CONFLICT AND ECONOMIC INDICATORS: A CASE STUDY OF ETHIOPIA

Report Prepared for THE HUMANITY KNIGHTS NETWORK

Aditi Pany

July 2006

The completion of this report was done through the voluntary efforts of the author. The Humanity Knights Network would like to thank Aditi Pany for her contribution.

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Table of Contents
Table of Contents............................................................................................................ii 1.0 Introduction to Ethiopia..........................................................................................1 2.0Impact of Conflict on the Ethiopian Economy........................................................2 2.1GDP.........................................................................................................................2 2.2 GNI.........................................................................................................................3 2.3 Foreign Debt...........................................................................................................3 2.4 Exports/Imports......................................................................................................4 2.5Telecommunications................................................................................................4 2.6 Transportation.........................................................................................................5 2.7 Labour Force...........................................................................................................6 2.8 Education................................................................................................................7 2.9 Health......................................................................................................................7 3.0 Conclusion.................................................................................................................7 4.0Bibliography...............................................................................................................8

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1.0

Introduction to Ethiopia

Ethiopia is the oldest independent country in Africa, and is among the oldest countries in the world tracing back to more than 2000 years. Located on the eastern part of the African continent, referred to as the Horn of Africa, Ethiopia shares its borders with Kenya, Somalia, Sudan, Eritrea and Djibouti. This landlocked country covers an area of 1,127,127 sq. km. with great terrain diversity and wide variations in climate, soils, natural vegetation and settlement patterns. In fact, three major crops are believed to have originated in Ethiopia - coffee, grain sorghum, and castor bean. Ethiopias population of 74,777,981 is mainly rural, with most habitants living in highlands above 5,900 ft (1,800 m). Almost half the people are Muslim, while over a third belong to the Ethiopian Orthodox Church and about 15% practice traditional religions. Amharic is the countrys official language, but a great many other languages are spoken, including Tigrinya, Oromo, Somali, and Arabic. The United Nations Economic Commission for Africa is headquartered in the capital city of Ethiopia, Addis Ababa, as is the African Union. Unique among African countries, the ancient Ethiopian monarchy maintained its freedom from colonial rule with the exception of the 1936-41 Italian occupation during World War II. However, throughout its history, hunger and war have plagued this nation. Between 1961 and 1967 there were border skirmishes between Ethiopia and Somalia, and in the late 1960s and early 70s there was considerable fighting between the government and a guerrilla secessionist movement in Eritrea. The failure of Emperor Haile Selassie (who had ruled since 1930) to deal adequately with the longterm drought in Northern Ethiopia, it is believed, led to his downfall, with a military group (the Dergue) seizing control of the government in 1974. The coup led to a period of civil war interspersed with severe droughts throughout the 1980s resulted in devastating famine. In 1987, a Marxist-based constitution was approved, and in 1988 Ethiopia and Somalia signed a peace agreement, but internal strife worsened. Torn by bloody coups, uprisings, wide-scale drought, and massive refugee problems, the regime was finally toppled in 1991 by a coalition of rebel forces, the Ethiopian People's Revolutionary Democratic Front (EPRDF). A new constitution was adopted in 1994, and Ethiopia's first multiparty elections were held in 1995. Eritrea, controlled by Eritrean Peoples Liberation Front (EPLF), established its own provisional government in 1991 and became an independent nation in 1993, cutting off Ethiopia's access to the Red Sea. A 1998-2000 border war between Ethiopia and Eritrea killed tens of thousands and ended with a UN-sponsored agreement to demarcate the ill-defined border. A treaty was formally signed in December 2000. Final demarcation of the boundary is currently on hold due to Ethiopian objections to an international commission's finding requiring it to surrender territory considered sensitive to Ethiopia. Ethiopia, despite work toward reforming the nations agriculture, continues to face problems of famine and conflict. A new famine threatened the country in 2003 as a result of a drought that began in 2002. The situation improved somewhat by 2004, but several million people were still dependent on food aid. In 200304 there was ethnic violence in the Gambela region (Western Central Ethiopia); there were accusations that the army was involved in some of the attacks.

