Ethiopian Econmy Compiled by Fike

Ethiopian Economy
CHAPTER ONE
AN OVERVIEW OF THE ETHIOPIAN ECONOMY
1.1. OVERVIEW AND STRUCTURE OF THE ETHIOPIAN ECONOMY
Ethiopia, with a total land area of about 113,000,000 hectares, is one of the largest countries in
Africa. It has diverse physical features ranging from about 500 meters below sea level in the
Danakil depression of the Afar region to over 4,600 meters above sea level in the Semien
Mountains. The varied nature of the topography coupled with other environmental features
resulted in a variety of agro-ecological zones in the country. The country is endowed with huge
human resource, arable land, livestock and natural resources. However, much of its potential has
not yet been exploited. The population of Ethiopia was estimated at over 63 million in the year
2000, making it the third most populous nation in Africa and twentieth in the world. The annual
growth rate of the population is estimated at 3%. Almost 66% of Ethiopia’s landmass is known
to have a potential for agricultural development. But only a quarter of this is said to be developed
until now. Although the livestock contribution to the economy is limited, its wealth is the largest
in the African continent. The forest, water, fish and the mineral resource potential of the country
are enormous. These minerals include gold, platinum, marble, tantalum, copper, potash, soda
ash, zinc, nickel, iron and natural gas. Of course, these are not yet exploited in the desired and
appropriate manner. The economy is characterized by its dualistic nature: the traditional
(subsistence) and modern (technological) sector. The traditional sector consists of mainly peasant
agriculture, which is the backbone of the country. The modern sector is composed of
underdeveloped industrial and service sector. The structure of the economy, in general, is
decomposed into the three main sectors: the primary agricultural sector, the secondary-industrial
(manufacturing) sector and the tertiary-service sector. The agricultural sector includes, among
other things, such activities as crop production, animal husbandry, fishery, bee keeping and
forestry. This sector remains to be the most important sector of the economy since it produces
much of the country's annual output, absorbs huge amount of the labor force and generates large
proportion of the foreign exchange earnings of the country. The industrial sector includes such
activities like mining and quarrying, construction, energy, water supply, small handicrafts and
cottage industries, medium and large-scale manufacturing firms. The 2 level of development of
the manufacturing sector is at its infancy and the country’s industrial base is at its lowest level.
The sector is dependent on imported semi-processed materials, raw materials, spare parts and
fuel. It is mainly dominated by the food, textile and beverage sub-sectors. The service sector, on
the other hand, includes all the activities in the production of the intangibles. For the purpose of
analysis, it is divided into distributive and other services sub-sectors. The distributive service
sub-sector includes such activities as tourism, trade, hotels and restaurants, and transport and
communication. The other services sub-sector includes the provision of public administration,
defense, finance, banking and insurance, social services (education and health), and real estate
development. The Ethiopian modern transport sector is dominated by road transport accounting
for more than 90% of the freight and passenger transport. Air, rail and water transportation also
Department of Agricultural Economics; OBU Page 1

Ethiopian Economy
play important roles for the transportation of passengers and freights. Ethiopia’s export is mainly
dependent on primary products such as coffee, pulses, oil seeds, chat, hides and skin, leather and
leather products, meat, live animals, fruits and vegetables.
Explain the characteristics of the Ethiopian economy?
 The Economy of Ethiopia can be characterized as one of the Least Developed economy
in the world.
 The overall economy is dominated by agricultural sector.
 The fate of the country’s development is largely dependent on the development of this
sector of the national Economy.
 The production capacity of the overall economy is very poor because of the following
factors,
In Agricultural Sector
 Traditional way of farming is still common practice. I.e. subsistence farming
 Lack of modern agricultural technology makes Ethiopian agriculture fully dependent on
nature.
Industry Sector
 This sector is not developed yet.
 The existing few industries are light industries with limited production capacity.
 Because of non-existence of heavy industry it is practically very hard to expand light
industries, as the only means of obtaining them is import.
 Because of limited capacity of this sector, its production is also limited.
Lack of qualified human resources
 In general the qualified human power is limited and even the existing qualified personals
are not allocated accordingly.
 Lack of consistent economic and social policy
 Due to different reasons the country’s economic or any other policies are not consistent
or have very short time period.
 These and the like factors contribute to poor performance of Ethiopian economy.
 As it is known the performance of a country’s economy is measured by GDP.
 Poor performance of the country’s economy implies less aggregate production, which
contributes to very low GDP.
 The country’s yearly output is very low as compared to other nations.
1.2. The Resource Bases of the Ethiopian Economy
Identify and explain the resource base of the Ethiopian economy?
 In terms of its natural resource base, Ethiopia is potentially a rich country, with fertile
soil and good rainfall over large areas of the country.
1.2.1. Population
 The study of population is called Demography. Demo is people and graph means
writing. Why do we study population? We study population for different reason;
 Socio-economic planning purpose

