still these subdivisions showa macrolevel
image of the country’s economy. Further economic analysis can be done to find the details of what
rising or dropping the GDP via thoroughly checking their goods, sectors or the foreign trades. 3.1.3 Determining GDP
GDP can be calculated with the help of two methods; the Output approach and the expenditureapproach explained as follows:
3.1.3.1 Output Method
The output method highlights the total output of country by directly calculating the total valuesofgoods and the services that are produced by a country. There are many complications of valuenumber in the production stages so only the value of total output is taken for a good or a service. The definition of gross value is “the value of all newly generated goods and services less thevalueof all goods and services consumed in their creation; the depreciation of fixed assets is not
included”. To calculate the value added, the output is to be valued at the basic prices andtheintermediate consumption at the price of purchases. Taxes minus the subsidies on the products arethen added to the value to get the final market price of the GDP. The output approachis alsoreferred to as the “net product” or “value added” method. This method contains three stages:  Approximating the gross value of domestic output:  Finding the intermediate consumption which is the cost of material, supplies, and services that
are used in the production of final goods or services:  Subtracting intermediate consumption from gross value in order to obtain the net valueofdomestic output. Its formula is given as:
Net value added = Gross value of output – Value of intermediate consumption. Gross value of output = Value of the total sales of goods and services + Value of changes intheinventories.
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3.1.3.2 Expenditure Method
The most commonly and widely used method to find the GDP is the expenditure method. It
basically measures the output of economy that is made inside a country without consideringwhoactually made the production of goods or services. So the GDP is the sum of all the final goods andservices’ expenditure. The expenditure method has four aggregates for the calculation of GDPthat
are: consumption by households, investment by businesses, government spending on goods andservices, and net exports, which are equal to exports minus imports of goods and services. The formula for calculation the GDP based on Expenditure method is:
GDP = C + I + G + (X – M)
Where:
C represents the Consumer spending on goods and services
I represent the Investor spending on business capital goods
G represents the Government spending on public goods and services
X represents the exports
M represents the imports
3.2 Ethiopia’s GDP
The World Bank data shows a strong and broad growth of the economy of Ethiopia in the last tenyears from 2010 to 2020 with an average of 9.4% per year. Due to the impact of coronavirus ontheeconomy of Ethiopia, its growth slowed down in 2019-2020 to approximately 6.1%. It impactedthe main industries, construction sites and basic services. However, agriculture was not affectedbythe COVID-19 pandemic in Ethiopia and therefore its influence on the economic growthwasimproved in the year 2019-2020. Private consumption and public investment clarify demand-sidegrowth, the latter supposing a progressively significant part. This growth of the economic hasledto the positive changes that is the reduction of the poverty in the rural as well as the urbanareas. In the year 2011 the population living under the poverty line was 30% which has been reducedto24% by the year 2016. The government of Ethiopia has made a new 10-year plan for the year 2020to 2030 to mark sustainable economic growth made under the Growth and TransformationPlanswith more importance to the private sectors.
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3.2.1 Ethiopia’s GDP from 1970 to 2019
Figur e 1: GDP 1970-2019
Source: The World Bank (Bank, 2020)
The above figure shows the GDP of Ethiopia from 1970 to 2019. Ethiopia’s GDP is 8.4for theyear 2019. The GDP of Ethiopia increased $95.588 billion in nominal by 2020 and increase$272billion in PPP by 2020. The GDP rank of Ethiopia is 63rd in nominal for the year 2018while62nd in the PPP. The GDP growth rate is 7.7% in the year 2018 while in 2020 this growthratedeclined to 1.9%. The GDP per capita has an increase of $974 in nominal by 2020 and increase$2,701 in PPP by 2019 (source: Ethiopia – Country data IMF) (2021). GDP per capita rankofEthiopia is 167th in nominal by 2018 and 164th in PPP by 2018. The GDP values bysector is34.8% in agriculture, 21.6% in industry and 43.6% in the services by the year 2017 (Source: “The World Fact book”). The inflation rate in 2020 was 20.2% (Source: “World EconomicOutlook Database, October 2020” by international monetary funds)
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3.2.2 Ethiopia’s GDP from 2009 to 2019
Figur e 2: Ethiopia’s GDP from 2009-2019
Source: (World-bank.org)
The figure above presents the GDP of Ethiopia from 2009 to the year 2019. Constant increasecanbe observed in the GDP throughout the years. 3.2.3 Ethiopia’s Real economic growth rate
Figur e 3: Real economic growth rate of Ethiopia
The figure shows the GDP of the Ethiopia over various years with a target annual growthof 11%. The bar on the right shows a constant level of GDP from the year 2017 to 2020.