2.0 Impact of Conflict on the Ethiopian Economy

Conflict is the major and fundamental explanatory factor for the poverty and backwardness of Ethiopia. It has not only inflicted tremendous pain and human misery but has also suppressed economic activity. In addition, conflict in this region particularly, has also amplified the devastating effect of natural disasters such as droughts. The post conflict years, though short-lived, have experienced healthy economic revival. 2.1 GDP

One of the most direct and measurable impacts of war on the economy is the diversion of funds and resources from productive investments such as education, health, infrastructure and so on, to destructive uses of war and weaponry. A paper presented by Alemayehu Geda, at the Making Peace Work Conference at Helsinki, Finland analyses the expenditure on defence and its impact on growth through the conflict and post conflict periods between 1974 and 1999. The results are shockingly evident of the costs of conflict borne by Ethiopia. Geda writes: Defence expenditure has been a major proportion of government expenditure since the mid-1970s. In the last year of the imperial regime it accounted for 13 per cent of government expenditure, 1.9 per cent of GDP. Under the Dergue regime it increased to 17 per cent of expenditure, or 3 per cent of GDP. Between 1977-9, during the Somali invasion, it rose to 26 per cent of expenditure (6 per cent of GDP). This high share continued through the era of the Dergue until it was overthrown in 1991 by the current government (figure 1). From 1991, defence expenditure declined, but increased again towards the end of the century, with the rise of the border war with Eritrea.

This pattern had a detrimental effect on growth. Although growth variability in Ethiopia often results from drought, Table 1 shows that GDP growth declined during years of conflict and recovered during post-conflict years. For instance GDP growth averaged 3.8 per cent 1969-74 and fell to 2.6 per cent between 1975-80 (the civil war period and conflict with Somalia). Between 1980-5 there was drought, then 1991-92 was the peak 2

period of the 1974-91 civil war and instability associated with regime shift. Post conflict, growth then improves, with the exception of 1993-94. Table 1: Impact of conflict on economic growth

Table 2

Fortunately, as Table 2 shows, since 1991, Ethiopia's economy has experienced a remarkable degree of macroeconomic stability and good growth on average. This is inspite of its 1998-2000 conflict with Eritrea. Growth however has been highly variable, reflecting the dependence of the economy on a rain-fed agricultural sector subject to frequent drought. The drought of 2001-2002 (which straddled the FYs 2002/03) was the most severe since the one in 1984/5. The economy has picked up since, registering an 11% growth ($54.89 billion in PPP terms) in the post drought year of 2004-05 and is projected to sustain a growth rate of above 5% n 2005-06. 2.2 GNI

The GNI per capita of Ethiopia was US$110 in 2004, which translates to US$810 in Purchasing Power Parity terms. This dismal figure places Ethiopia in the Low Income category, according to the UN Human Development Report.

2.3

Foreign Debt

Ethiopias external debt stands at $5bn and its debt situation is becoming increasingly unsustainable, with changes in interest rates and continued low coffee prices that are projected to drive the value of the debt up to 220 percent of Ethiopia's exports. As reported by Oxfam, between 1998 and 2001, Ethiopia made debt repayments worth $536 million to its international creditors money that could have been spent on improving the countrys agricultural sector and introducing safeguards to shield its population from famine. As a result, there has been strong campaign in favour of debt relief for Ethiopia. Although Ethiopia has received debt relief to some extent, resistance has been expressed by some debtors due to Ethiopias high defence expenditure. 2.4 Exports/Imports

