2.1 Introduction

Ethiopia has attracted global attention because of its double-digit economic growth.[20] Following a developmentalist state model, Ethiopia has prioritised state-directed economic growth over human rights or political pluralism. The late Prime Minister Meles Zenawi believed that a measure of prosperity was essential before democracy could take root.[21] International commentators such as CNN complimented such strides, calling out Ethiopia’s success for being Africa’s fastest-growing economy in 2018 and Deloitte labelling it the ‘growth miracle’.[22] The EPRDF under Abiy inherited significant parts of Zenawi’s economic paradigm, deriving Ethiopia’s Homegrown Economic Reform Plan, a high-growth strategy aimed at making Ethiopia a middle-income country by 2025 through foreign financing and privatisation.[23]

Hence, structurally speaking, the same problems that strained the previous administration remain. At the core of the government’s strategy is the priority of achieving macro-level growth that masks marginalisation and inflames the anger that communities feel. Indeed, the headline statistics about Ethiopia’s progress conceal many shortcomings. According to one Addis Ababa-based analyst the growth has not been felt by ‘the common man on the streets of Addis Ababa or in the rural areas’.[24] While Ethiopia’s economy indeed witnessed remarkable growth, the growth has been largely state led and concentrated in several service sectors, with only limited decent employability and livelihood improvements. Limited productive growth and the unaccommodating labour market has pushed many into vulnerable employment, often in the informal sector.[25] Paradoxically, the country remains one of the world’s poorest countries – sitting just above Haiti and below Afghanistan in terms of gross domestic product (GDP) per capita – with rising urban inequality, surging inflation and high unemployment rates.[26]

While this ‘development before democracy’ strategy has paid off in a number of areas, the question remains whether its success can be sustained for much longer amid large popular unrest due to economic marginalisation. With rapid population growth and urbanisation, does Ethiopia’s economic model accommodate its ever-changing labour force? To this end, this chapter outlines the three key pillars of the Ethiopian urban economy under EPRDF and Abiy’s economic strategies – a large public sector, a small formal private sector and a large informal sector – in an attempt to understand embedded economic structures that polarise communities. The discussion underscores the fact that while Ethiopia is growing at a fast pace, it is a high-level growth largely driven by the ability of the public sector to invest in a wide range of programmes and projects simultaneously. In contrast, this growth is rarely reflected in citizens’ livelihoods and daily lives, which remain strained by high inflation rates and limited decent employment. Low wages, limited productive growth and increasing informality force urban residents (mostly migrants), fleeing rural poverty, to continue living in substantial poverty and/or substandard homes in slums and squatter settlements.[27]

2.2 Growing without changing

In the early 1990s, Africa’s poverty was alarming and viewed as a threat to rich countries.[28] Twenty years later, they described Ethiopia as a stable growing economy, progressing through economic reform and increasing competitiveness with a promise of an ongoing wealth creation in Africa.[29] Specifically, figures of annual GDP growth provided the grounds for this paradigm shift in perceptions of Ethiopia, which was beginning to shift its position from political instability and stagnation towards economic growth and political stability. Successively since 2004, Ethiopia’s economy has continued to grow by 10.4% on average – in contrast to an average of 3% average growth in the previous decade and much faster than the average annual growth in Africa as a whole (nearly 6%). By taking into consideration population growth of 2.4% per year, GDP growth per capita averaged 8% per year from $584 (PPP) in 2004 to $2,022 (PPP) in 2018.[30]

Figure 1 showcases Ethiopia’s accelerated economic progress that began in 1992 and which shifted to an even higher gear in 2004. The first ‘gear shift’ took place shortly after the political and economic transition of 1991 with the downfall of the communist Derg regime and the introduction of a market-oriented economy. The post-Derg EPRDF government, in turn, implemented a series of complementary economic reforms which paved the way for the second growth acceleration starting in 2004. Gradually Ethiopia began to move in a direction of liberalising its economy towards a market-based system. Nonetheless, the state continues to intervene and controls most sectors of the economy. Indeed, Ethiopia’s rapid economic growth over the past decade, state intervention in the economy and a focus on industrialisation correspond with its characterisation as a developmental state.[32] In brief, the EPRDF’s economic strategy focused on promoting agriculture and industrialisation while delivering substantial public infrastructure investment.[33] Despite limited government revenues, Ethiopia was able to finance high public investment in a variety of ways. For example, the government kept consumption low in order to finance budgetary public infrastructure investment as well as tapping into external concessional and non-concessional financing.[34] The government also deployed fewer conventional mechanisms, such as fiscal policies that kept interest rates low and dedicated credit to public infrastructure,[35] an overvalued exchange rate that cheapened public capital imports and monetary expansion including direct Central Bank budget financing, which earned the government seigniorage revenues.[36]