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3.2.4 Ethiopia’s GDP Constant Prices
Figur e 4: Ethiopia’s GDP constant prices 1981 – 2019
The figure 5 above is representing the constantly growing GDP prices of Ethiopia, the datahasbeen provided from 1981 to 2019. 3.2.5 Share Of Sectors In Ethiopia’s GDP
3.2.5.1 Ethiopia’s GDP From Agriculture Industry And Services
Figure 5: Ethiopia’s GDP from agriculture industry and services
(2009 – 2019) Source: (Statista)
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The above figure shows the GDP of Ethiopia from its different economic sectors fromtheyear2009 to 2019. It shows that in 2019, the share of agriculture in Ethiopia’s gross domestic product
was 33.88 percent while the industry contributed approximately 24.77 percent and the servicessector contributed about 36.87 percent. 3.2.5.2 Ethiopia’s GDP per capita
Figure 6: Ethiopia’s GDP per capita (1981–2019)
Source: (Worldbank.org)
The GDP per capita of Ethiopia is provided in the figure 7 above, after the year 2000, thereisaconstant increase in the per capita GDP. 3.3 Balance of Trade (BOT)
The value of the exports of a country and the value of the imports of country in a particular periodof time is known as the Balance of trade or the BOT. balance of trade is actually a part of thebalance of payments and make its biggest section. The balance of trade and balance of servicesaretaken as different in some countries. 3.3.1 Components of BOT
Following are the components of balance of payment, Current Account, Capital account andOfficial financing. 3.3.1.1 Current Account
This is the most important part of the balance of payments as it depicts the trading strengthof anation. If payments are more than receipts, there is a deficit which is unwanted. The current
account is further divided into visible trade that is the trade in goods and the invisible trade that isthe trade in services.
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3.3.1.2 Calculating the BOT
Balance of Trade formula = Country’s Exports – Country’s Imports. 3.3.1.3 Trade Surplus and Deficit
When the economy of the country has a trade surplus then it lends money to the countries withadeficit of money while the economies with greater trade deficit borrows money fromothercountries in order to pay for its goods and services. Trade of balance is sometimes relatedwiththepolitical and economic stability of a country because it shows the foreign investment of a countryand most of the countries see this as a desirable trade balance. There is trade deficit whentheexports become less than the imports and this is undesirable for a country. But sometimes thisdeficit is of country’s interest like when it wants the foreign agencies or countries to invest initsnew or emerging markets. 3.4 BOT of Ethiopia
The figure below shows the balance of trade of Ethiopia up to 2019 from 2009. Balance of tradeisthe value obtained by subtracting exported goods from imported goods value. So, a positivevalueof BOT will show a surplus of trade while a negative value will show a trade deficit. In2019, Ethiopia’s trade deficit amounted to around 11.79 billion U.S. dollars.
Figur e 7: Balance of Tr ade 2009-2019
Source: National Bank of Ethiopia (statista)
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The figure shows the trade balance of Ethiopia in US billion dollars from2009 to 2019andall
the values are in negative which shows a trade deficit. This shows that the import ratiofor thecountry has been greater than the exports and this puts the development of the economyat aconsistent risk.