Ethiopias major agricultural export crop is coffee, providing 65%-75% of Ethiopia's foreign exchange earnings. Coffee is critical to the Ethiopian economy, and Ethiopia earned $267 million in 1999 by exporting 105,000 metric tons. According to current estimates, coffee contributes 10% of Ethiopia's GDP. More than 15 million people (25% of the population) derive their livelihood from the coffee sector. Other exports include live animals, hides, gold, pulses, oilseeds, and khat (or qat), a leafy shrub which has psychotropic qualities when chewed. Dependent on a few vulnerable crops for its foreign exchange earnings and reliant on imported oil, Ethiopia lacks sufficient foreign exchange. In the 1980s, Ethiopia faced several famines and droughts. Consequently, the country, which had been virtually selfsufficient in food supplies in the 1970s, became a net importer of food worth as much as 243 million birr (1 $ = 8.74 Birr) annually during the period EFY l983/84 to EFY l987/88. The financially conservative government has taken measures to solve this problem, including stringent import controls and sharply reduced subsidies on retail gasoline prices. Nevertheless, the largely subsistence economy is incapable of supporting high military expenditures, drought relief, an ambitious development plan, and indispensable imports such as oil and, therefore, must depend on foreign assistance. In December 1999, Ethiopia signed a $1.4 billion (1.4 G$) joint venture deal to develop a huge natural gas field in the Somali Region. The war with Eritrea has forced the government to spend scarce resources on the military and forced the government to scale back ambitious development plans. Foreign investment has declined significantly. Government taxes imposed in late 1999 to raise money for the war will depress an already weak economy. The war has forced the government to improve roads and other parts of the previously neglected infrastructure, but only certain regions of the nation have benefited. The current government has embarked on a program of economic reform, including privatization of state enterprises and rationalization of government regulation. While the process is still ongoing, the reforms have begun to attract much-needed foreign investment. 2.5 Telecommunications

Telecommunications service was introduced in Ethiopia in 1894 during the rule of Emperor Menelik II. When war inevitably broke out and the fascist powers invaded 4

Ethiopia, telecommunication facilities were targeted for destruction to deprive the resistance forces of access to information. Telecommunications in Ethiopia is therefore essentially a history of network rehabilitation and restoration In 1989 Ethiopia counted only 1,090,000 telephones, or two sets per 1,000 inhabitants, one of the lowest per capita figures in the world. Infact, the size of the Ethiopian ICT sector remains very small by all measurable indices with the lowest computer penetration, tele-density, number of hosts and Internet users. Ethiopia is one of the six countries at the bottom of the ITU Digital Accessibility Index (DAI, 2003). The other countries at the bottom of the ICT league table are Guinea Bissau, Chad, Mali, Burkina Faso and Niger (Adam, 2004). However, progress has been made over the last eight years. The promulgation of new telecom law and the establishment of a sector regulator in 1996 led to improvement in fixed line services and the introduction of new services under strict monopoly. The fixed line telephone penetration doubled from lower base of 0.26 in 1996 to 0.6 in 2003. Similar progress was also made in incumbents income and tax for the government coffers. Telecom revenue doubled and telephone traffic tripled during same period. The Internet and mobile services were introduced during this period and the government has shown some positive signs for liberalization of the sector. The Mobile services segment of the market is one of the growing segments of communications in Ethiopia despite marketing, technical and network management hiccups. The number of subscribers has been doubling year to year ever since its introduction in 1999. Although its widespread use has been hampered by the late start of the service compared to other African countries, it remains one of the most promising communication services in addressing the digital divide in Ethiopia. In contrast, the Internet market was stifled by the underdeveloped infrastructure and unchallenged monopoly of the incumbent. The Internet service segment is one of the least developed in the world when compared to the population size. Although Internet was introduced in 1996, there were only 7,709 Internet subscribers by 2002 giving a density of about one subscriber per 10,000 people. Ethiopia lagged 20 times far behind the low-income countries average and about 460 times the world average by the time. 2.6 Transportation

A lack of resources, coupled with military and political instability, has retarded the growth of a transportation infrastructure in Ethiopia, even though development of such a system traditionally has been a government objective. Ethiopia has a total of 33,856 kilometers of roadways, of which only 4367 kilometers are paved. Almost all primary roads are gravel roads, including those that connect Addis Ababa with major cities and towns across the country. Some 75 percent of government spending on infrastructure is targeted at improving the road network. In 1998 the World Bank approved a US$309 million credit to help fund efforts to improve roads in Ethiopia. In 2003 work began on the second phase of the Road Sector Development Programme, which is scheduled to upgrade 80 percent of paved and 63 percent of unpaved roads by 2007.