Ethiopian Economy
 For budget allocation
 For health service planning
 Education planning
 Population is central in development issues. It’s the important sources of important factors
of production like labor and entrepreneurship.
What do we study in studying population?
 Size of population
 Dynamic of the population
 Structure of the population
 In the country the dependency ratio is high. The implication of high dependency
ratio in a country indicates that almost half of the population is dependent on the other
half for its living.
 Dependency ratio is the ratio or proportion of economically inactive age group to the
economically active age group.
1.2.2. Land and Climate

 For a country like Ethiopia, where agriculture is the backbone of the economy, land is a
very important resource base.
 In the context of agriculture, land here refers not only to areal extent, but to its
productivity of food crops and other crops.
1.2.3. Livestock
 Ethiopia is a country with large number of livestock population.
 The country stood 1st in Africa and 9th in the world.
 Livestock is a security, investment and additional income for farmers in Ethiopia.
 It contributes nearly to 10% of the GDP.
Livestock Development
 The constraints that hindered livestock development can be broadly categorized as:
 Environmental – the presence of diseases like, Tsetse fly, etc. that kill thousands of cattle
every year
 Technical – shortage of trained personnel to guide and use dairy farms as well as to
fatten the cattle.
 Infrastructural – lack of water supply and road networks to transport the cattle to the
required destinations in a timely way with less exhaustion of the livestock.
 Institutional – shortage of veterinary and other services for the rearing of better quality
livestock.

Ethiopian Economy
1.2.4 Fishery
 Ethiopia has an extensive body of inland waters, comprising eight principal lakes,
numerous rivers and reservoirs.
 These water bodies host enormous wealth of fish resources.
 However, fish catch production is not developed and per capita of calorie-intake is low.
 It contributes only 1% to the GDP.
1.2.5. Forestry
 Forestry resources are very important for economic development and for the maintenance
of ecological balance.
The main reasons for the quick depletion of the forest cover are the following;
 Efforts to increase farm and grazing lands as the population pressure increases;
 Fuel wood demand;
 Increase in demand for the construction industry; and
 Increase in demand for the furniture industry.
1.2.6. Water Resources
 Ethiopia is endowed with enormous water bodies and long rivers.
 It's sometimes known as the “Water tower of Africa”.
 River Abay, Wabishebelle and Genale are international rivers,
 Whereas River Awash, Omo, Tekeze, Mereb, Baro and Angereb are inland rivers.
1.2.7. Minerals
 Ethiopia is rich in mineral deposits and precious metals.
 However, the mining sector remains small and underdeveloped.
 It requires capital-intensive technique of production.
 It contributes less than 2% to the GDP.
1.2.8. Energy
 Ethiopia is one of the countries in Africa with good sources of energy.
 However, the country is excessively dependent on traditional sources of energy such as
fuel wood, crop residues, and animal waste (dung).
 More than 90% of the country’s energy need is met from these traditional sources.
 Less than 10% of the total demand is met from modern energy sources such as
hydroelectric power and petroleum.
1.3. The National Income Accounts (NIAs) and Sectorial Components
 They are used to measure and assess the performance of the economy and the
contributions made by the different sectors to the entire economy.
 The most important measure of all national income accounts is the GDP.
 It is the monetary value of all currently produced final goods and services in a country in
a year.
 Ethiopia keeps record of the GDP figure since 1950.