In addition, the endowment funds of EPRDF parastatal companies across regional sisters were key in channelling political finance and development to the different regions. Effective provisioning meant that the Front had to establish a number of revenue sources, including small clandestine businesses scattered at home and abroad. There are four large umbrella holding endowments in Ethiopia today. These holdings constitute the EPRDF’s largest assets including a number of commercial entities affiliated with allied regional elites and politically connected associations. Furthermore, private conglomerates such as Midroc and well-connected individuals have formed cross-holding and business alliance relationships with the party companies. The largest endowment is owned by the biggest of the four members of the ruling coalition. The Endowment Fund for the Rehabilitation of Tigray (EFFORT or Tirit), established in 1995, is owned by the TPLF. It is by far the largest in terms of assets, number of subsidiaries, sectoral coverage and supra-regional orientation. The junior partners of the ruling coalition also own for-profit companies of lesser importance, again overseen by holding companies registered as endowments. They are Endeavour (Tiret) of ANDM (Amhara), Tumsa Endowment (formerly Dinsho) controlled by OPDO (Oromia) and Wondo Group controlled by SEPDM (Southern Ethiopian People’s Democratic Movement).[37]

The extent to which growth in GDP per capita in Ethiopia translates into poverty reduction, however, has been low. The largely stagnant population growth helped Ethiopia sustain its improvements across a number of Sustainable Development Goals. However, the continued postponement of a population census has masked the explosive population growth that was not accommodated in official statistics. In its mission to accelerate GDP growth, Ethiopia has also managed to reduce its poverty rate from 27.3% under $1.9 per day in 2015 to 24.2% in 2018.[38] Countries with similar per capita GDP levels tend to have higher poverty rates. However, the ‘poverty elasticity growth’, a measure of the extent to which GDP growth reduces poverty, amounted to -0.22 between 2005 and 2015. That means a 1% increase in per capita GDP was accompanied by only a 0.22% reduction in the poverty rate.[39] Poverty elasticity growth for other African countries for the same period includes -0.65 for Uganda, -0.57 for Kenya and -0.4 for Rwanda.[40] Hence, while GDP growth has made strides in alleviating poverty levels in Ethiopia, the structure of growth is still lagging in producing growth that is adequately pro-poor. Promoting shared prosperity requires fostering the consumption growth of the bottom income groups.

Indeed, apart from market-oriented reforms implemented during the 1990s, EPRDF’s successive economic strategies have lacked stern efforts to produce sustainable structural economic reforms.[41] Part of the concern about the long-term sustainability of Ethiopia’s recent growth emanates from this lack of transformation. As GTP II nears its completion date (2020), the underlying economic structure, in the simple but wide sense of a shift in relative shares of sectoral activity, has been modest. Figure 2 shows changes in GDP composition by added value per sector. While agriculture was the main economic sector at the beginning of the programme, the services sector gradually took over and was complemented, in recent years, by a construction boom. Out of an average growth rate of 10.4%, services contributed 5.4 percentage points followed by agriculture with 3.6 percentage points and industry with 1.7 percentage points.[42]

The key challenge for the current economic structure lies with its failure to create jobs, especially amidst high population growth rates. As the structure of output shifted from agriculture towards services, the corresponding employment shift was modest. The growth was concentrated in the services and construction sectors – both of which are considered sectors of limited employability or employment largely engaged on an informal basis. With services constituting 37% of output share of GDP, they covered only 15.2% of the total employment share in 2013, up to 21% in 2018.[44] Similarly, industry (including construction) constituted 27% of GDP and 12% of total employment.[45] Most alarming is the share of manufacturing, stagnant at 5% of GDP for so long despite successive attempts at pursuing a strategy of industrialisation. Indeed, many analysts, including the World Bank, have highlighted this as a structural weakness of Ethiopia’s growth paradigm, with prominent economists arguing that sustaining rapid growth in African countries is unlikely without a profound structural change in favour of manufacturing.[46]