Ethiopia has only one railroad, the 681-kilometer line that connects Addis Ababa with the port of Djibouti. Ethiopia and Djibouti jointly own and operate the line, which carries up to 800,000 passengers and 250,000 tons of freight per year. Like the road system, it badly needs rehabilitation, plans for which are underway. In order to reduce its reliance on Djibouti, Ethiopia announced in 2001 that it had reached an agreement with Sudan to build a rail link to Port Sudan. At a cost of US$1.5 billion, the project has not shown any signs of progress yet. Ethiopia has no significant navigable waterways, although limited ferry service is available on Lake Tana. The Baro and Awash rivers are navigable only in the rainy season. The Abay (Blue Nile) is not navigable within Ethiopias borders. A positive feature of Ethiopian transportation is Ethiopian Air Lines, which delivers efficient and reliable service domestically and internationally and provides maintenance and training for some other regional carriers. Ethiopia has two international airports in Addis Ababa and Dire Dawa and some 40 airfields elsewhere. Bole International Airport in Addis Ababa handles 95 percent of all international air traffic and 85 percent of domestic flights. A major renovation and expansion of Bole was completed in 2002. In 20002001, Ethiopian Airlines carried nearly 1 million passengers. 2.7 Labour Force

Despite better economic performance in the 1990s, employment creation in Ethiopia has been limited. The Ethiopian economy is predominantly agrarian and its performance is heavily dependent on agriculture which accounts for about 85 per cent of its employment. In general, the labour market is characterized by an increasing informal economy, a large share of subsistence agriculture, the dominance of casual workers and a limited state budget. The Ethiopian population has been rapidly increasing over time. Currently, the size of the population is estimated at about 70 million. Given the current growth rate of 2.65 per cent, the total population of the country is projected to reach 140.3 million by the year 2030. Because of rapid population growth and dismal performance of the economy, the number of unemployed population has been increasing over time in the country. In absolute terms, unemployment has increased from 169,621 units in 1984 to 770, 844 in 1994, representing an average annual growth rate of 2.91 per cent, which is close to the population growth rate. Youth employment in particular is a pressing issue in Ethiopia where almost two-thirds of the population is younger than 25 years. Indeed, Ethiopia has one of the highest urban unemployment rates worldwide, at about 50 per cent of the youth labour force. Some of the main causes of the youth employment problem in Ethiopia are a fall in aggregate demand due to the war with Eritrea, the 2001 drought and, in general, weather circumstances; lack of skills; low availability of investment, capital, risk absorption capacity and financial management skills; limited market accessibility; and the absence of youth in decision making or implementation of policies affecting them. In addition, it has also been noted that the HIV/AIDS epidemic has deepened the extent of poverty by selectively removing the economically active labour force. For instance, the Ministry of Health (MOH) estimates that at present more than 3 million people are

infected with HIV/AIDS in Ethiopia and more than 90 per cent of these are in the age group of 15-49 years. 2.8 Education

According to the data reported by the United Nations Human Development Report 2003, Ethiopias adult literacy rate has increased from 28.6% in 1990 to 40.3% in 2001. In the corresponding period, public expenditure on education, as a percentage of GDP, increased marginally from 3.4% in 1990 to 4.8% in 1998-2000. As a percentage of total government expenditure, public expenditure on education stood at 9.4% in 1991, almost equal to the share of defence expenditure in the same period. The net primary enrolment ratio in 2000-01 was 47%, while the net secondary enrolment ratio in 2000-01 was 13%. Overall, Ethiopias Education Index, as defined by United Nations, was among the lowest at 0.40 in 2005, which is lower than the Education Index average of the least developed countries (0.50) and Sub-Saharan Africa (0.56). 2.9 Health

Health indicators for Ethiopia present a dismal picture of high prevalence of disease, resource shortfall and high risks. At 47.6 years, the life expectancy in Ethiopia is among the lowest, even within the low income countries. Infant mortality rate (per 1000 live births) was 112, while HIV prevalence (ages 15-49) was around 4.4% in 2003. Undernourished population, as a percentage of total population is extremely high at 46%, according to latest figures. Health expenditure in Ethiopia, both public and private, is very low relative to the funds needed to address the country's large burden of disease. Public health expenditure as a percentage of GDP was only 2.6% in 2003, yielding a per capita health expenditure (public + private) of US$21 in PPP terms. However, owing to increasing fund flow to the health sector, particularly donor funds, improvements have been visible. Immunization against measles, for instance, has increased from around 30% in 1998-99 to over 60% in 2004-05. Health human resources are also being trained to support the overwhelming needs of the health sector in Ethiopia.