Figur e 8: BOT 2018-2020
(Source: Trading economics)
The figure above shows the BOT of Ethiopia from 2018 to 2020. The negative values ontheright show a trade deficit in USD Million. In the third quarter of 2020, Ethiopia chronicledatrade deficit of 2645.60 USD Million. 3.4.1. Exports, imports, current account, current account to GDP, FDIandPublic external debt of Ethiopia
Table 1: Economic indicators Ethiopia
Ethiopia Trade Last Previous Highest Lowest Unit
Balance of Trade -2645.60 -1745.80 -956.70 -3852.10 USDMillionCurrent Account -785.50 -211.00 159.30 s-2535.80 USDMillionCurrent Account to GDP -4.40 -5.30 1.50 -12.60 percent
Imports 3480.30 2688.70 4436.30 1355.50 USDMillionExports 834.70 942.90 984.80 265.90 USDMillionForeign Direct Investment 632.00 495.90 1327.30 151.90 USDMillionTerrorism Index 5.31 5.35 5.94 2.31
Source: Trading economics
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The table shows the balance of trade, current account, current account to GDP, imports, exportsforeign direct investment and terrorism index of Ethiopia from 2006 to 2020. Ethiopiahasaconstant trade deficit because it has a very small production of export and also has somedifficulties in logistics. Its major exporters are gold, coffee, live animals and oilseeds whiletheimports of Ethiopia include fuel, foodstuffs and textile apparel. Its trade partners are ChinaandSaudi Arabia. 3.5 Ethiopia GDP Annual Growth Rate
The Ethiopian economy is considered to be amongst the most fastest growing in all of Africa. Theeconomy of Ethiopia has experienced strong growth, averaging to approximately 9.4 percent ayearfrom 2010-2019. The real GDP or the GDP in 2019-2020 period experienced a decline ingrowthand declined from 9 percent in 2019 to 6 percent in 2020 due to the presence of the COVIDpandemic. The main constituents of growth remain to be the industry, construction andservicesmainly, and the service sector for most of the growth that has been recorded in this period. It canbe seen through the figure below that the growth rate of GDP has been positive and increasingduring the last two decades, with only minor setbacks.
Figur e 9: Ethiopia Economic Growth
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4. Factor Analysis of Ethiopian Economic Growth4.1 Sectoral Contribution to GDP
4.1.1 Agricultural Contribution
The figure 8 is depicting the contribution of agricultural products and revenue in the GDPover theperiod of last 20 years. It can be seen that the agricultural contribution has been somewhat slowand in accordance with the review study carried out by Welteji (2018) the unfair macroeconomicpolicies, the political unrest and colossal villagization and settlement programs carried out bythegovernment over the years are the main reasons for the lack of development and growthof theagricultural and rural development in Ethiopia. He also highlighted that the pressing concerns andconstraints influencing the development and growth of the agricultural sector in Ethiopia includethe population growth, low-level of farmer input and innovation, capital constraints, environmental
degradation, decline in yield due to climate related factors, increasing supply of food crops throughexports. Thus, the government needs to curb these issues in order to increase the developmental
rate of the agriculture sector.
Figur e 10: Agricultur al Contribution to GDP Ethiopia
4.1.2 Service Contribution to GDP
The service sector has been contributing substantially to the GDP of the country for almost adecade. The service sector also attracts most of the foreign investment and earnings, largelyduetothe Ethiopian airlines. The services sector accounted for 37.1 percent of the GDP in 2019andwasapproximately responsible for 24 percent of the employability. The tourism and
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telecommunications sectors are growing vastly throughout and at a steady pace and havebeenplaying esteemed roles in the development in the country (Kabeta & Sidhu, 2016; WorldBank, 2021). There has been an increase in the privatization of many state-owned businesses, whichisalso one of the main reasons for the development and growth of the services sector. The countryisprogressing towards a market economy, and the public sector still holds a dominant role intheeconomy. Still, the service sectors like telecommunications, insurance, airlines, financial, transportation and retail services are leading in contribution to the GDP (Tekilu, Wondaferahu, &Jibril, 2018; World-bank, 2021).
Figur e 11: Service Contribution to GDP
4.1.3 Industrial Contribution
Over the passage of years, the development and contribution of the industrial or the manufacturingsector have increased, as demonstrated in figure 10. According to the World Bank Group(2020)and the Doing business (DB) report by World Bank (2021) the industrial sector has beenamongthe main contributors to the GDP (around 25 percent) and also accounts for the 9 percent ofemployability in the country. In comparison to the agriculture and services sector, althoughthedevelopment and contribution is considerably low, the sector is still transcending towards growth. In 2019-2020, the development and growth were inhibited due to the precedence of the pandemic, but the country is on its path to regress from the downturn. The main industries includethegarments, food processing, textile, leather, chemicals, metals, beverages and cement. Themanufacturing sector accounts for a low impact on the total exports, and according to the expert
opinions the development of the industrial sector is integral for the recovery of the negative BOT.