Despite the attention given to manufacturing in GTP I and GTP II, it is quite clear that the sector’s productive capacity is not keeping pace with the rest of the economy. Ethiopia’s largescale investments in infrastructure are yet to produce largescale growth in the manufacturing sector.[47] A key reason for this weakness is the private sector’s limited access to credit.[48] Shiefraw measures the average investment rate among firms with initial bank ties at twice that of firms without bank ties.[49] This observation is consistent with a study by the World Bank which found that 56% of small and medium enterprises (SMEs) are credit constrained, which is far above the African average.[50] This situation has led to a steady decline in private sector borrowing from the banking sector as a percentage of GDP.[51] While individual investors can borrow from private banks, the latter are constrained by high liquidity and reserve requirements as well as single-borrow limits. In addition, the market, dominated by state-owned banks, dedicates almost all of its lending efforts to public infrastructure projects and expansion of state-owned enterprises.[52] To emphasize this, the new directive of the National Bank of Ethiopia (NBE) requires private banks to set aside 27% of any loan provided to the private sector for purposes of purchasing NBE bonds. The idea is that funds raised in this manner will be allocated to the Development Bank of Ethiopia (DBE) for on-lending to priority sectors.[53] As a consequence, the employment share of manufacturing remains below its 5% contribution to GDP as firms struggle to grow and increase labour productivity and hiring.

Beyond limited employability growth in the productive sectors, the state-led model leads to a reduction in public sector employment – considered the largest employer in Ethiopia. The public sector accounts for almost one-fifth of urban employment and about 68% of employment among those with higher education.[54] However, cutbacks in public expenditure and privatisation of public enterprises under EPRDF’s capital accumulation model have tended to reduce the employment creation role of the public sector and cut redundant labour, resulting in an increase in unemployment. Attraction of foreign investment and largescale infrastructure projects have failed to replace the secure employment within the public sector that also comes with a number of non-financial benefits. Ethiopia’s large growth rate has largely been driven by the ability to attract low-cost investment – specifically cheap low-skilled labour. Between 1999 and 2013, and despite high rates of growth registered, labour productivity in Ethiopia increased at a marginal rate of 4.4% in manufacturing, 3% in agriculture and 4.3% in construction.[55] Beyond low wages, employment in Ethiopia’s formal sector is often characterised by precarious working conditions including long hours, physically dangerous environments, limited on-job training and lack of benefits. In addition, the possibilities for employees within the formal sector to organise and lobby remain very limited. Box 2 looks closer at working conditions in Ethiopia’s industrial parks that aim to improve competitiveness and innovation.

2.3 Inequality and marginalisation: the informal sector

Ethiopia’s double-digit growth conceals high rates of unemployment. According to the conservative Central Statistical Agency, the unemployment rate reached 19.1% in 2018, up from 16.8% in 2015.[59] Specifically, employment is further strained by rapid population growth and urban transition. The demographic transition began in the 1950s, while rapid urbanisation began in the 1960s.[60] Each year an estimated 2 million people are added to Ethiopia’s population. In addition, the limited productive growth in the agricultural sector, coupled with inadequate expansion of the manufacturing sector, has resulted in rapidly growing migration of labour to the urban informal service sector. Rural-urban migration is a result of the scarcity of land compared to the growing rural population and the need for employment and income-generating opportunities.[61]

The pace of urbanisation, however, far exceeds the rate at which basic infrastructure and services can be provided, and the consequences for the urban poor have been substantial. The inadequacy of urban development efforts over the past three decades has left weak urban governance and management structures, obsolete local tariff and revenue structures, a critical shortage of trained personnel and declining urban infrastructure and services.[62] This scenario has crippled urban areas and resulted in an increase in poverty and inequality. Real incomes in urban areas have risen, but only for the wealthiest households have they increased significantly. The incomes of poorer households have actually declined in real purchasing power when considering the high inflation rates of recent years.[63] According to the latest poverty data, the GINI coefficient for urban areas has increased since 2000 and remains as high as 0.47 in 2018 compared to 0.27 in rural areas, with an average GINI coefficient of 0.46 across urban Africa.[64] This is clearly manifested in the number of underage labourers, street vendors and taxi drivers who cover the streets of large Ethiopian cities. Inadequate shelter, combined with poor sanitation, overcrowding and the high proportion of vulnerable women, young people and children with very low incomes and high unemployment results in a high risk of disease and an extreme poverty trap for many urban residents.[65]