3.0

Conclusion

The data presented indicate, for the most part, that economic crises have been brought on by the conflict in the region and further aggravated by drought. At the same time, it also clearly shows that Ethiopia has experienced some improvements in its economic situation over the past few years of relative stability. However, owing to the legacy left behind by war, Ethiopia still remains among one of the most underdeveloped nations in the world. It is critical to appreciate the magnitude of impact made by war and conflict on the social, psychological, economic and cultural fabric of the country, and commit to assisting in the socio-economic development of Ethiopia with resources, physical and intellectual.

4.0 Bibliography
Abii Tsigie and Girma Feyissa. Telecommunications in Ethiopia: Past, Present and Future. Retrieved 22nd July, 2006, from http://www.vii.org/papers/ethiopia.htm Alemayehu Geda. (2004). Does conflict explain Ethiopias backwardness? Yes! And significantly. Retrieved on 22nd July 2006, from http://www.wider.unu.edu/conference/conference-2004-1/conference%202004-1papers/Geda-2505.pdf Central Intelligence Agency, United States of America. (2006). The world factbook: Ethiopia. Retrieved 14th July 2006, from https://www.cia.gov/cia/publications/factbook/geos/et.html Charles Chidi Achodo. (2000). Conflict and post conflict patterns, issues and impact on economic development and poverty cycle in Africa. Country Reports.org. Ethiopia country report. Retrieved 24th July 2006, from http://www.countryreports.org/country.aspx?countryid=77&countryName=Ethiop ia), and http://siteresources.worldbank.org/INTPRS1/Resources/RegionalEvents/Africa-Poverty-Forum--06-00-/Plenary/conflict.pdf Human Development Report. (2003). Human Development Indicators 2003 Ethiopia. Retrieved 13th July 2006, from http://hdr.undp.org/reports/global/2003/indicator/cty_f_ETH.html Initiative for Policy Dialogue, Columbia University. (2001). Ethiopia targeted country visit. Retrieved 22nd July 2006, from http://www0.gsb.columbia.edu/ipd/programs/item.cfm?prid=3&iyid=5&itid=224 International Monetary Fund. (2001). Ethiopia: Momeorandum of Economic and Financial Policies. Retrieved on 22nd July 2006, from http://www.imf.org/external/NP/LOI/2001/eth/01/INDEX.HTM Lishan Adam. (2004). Ethiopian telecommunication sector performance review. Retrieved on 22nd July 2006, from http://www.researchictafrica.net/images/upload/Ethiopia%2002_04_04%20LA%2 0v1.pdf Mongabay. Ethiopia: Transportation and Communications. Retrieved 16th July 2006, from http://www.mongabay.com/reference/new_profiles/264.html National Geographic. (2006). People and places: Ethiopia. Retrieved 14th July 2006, from http://plasma.nationalgeographic.com/places/countries/country_ethiopia. html?source=G1201 The Columbia Encyclopedia. (2005). Ethiopia. Retrieved 14th July 2006, from http://www.bartleby.com/65/et/Ethiopia.html The Federal Reserve Bank of St. Louis. (2005). The economic effects of violent conflict. Retrieved on 23rd July 2006, from http://research.stlouisfed.org/wp/2005/2005066.pdf

UNDP. (2006). Post-Conflict Reconstruction of Communities and Socio-Economic Development. Retrieved 22nd July 2006, from www.ticad.net/documents/issuepaper.doc US Library of Congress. (1991). Ethiopia: A Country Study. Retrieved 14th July 2006, from http://countrystudies.us/ethiopia/104.htm World Health Organisation. (2005). Selected Country Experiences: Ethiopia. Retrieved 14th July 2006 from, http://www.who.int/health_financing/countries/experiences/en/index.html Labour market flexibility and employment and income security in Ethiopia: Economic aspects. Tassew Woldehanna, Fantu Guta, Tadele Ferede http://www.ilo.org/public/english/employment/strat/download/bg1.pdf Characteristics and determinants of youth unemployment, underemployment and inadequate employment in Ethiopia. Berhanu Denu, Abraham Tekeste and Hannah van der Deijl http://www.ilo.org/public/english/employment/strat/download/esp2005-7.pdf

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