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Figur e 12: Industrial Contribution to GDP
4.2 Political Factors Influencing Economic Performance
4.2.1 Openness To Trade
The openness to trade scores demonstrated by the World Bank Group (2020) database for Ethiopiaare only available from 2011-2019. It can be seen that the country’s openness to trade has beendeclining over the previous few years. The total percentage of the trade in comparison of its GDPwas only 29 percent for 2019, and most of this is accommodated through imports and the exportsare exceedingly low as presented in chapter 3 previously. In comparison with its other Africancounterparts however, it is relatively open to trade. It is a member of the IGADand the COMESAbut has been in a process of joining the WTO, which resultantly limits its trade performance(World-bank, 2021). The government has been working towards restructuring the tariffsforrationalizing and revolutionizing the investment opportunities in the country. Ethiopia also, hasrecently signed with the African Continental Free Trade Agreement and has structured the policiestowards offering tax incentives and economic zones with the custom duties offering exemptionstothe investors. The main exports of the country include coffee, meat, gold, pulses, andsomemanufacturing products and the imports include petroleum products, medicines, vehicles, palmoil, fertilizers and air crafts.
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4.2.2 Corruption
Figur e 13: Openness to tr ade 2011-2019
The corruption index has been demonstrated via the figure 12. It can be seen that rankinthecorruption or the ranking of the country for its corruption has been in variability. In 2020, it wasseen to increase one point from 37 to 38, and in 2019 the country also gained 3 points on the2018ranking or score for its corruption. As, corruption is among the main factors that can affect theforeign business’ presence, thus there needs to effective control and regulations implementationforthe control of corruption activities in the country.
Figur e 14: Corruption Index
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4.2.3 Governance Indicators
The next series of graphs are demonstrating the governance indicator ranks and scores for Ethiopia, from 2000-2020. These measures are the rule of law, regulatory quality, voice and accountability, terrorism and government effectiveness. These measures or indicators highlight the governanceand various measures of the political efficacy in the country, which is essential for the development
of trade and foreign businesses in any country, including Ethiopia.
Figur e 15: Rule of law
The rule of law is representative of the perception of the society, according to which the societal
agents abide by the rules of the society relating to property rights, contract enforcement, policeand courts etc. (WGI, 2020). It can be seen that the score or rank, as given out of 100, has beenlow for Ethiopia, showing that the rule of law or legal enforcement is relatively lowinthecountry.
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Figur e 16: Regulatory Quality
The regulatory quality is representative of the ability of the government to implement andformulate polices and regulations for the promotion and development of the private sector (WGI, 2020). It can be seen that the rank of Ethiopia for this indicator is excessively low, indicatingthelack of governmental control on implementation of regulations for the development of the privatesector, which is among one of the main constraints of the development and growth of Ethiopia.
Figur e 17: Government effectiveness
The next indicator being demonstrated is the governmental effectiveness. It refers to the qualityof services, public and civil, and the degree of independence from the political pressures andthecredibility of the government to bring about reforms in the country. Overall, it is a measureof thegovernmental effectiveness in policy formulation and implementation for development of the
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country. The rank has been falling since 2014, indicating a negative performance in the abilitiesof the present government of Ethiopia. The effectiveness of policy formulationandimplementation is integral to the future development and progress of the country.
Figur e 18: Voice and Accountability
The voice and accountability refer to the freedom of speech and democracy of the country. It alsodemonstrates the ability of the media to freely publish and promote its opinions without political
interference and control (WGI, 2020). It can be seen that the voice and accountability indexhasbeen improving over the last 5 years and it can be stated that Ethiopia is towards theestablishment of a democracy and will soon be free from authoritarian control of the government
(Economist, 202o). 4.2.4 Terrorism
The next figure is showing the terrorism index for Ethiopia. This index shows the impact ofterrorism in the country. It can be seen that the index decreased from 5.35 in 2018 to 5,31in2019(Trading Economics, 2020b). This is a good sign and shows positive action on part of thegovernment. The control of terrorism and increase security policies and reforms is inthebest
interest of any country, especially from the perspective of development and growth.