Ethiopian Economy
1.4. Historical Review of National Economic Development Objectives and Strategies of
Ethiopia
 In the late 1950s, Ethiopia adopted an export promotion strategy with a package of
incentives to attract foreign direct investment.
 Export promotion is a strategy adopted to boost exports by expanding the items,
quantity and quality of exports.
 This is what is known as diversification of exports and trading partners across the
globe.
 The ultimate goal of this strategy is to generate as much foreign exchange as possible
that the country needs to finance its’ imports.
 This involved diversification of export items and improving the quality of the products
meant for exports.
 This strategy did not bring remarkable results as expected
 In the early 1960s, learning from the industrialization of the advanced economies,
Ethiopia adopted an import substitution strategy.
 The focus and objective of this strategy was to save as much foreign exchange as
possible by producing goods that are imported.
 The strategy was mainly adopted based on protecting the domestic industries from
outside competition.
 The protection was through the imposition of high tariff (import tax) on similar imported
goods from abroad.
The Sectarian Components
National economy has got three sectors by large
Agricultural sector: At early stage it was the only sector of the national economy. Later when
division of labor started to flourish other sector like industry and service sectors developed
gradually
 Under this sector included activities like:
 Plant production
 Animal husbandry
 Forestry and wild life and Fishery
Industrial sector: With the development of division of labor this sector developed gradually.
Small crafts and cottage industries were the first forms of industrial development.
 Under this sector of national economy included activities such as:
 Cottage Industries
 Light and Heavy industries
 Mining of minerals and water resources
Service sector: This sector is developed lastly after the two sectors to facilitate different
transactions and similar activities between the above two sectors. Now they are becoming
increasingly important and even they contribute the highest share of GDP in developed countries.
 Here belong large varieties of activities like:

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 Trade and Commerce
 Financial intermediaries
 Transportation, Education and communication
 Health service
Detailed treatment of these sectors will be given in the subsequent chapters.
CHAPTER TWO
RECENT PERFORMANCE OF THE DIFFERENT SECTORS IN THE
ETHIOPIAN ECONOMY
2. The Agricultural Sector
The agricultural sector is the backbone of the Ethiopian economy. Hence its performance
determines the economic well-being of the people. Also, many other economic activities,
including transportation and manufacturing, rely heavily on the agricultural sector. As records
reveal, the agricultural sector in Ethiopia is the mainstay of the country’s economy. It is also the
most volatile sector, as exhibited in the unevenness of its growth patterns, which is the effect of
its heavy dependence on rainfall and the seasonal shocks that are frequently observed in
Ethiopia. However, it contributes the largest share to the GDP, export trade earnings, and
employment. It also provides raw materials for the various industries in the country to a great
extent. With this scenario, the various strategies so far adopted to develop it need rethinking.
This serious work of rethinking the development priorities should be made considering the
various regional as well as local objective conditions.
Agricultural versus industrial development
Different views or paradigms have been adapted for the development of a country. The role of
agriculture in economic development has been considered as largely passive and supportive or
secondary. In the Western economies, the industrial sector was given priority, based on the
assumption that it has the largest potential to adopt technology and to create forward and
backward linkages with the other sectors. However, the desirability of placing such heavy
priority on industrial growth is questionable for most developing countries like Ethiopia. Since
the 1970s, development economists have come to realize that the agricultural sector needs to be
viewed as a leading and dynamic sector. They further state that, without the development of the
agricultural sector, the growth of the industrial sector will become weak. Hence, the agricultural
sector has to be the leading sector, and this is the approach of the current Ethiopian strategy of
development, ADLI.
Uni-modal agricultural strategy
It is a pathway based on the proposal that the achievement of transformation in the agricultural
sector is possible through intensification of small-scale peasant farms. It is based on the concept
of a specific peasant economy in which small producers who are not separated from their means
of production retain a degree of control over land and family labour in spite of international
secular differentiations (example: Japan, Thailand and China).
Characteristics of the Uni-modal Strategy
The central element of this approach is the development and diffusion of highly divisible
innovations that promote output expansion within the existing agrarian structure (small size
holdings)

