Ethiopia's Path to Middle-income Status Paved by the AfCFTA

Oct 23 , 2021
By Stephen Brien (PhD)

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It is important for Ethiopia to recognise that long-term economic growth is underpinned by the sharing of ideas and technology. This can best happen by improving Ethiopia’s business climate and by practically implementing the AfCFTA deal, writes Stephen Brien (PhD), director of policy at the London-based global think-tank, the Legatum Institute.

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Ethiopia is at a pivotal moment in its history. Its future path is not only vital for Ethiopian citizens but will have an impact on the development of the continent as a whole.

When it comes to building prosperity, one of the most crucial levers is boosting regional trade. As we look to the future, enhancing trade within Africa is one of the most important things the continent can do collectively to enhance prosperity.

Currently, African countries trade with each other less than do the countries of any other continent. Enabling and facilitating trade between African nations is crucial to the development of both Ethiopia and nations across the continent; and enhancing trade within Africa is also an ideal opportunity for greater innovation, competition, and social and economic inclusivity, as there are many opportunities to serve markets better than can be done by global players. Furthermore, the most balanced gains from trade occur between partners with common levels of technology and labour costs.

On top of this, encouraging innovation and competition through knowledge transfer is vital not only to stimulate economic growth but to help create lasting social and economic well-being, as, without an open and competitive economy, it is very challenging to create the conditions needed to achieve greater levels of prosperity.

Huge progress was made in 2018 with the establishment of the African Continental Free Trade Area (AfCFTA), the largest free trade area in the world in terms of membership. It breaks down a range of barriers to trade across the continent and provides opportunities for African exporters to access and scale markets.

However, on paper, a free trade deal is literally that – a piece of paper, and signifies only the beginning of a process, as it is the movement and exchange of ideas that is the real value of a free trade agreement.

On top of this agreement, there needs to be a meaningful reduction of tariffs between African nations, so that markets can trade more freely. Ethiopia and other nations need a genuine harmonisation and recognition of standards, and a reduction of non-tariff barriers so that goods can cross borders more easily.

Moreover, it is critical to reduce the costs of border administration. In too many African countries the time and costs to import and export are prohibitively high, with Ethiopian businesses currently having to comply with eight different documents in order to export goods.

These procedures need simplifying, and the huge set of complex rules and anti-competitive practices around shipping, for example the compulsory use of Ethiopian Shipping & Logistics Services Enterprise (ESLSE), need updating – as well as reforms to the way import licenses and in-person visits to the Ministry of Trade work. The extensive documentation and restricted access to foreign exchange get in the way of businesses doing what they do best: innovating, lowering costs for consumers, generating jobs and creating prosperity.

The Legatum Institute [at which the author is the director of policy] has published a new report that show­s the huge opportunities for Ethiopia to achieve upper middle-income status by 2050 if the country starts embracing a more open, inclusive economy, underpinned by a stable political settlement. However, as has been recognised by Prime Minister Abiy Ahmed (PhD), this is likely to require changes in the way the state has operated.

Our work has shown that trade liberalisation works best when it is complemented by measures for economic transformation. And AfCFTA offers this momentum for new thinking on trade and economic development policies in Africa. However, for the benefits of AfCFTA to be fully realised, it has to be backed up by increased productive capacity, enhanced regional value chains, and the removal of internal obstacles to promote growth of SMEs so that African companies can compete well in the liberalised regional market.­­­

Prime Minister Abiy’s new Government has rightly placed strong importance on improving Ethiopia’s business climate, with the aim of increasing the productivity and competitiveness of Ethiopia’s private sector. However, there has been limited progress so far on minimising regulations and simplifying business start-up costs and procedures. That is where the work now needs to be focused.

With the new Ethiopian Government committed to a privatisation process, it is clear that ending the preferential treatment of state-owned enterprises and politically-linked companies will be vital to achieving greater economic and social wellbeing for all Ethiopians. But, privatisation in itself won’t contribute to greater levels of economic inclusivity. It is vital that Ethiopia also shift its broader regulatory order to accommodate an embracing of private enterprise and capital, and, importantly, that it strengthens the judiciary and rule of law systems in the country, to avoid the risks of corruption in these processes, as experienced in other countries.

To fully capture this opportunity, requires the Ethiopian government to recognise that economic development is reliant on new ideas and on old ways changing. It is important for Ethiopia to recognise that long-term economic growth is underpinned by the sharing of ideas and technology, which requires a change in mindset as to the immense value of what can be gained from the outside world and from allowing markets to be truly contestable. This can best happen by improving Ethiopia’s business climate and by practically implementing the AfCFTA deal.

In recent times Ethiopia has been seen as one of the world’s best performers in economic growth and the country has huge potential. But for Ethiopia to capitalise on its past successes, and to become genuinely prosperous as a nation, there will need to be a real shift of approach – that goes beyond the signing of free trade deals - to opening up to the outside world.

Since AfCFTA was formed, we have seen several of the major world economies becoming more protectionist – with Biden's own trade policies not differing significantly from those of his predecessor. In many ways, it could be interpreted as an end to the golden era of globalisation.

It is vital Ethiopia does not pursue this path. Now is the moment to implement AfCFTA practically by opening up trade links with the outside world, to reform the domestic business environment, as well as to embrace a more inclusive economy and a stable political settlement, so that sustainable economic growth and solid upper middle-income status are assured.

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PUBLISHED ON Oct 23,2021 [ VOL 22 , NO 1121]

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