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4.3 Doing Business Index
Figur e 19: terrorism
The ease of doing business index scores are being shown for Ethiopia in figure 18 (TradingEconomics, 2020a). The graph below is showing that Ethiopia ranks 159, fromamongst 200countries in the ease of doing business. This rank shows that the political, infrastructural andeconomic factors need to be improved in order to increase the DB rank of the country. However, the country has seen a marginal drop in its competitiveness over the previous decade, in2008it
supported the rank of 111, in 2010 104, and from 2014 onward there has been a decline inthecountry’s ease of doing business.
Figur e 20: Doing Business
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4.4 Competitiveness Index
Figur e 21: Competitiveness
The competitiveness index or ranks evaluate the global competitiveness for countries basedupontheir economic competitiveness. In accordance with the competitiveness scores of Ethiopiait canbe seen that there has been a marginal increase in the competitiveness for the county since2007. The score of the country has increased from 3.26 in 2007 to 44.37 out 100 in 2019. Thishighlights the fact that the country is developing, and is on the path to development and growth.
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5. Challenges and Solutions to the Economic DevelopmentinEthiopia
5.1 Challenges
The previous chapters have highlighted the development and some of the issues beingfacedbyEthiopia in its development and path to progress. The following are some of the main developmentchallenges being confronted by the country, which are also limiting its growth. The main challengesfor Ethiopia include its debt burden, foreign exchange afflictions stemming frominadequatesectorperformance, fall in remittances and deficit balance of trade. The key challenges are as follows:
5.1.1 Debt Burden
Ethiopia has a large amount of debt: foreign debt and domestic debt account for about 30percentand 27 percent of the GDP, respectively. Servicing foreign debt was formerly a stretchfor thegovernment’s budget before the pandemic. The restrictions on the country’s balance sheet havebeenworsened in the previous months. Without suppression debt payments are overdue, the InternationalMonetary Fund (IMF)’s emergency funding of $411 million and the World Bank’s $82.6 millionarea drop in the bucket. 5.1.2 Foreign Exchange Afflictions Stemming from Inadequate Sector
First, The Ethiopia foreign exchange is feeble and shows a substantial near future challengetoitseconomy. By now, the exchange rate has fallen to 42.12 Birr/$1 at the end of April 2021, illustratinga 15 to 17 percent depreciation from the same period of time last year, as reported by the EthiopianMinistry of Finance officials. Second, Ethiopia foreign exchange condition can be based onits poor-performing sectors, especially its national airline, agricultural exports, hospitality sector, andproduction targets.  Ethiopian Airlines, the country’s major foreign exchange earner, saw a deterioration inrevenueof over $550 million between January and April 2020. This is extremely cause of concernastheairline sustains over 1 million jobs and contributed over 5 percent of Ethiopia’s GDPin2019.  Ethiopia’s agriculture exports— 60 percent of total exports in 2019—have also been addresseda big hit as demand slows in main European and North American trading partners. The
agriculture sector is the major employer in the country and creates significant foreign exchangefor Ethiopia, specifically coffee and oil seeds. Based on Deloitte, Ethiopia’s agricultural exportsas of April 2020 were only at 20 percent of their usual volume, translating into a year-to-date(YTD) loss of about $132 million. Furthermore, a substantial amount of Ethiopia’s agricultural
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land and pastures have been affected by a locust invasion, pushing over one million peopleintohunger.  Ethiopia’s hospitality sector has flopped as travel bans have passed into effect across theglobe. The collateral damage is crucial as hospitality accounts over 8 percent of the total employmentin the country. Meanwhile, Ethiopia’s manufacturing sector is a key focus of the government inpast few years has weakened as a result of the disruption in supply chains around theworld. Ethiopia’s textile and garment industries, notably , have been affected by supply shortcomingsin China, along with the slowdown in demand in Europe and North America. 5.1.3 Fall In Remittances
Ethiopia will encounter a sharp decline in remittances from its worldwide diaspora, whichin2019totaled $5.7 billion, as stated by Ethiopian Ministry of Finance officials. Ethiopia is not immunetothe expected 20 percent decline in global remittances in 2020, as estimated by the WorldBank. Numerous Ethiopians in the diaspora encounter economic difficulty in the United States, Europeandsomewhere else. Various countries in the Middle East, in particular Lebanon, the UnitedArabEmirates, and Saudi Arabia have worsened the situation by deporting and expellingEthiopiandomestic workers. 5.1.4. The Pandemic and Drop in Economic Growth