Ethiopian Economy
It is a pro-poor growth strategy.
It believes in enhancing small-landholders’ access to modern inputs such as improved seeds,
fertilizers, and providing them to farmers on revolving-credit bases.
It focuses on the production of food crops with a view to ensuring food security.
Advantages of Uni-modal Strategy
It protects the existence of a differentiated peasant group/class
It protects the peasants from eviction.
It creates a huge potential for the government to gain political support.
It reduces poverty in the rural economy.
It provides individual peasants with access to modern technologies.
It reduces outgoing migration from rural areas.
Limitations of Uni-modal Strategy
It focuses only on food crops rather on other marketable or high-value products for the market.
Does not improve the shortage of knowledge regarding market information and weather
conditions.
Does not improve the shortage of infrastructures that is due to the smallholders’ settlement
patterns (fragmentation)
The small-size holdings cannot employ large-scale agricultural inputs.
Continuous price rises of the agricultural inputs, like urea, dap, etc. are not controlled.
Bi-Modal Agricultural Strategy
It is an agricultural development pathway that advocates the practices both of the intensification
of small peasant farms and of commercialization. It is based on a dualistic structure of farm units
(as in the case of Mexico and Columbia) which proposes that commercialization and
commoditization inevitably generate differentiation in agrarian societies, whereby rural
producers are set apart into agricultural capitalists and landless agricultural employees.
Characteristics of the Bi-modal Approach
It is a dualistic agricultural development approach that supports a strong principal commercial
sector.
An obvious implication of this pathway is that entrepreneurial individuals should be allowed to
accumulate land.
It supports the differentiation of individuals who invest more in farming and those who develop
business.
Advantages of Bi-modal Approach
It supports individual rights to acquire land
It invites more capital and technology investment for agriculture
It promotes large-scale diversification
It allows the transfer of technology
Limitations of Bi-modal Approach
It creates differentiation in the rural society
Lack of off-farm job opportunities
Promotes the eviction of small peasants/poor people
It deprives the majority of the rural population of land.
2.1. The Role of Agriculture in the Ethiopian Economy
2.1.1. Contribution to the supply of food, inputs and expansion of markets

Ethiopian Economy
Agriculture is known to supply the country with food grains, cash crops, milk and dairy products,
and meat products among other things. Besides, a productive agricultural sector provides
relatively abundant food and raw material to the increasing industry-based urban population
A. Backward linkages:
Productive agricultural sector supplies food and raw material to the industrial sector and its labor
force. In turn, it has to be supplied with modern inputs and technologies to cope with responding
to the growing demand of the non-farming and farming population. Without such support, the
agriculture sector appears weak and non-supportive. It may even risk its own population facing
food insecurity. Furthermore, productivity in the agricultural sector improves the level of income
received by rural people. Increased income of rural people is believed to generate increased
demand for manufactured goods from the industrial sector.
B. Forward linkages:
Productivity in the agricultural sector can promote the following forward linkages.
 First, it reduces the cost of living in the industry-based/urban areas which, in turn, reduces the
pressure on wages and makes industrial profit higher.
Second, increasing the provision of raw materials reduces the cost of raw materials and makes
industrial profits higher. These two factors can contribute significantly to increasing industrial
savings and investment that leads to the promotion of the sector.
2.1.2. Contribution to the gross domestic product
 The sector is the most important contributor to the country’s GDP.
 For many years the agricultural sector alone contributes more than half of the total value
of goods and services produced in the Ethiopian economy.
2.1.3. Contribution to employment (85%):
 Almost 85% of the population earns its living from the sector.
 This implies that most of the population is engaged in the various activities performed in
the sector.
2.1.4. Contribution to the foreign exchange earnings (90%):
 The sector contributes 90% of the export earnings of Ethiopia.
 These exports are composed of cash crops like coffee, pulses and oil seeds, cut flowers,
fruits and vegetables and chat.
 The other component of the export is the livestock sub-sector in the form of hides and
skins, live animals and leather products.
2.1.5. Sources of capital
Although, the agricultural sector provides meagre surpluses of savings and taxes to support
investment. The transference of surplus from the agricultural sector to other sectors is made
through the following three modalities:
 tax;
 defining the terms of trade to protect domestic agriculture by imposing price controls on
agricultural products,
 and compulsory delivery of agriculture commodities at very fixed prices