Urban poverty has been aggravated by population growth that is beyond what the urban economy can support. The official urban unemployment rate in Ethiopia has increased from 17.5% in 2012 to 19.1% in 2018, mainly due to female and youth unemployment.[66] Among the regions, Dire Dawa has the highest rate of unemployment at 25.3%, followed by Tigray at 21.5%, Addis Ababa at 20.2% and Amhara at 19.7%.[67] Vulnerability pushes many of Ethiopia’s urban residents into informal employment. Informal employment comprises the total number of informal jobs, whether carried out in formal sector enterprises, informal sector enterprises or households, during a given reference period. A 2013 International Labour Organization (ILO) survey revealed that out of the total urban employed population, 31.7% were engaged in the informal sector.[68] The data indicated a decrease from previous years – 60% in 2003 and 50% in 1999. However, according to many researchers this number is inconsistent with the situation in Ethiopia and can be attributed to changes in the definition of the informal sector by the ILO and the Central Statistical Agency of Ethiopia.[69] Adjusting the data to become inclusive of all parameters previously counted in the 1999 and 2005 survey, Desta calculates a 35% increase in informal employment since 2003 to an approximate total of 81%.[70]

Informal employment in Addis Ababa specifically is largely exclusionary – meaning the poor resort to informality as a last resort. This is different to voluntary informality practised in several countries where businesses and households opt for informality, based on a cost-benefit analysis.[71] As much as 69% of all employment in Addis Ababa and 65% of urban Ethiopia is informal.[72] This comprises those working in informal businesses, as well as huge groups of domestic workers, apprentices and unpaid family workers. A remarkably large group of those in informal employment are domestic employees, generally women working in what is termed ‘elementary occupations’. This is a particularly vulnerable group, at the mercy of the household in which they work, with relatively high rates of abuse and violence. Domestic workers we interviewed during our fieldwork reflected such a sentiment: ‘It depends on our luck. Sometimes we are treated well, other times we are treated in an inhumane manner.’

The informal economy in urban Ethiopia consists of small-scale, non-dynamic activities. The World Bank reports that the informal sector is found to be a last resort and, therefore, the sector includes a large majority of new entrants and the unemployed.[74] The manufacturing sector is considered the largest employer in the informal sector, followed by trade, hotels and restaurants. The most common manufactured goods and services include a range of wood and metal works and other household and office furniture; the most common commercial activities include various retailing and repair activities dominated by electric, electronic and cell phone maintenance in addition to food and drink retailing activities. In terms of rate of change, community and personal services showed the largest employment rate of growth (205.2%) followed by the construction industry (142%).[75] Although the manufacturing and the commercial sectors, which respectively exhibit the largest figures of levels of employment, have also increased their employment level in absolute numbers, their rate of their growth is substantially small (28.5% and 25.2%).[76]

Within the informal sector, the largest amount of gross income was generated from the commercial sector followed by the manufacturing sector. However, the amount of income generated per person working in the informal sector has declined substantially since 1996 and varied sharply among the various sectors. Although the manufacturing sector provided the largest percentage of employment, workers engaged in this sector received the lowest income per person. In contrast, despite the agricultural sector providing a low percentage of the total employment in urban areas, workers engaged in agricultural work received the second largest amount of income per person (next to commercial activities).[78]

Like governments elsewhere in the developing world, the Ethiopian government initially followed anti-informal activity policy, and owners/operators were often dealt with unfavourably.[79] Later, increased international recognition of the sector’s contribution to poverty reduction led to the Ethiopian government’s change of attitude and adoption of various programmes and strategies to enable the sector. The government’s recent attempt to create enabling environments is likely to have increased the size of the sector. But despite such efforts, the informal sector has seen limited growth in productivity and remains dependent on low-skill work binding its workers to vulnerable employment. Key problems faced by informal workers to improve their conditions include the lack of sufficient capital to start an activity, followed by inadequate skill to perform it. More than 74% of informal entrepreneurs invest less than 251 Birr (US$7.70) when setting up an operation.[80]

2.4 Conclusion

Ethiopia is pursuing economic growth through a developmental state model consisting of state-led economic reform with strong centralised political control. While this model has succeeded in sustaining high GDP growth rates for a number of years, the country faces a challenge in promoting shared prosperity. Job creation urban centres has not kept pace with GDP growth, nor with population growth or the significant rural-urban migration. As a consequence, large segments of Ethiopia’s youth population have been pushed into the urban informal economy where they struggle to make end meet. Employment in the informal economy has been key to increasing the number of livelihood options, but the persistent poverty, inequality and marginalisation many face is also deepening grievances.