In similarity to the rest of the world, Ethiopian economy was displaced and experiencedunprecedented economic and social impact of the recent pandemic and with the continual spreadofthe virus, the resultant social and economic effects can be catastrophic. There was a substantial
increase in the prices of commodities including basic food items, unemployment was at a peakandthere was a drop in the economic growth as well. The economic impact of the pandemic seemstobe more extended than health-related consequences. This will overturn economic gains madeintherecent years, which have seen huge segments of the Ethiopian population uplifted frompoverty. The number of people living under the poverty line is now anticipated to raise to 31 millionpeoplein year 2020-2021 from 26 million people in 2019-2020. 5.1.5. Deficit Balance of Trade
Ethiopia’s balance of trade deficit can be mostly described by the unequal terms of trade withinagricultural goods (the country’s major exports) and capital commodities(Ethiopia’s major imports). International markets give a higher price to commodities that are manufactured or “value-added”than to those that are in their raw form. Acknowledging the uneven terms of international trade, many countries, as well as Ethiopia, followed policies of protectionism throughout the 1960s and1970s to develop national industrial capacity or import-substitution. In most cases, wherethecountry pursued policies of total industrial control, they failed miserably. For other countries, nonetheless, such as the economies of Southeast Asia, the policies were more successful, allowing
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these countries to ultimately participate in liberalized free trade at the global level. The exportsofthe country are excessively low, which have resulted in a negative trade balance and increaseindebtof the country. Also, the private sector of the country is underdeveloped which has limiteditsresilience to shocks and trade competitiveness. 5.2 Solutions
Among the main concerns of the country are its lack of policy formation and as the governanceindicators pointed out a lack of the governmental effectiveness in placating a control significantprogress in the governance formulation and implementation. 5.2.1 Reduce Debt Burden
In order to inhabit debt burden Ethiopia, need support from International debt relief. There doesnotyet seem to be international political support for an absolute Highly Indebted Poor Countries(HIPIC)-like debt relief at the moment. Donor countries such as the United States, Canada, China, France, the United Kingdom, and others should assist and support immediate debt moratoriumfor2020 and 2021 in order that countries like Ethiopia can utilize their limited resources toincreasesocial protection for their citizens. 5.2.2 Improve Foreign Exchange Afflictions
Ethiopia government should Encourage private and public sector investment. Whereas liquidityhasbeen made accessible to the banks, the effect of such measures can only be evaluated intermsoftheir positive impact on the businesses they were designed to reach. As investment in andbytheprivate sector has slowed, now would be a right time for enhanced public sector investment tomaintain the economy running and reduce drastic job loss. Furthermore, it is vital to engageandpromote private sector creditors to take part in debt relief efforts. The government has madesomedevelopment in the telecommunication sector within the pandemic time, especiallyindigitalpayments. Recently suggested laws would allow non-financial institutions into the financial servicessector for the first time, including telecommunications giant and state-controlled monopolyEthioTelecom. The government should move forward in these measures to bring about great neededinvestment, creation of job, vital revenue in the government treasury, and long-awaitedmobilemoney efficiencies for customers. 5.2.3 Build Friendly Diplomatic Relations to Absorb More Remittances
Remittances can contribute to financing development and improving the lives of millionsofhouseholds in developing economies. While remittances are private funds, sent and receivedbyindividuals and households who use them according to their own needs, governments canplayanimportant role in enhancing the positive welfare impacts of money transfers by makingthesetransactions less costly and by creating an enabling environment for remittances to be usedinthe
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most productive way for the households.The high costs of transferring remittances shouldbeoneofthe main areas of policy intervention. These high transfer costs imply that recipients receivesignificantly less money than what was sent initially. It also means that migrants tend to use informalchannels, which limits the ability of households to save and borrow money in the formal financialsystem. Reducing transfer costs and expanding financial inclusion and service provisionthroughincreased competition can spur the volume of remittances and channel more funds into theformalfinancial sector. 5.2.4 Revitalize the Economy During the Pandemic
Majority of African countries, including Ethiopia, do not have the financial muscle to supplyasocialsafety net for their citizens in a similar manner that developed countries have been doing. WhereasEthiopia is providing food and shelter to protect the most vulnerable, the government mustfurthermore expand food assistance and social protection programs for its most vulnerablepopulations. It has been hearing to see the private sector and citizenry take part and contributeinsupporting those less fortunate in their communities. 5.2.5 Make Domestic Companies More Competitive
In order to create a favorable balance of trade, Export diversification over high potential areas shouldbe expanded given that Ethiopia has several advantages for the development of its export sector. These include the abundant and capable labor Force; low wage level; a wide range of weather andsoil conditions; preferential access to European market and proximity to the middle East markets. Furthermore, the preferential access to the Common Market for Eastern and Southern AfricanStates(COMESA) with a total population of more than 260 million also provide significant marketopportunities for various export items for the country. Policies that improve the diversificationandassist the shift towards the export of semi processed and manufactured goods are fundamental. Oneclear option in this case is to make enormous investment in the export sector through a coordinatedeffort within the private sector and the government. In addition, policies that variety the destinationof export to new inroads, moreover to the already existing is also necessary. As suggestion, inorderto achieve the intended effects on trade balance, Ethiopia should rely on policy that focusingonthevariable of real exchange rate, which is the nominal exchange rate to aggregate price level. At thesame time, the devaluation-based policies (affected through changes in nominal exchange rate) mustcooperate with stabilization policies (to ensure domestic price level stability) to achieve thedesiredlevel of trade balance. The government has been devoting a large chunk of the budget to pro-poor programs andinvestments, these efforts need to be continued in order to necessitate actual change. Also, foreigndonor plans and activities can be a source of vital contribution and therefore should be sought out
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for financing the pro-poor programs. The government has been looking to expand the role of theprivate sector through foreign investments and industrial parks in order to support the growthmomentum of the country (World-bank, 2021). The governmental policies of the country shouldbemade welcoming of foreign parties and should allow for privatization of the services sector inorder to gain sustainable momentum of growth in the country. Also, there needs to be excessiveattention detailed to the restricting of the governance of the country, as the regulatory effectivenessis very low. The improvement in regulation and security will help in the attraction of foreignpartners and investors and will ultimately lead towards positive growth. The country recentlysawan increase in outsourcing of multiple manufacturing units from Asia, this is an indicationofprogress and further initiatives increasing the foreign investment and businesses shouldbeencouraged. Also, the Djibouti-Addis Ababa railway line, built under the Chinese BRI, is beingthought to be a factor contributing in the increase of the exports of the country. Also, theimpending privatization of the state-owned railway, maritime, air transport, logistics, electricity, and telecommunications sectors, is expected to boost private investment, as it is under the newlyformulated economic zones and trade agreements initiated by the country. Also, under thenewreforms of the investment plan 2020, will help in strengthening the business environment. Ethiopiabenefits from low-cost skillful and trainable labor and also has a strategic location in the MiddleEast and Europe, which should be capitalized by the business and commerce unit of thegovernment.
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Acknowledgment
I want to begin by giving a prayer of gratitude and thanksgiving to God almighty for grantingmean opportunity to pursue my dreams in this field of interest by taking care of my well-beingthroughout the entire journey in China. I testify of his goodness and his promises. I want to thank Hubei university of economics for enrolling me in their renowned institute, allowing me to learn and gain all the knowledge to build my foundation and the lessons taught. I am grateful to my supervisor, Assoc. Prof. Liu Hongmei, who offered prompt, wise, andalwaysconstructive feedback and advice despite her busy schedules. She displayed tireless dedication, graciousness, and impeccable professionalism in supervision. Professor Liu Hongmei depthofknowledge, insight, and strong work ethic has been and will continue to be a source of inspirationto me. I want to express my gratitude to my family members, who has been my pillar and support. Moreover my boyfriend for providing me with numerous and priceless help, advice, inspiration, andencouragement both in my studies and everyday life. Finally, the long, hard process of completing a four-year study would have beenentirelyimpossible without the support of many friends, teachers, and colleagues in international
economics and trade department. Thank you, l am deeply grateful for your help.
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