Ethiopian Economy
2.2. Structure of the Agricultural Sector
 Examine the structure of the agricultural sector of Ethiopia, and
 Identify and explain the major agricultural production systems.
The agricultural sector of Ethiopia is composed of crop production, livestock, forestry and
fishery sub-sectors. The crop production contributes almost 65% of the agricultural GDP and
animal husbandry contributes 25%. The remaining 10% is to be generated from forestry, fishing
and other activities. Agriculture proper can be broadly classified into two:
 Crop production and Animal husbandry or livestock rearing.
Three categories of farms practiced in Ethiopia are;
1. The smallholder farming system, - It is characterized by mixed farming. Farmlands with areas
less than 2 hectare each, and large family size
2. The pastoral/nomadic system- rain fed crop production is not possible because of low-level
erratic rainfall, and people rely more on livestock for subsistence. Most of the people are
nomadic, moving seasonally, together with their livestock, from one place to another in search of
pasture and water. Livestock production is much greater than crop production in the pastoral
nomadic system. General and empirical observations suggest that this system is characterized by
chronic food shortages. Thus, agricultural products and productivity are extremely low. With the
possible exception of livestock vaccination, there is virtually nothing that the government (or any
other, nongovernmental organization) has provided for long in terms of assistance or support to
the pastoral-nomadic system. However, these days, the sub-sector has been the focus of serious
concern through the expansion of extension service.
3. The modern commercial farming system- Commercial farming system was officially
introduced during the third five-year plan (1968 – 73) of the Imperial Government of Ethiopia.
Among the strategies envisaged to modernize agriculture and increase marketable surplus, the
plan stated that available government land would be utilized for the establishment of large
commercial farms. As a result, many entrepreneurs rented and developed commercial farms in
the Awash Valley, the Rift Valley and other areas. After the 1974 revolution, all these farms
were confiscated by the government. Additional government lands in many parts of the country
were also developed into large-scale state farms. These were organized into enterprises which in
turn were grouped under corporations, according to their locations and output specialization. A
separate ministry, the Ministry of State Farms Development was set up to manage and expand
state farms. Also another separate ministry, the Ministry of Coffee and Tea Development, was
established. State farms have been the most pampered of all production systems in Ethiopia.
There had been no limit for these farms in terms of receiving land, agricultural inputs, credits,
price incentives and marketing facilities. Despite all these advantages, they were unproductive
and inefficient. The major characteristics of many of them were mismanagement, abuse of assets,
corruption, etc. It must be noted that some of these farms were developed without adequate
studies, resulting in huge financial losses. In fact, most of the state farms were run on
government financial resources. This system, comprising about 5% of the total cropland area,
together with cooperatives, accounted for less than 10% of total agricultural production. The

Ethiopian Economy
efficiency of state farms is extremely low, relative to the high expenditure made in establishing
and operating them. The major crops grown in these farms include cotton, coffee, tea, sugarcane,
fruits and vegetables. The size and role of state farms declined after 1992 when the new
government granted some of the state farms to nearby farmers and investors. At present, there
are only 13 state farms. They produce mainly wheat, maize, cotton, coffee, and tea on 156,040
hectares of land. Under the current economic policy attempted have been made establish
commercial farms.
Out of the total investment permits issued between 1992/93 and 1997/98, 1148 or 26.8% of them
were in agriculture. However, only 508 projects became operational. With the advent of market
economy, the Federal Government has recognized the decisive role that private capital can play
in the expansion and development of large-scale modern farming in order to enhance the supply
of food and raw materials and to create employment opportunities. As a result, the role of state
farms is expected to fall significantly. The state may operate those state farms that are strategic
to the economy, jointly with domestic or foreign private capital. In order to encourage domestic
and foreign private capital, without any capital limitation, the government is committed to
creating an enabling environment.
Farming Systems in Ethiopia Currently, the following farming systems are widely practiced in
Ethiopia.
1. Highland mixed agriculture
2. Lowland mixed agriculture
3. Pastoral complex
4. Shifting cultivation and
5. Commercial agriculture.
1. Highland Mixed Agriculture
As the name implies, this is a farming system practiced in the highlands of Ethiopia by
integrating crop production with animal husbandry. Livestock rearing is a means to supplement
additional cash income, source of food and insurance against crop failure. The highland areas of
Ethiopia are said to be inhibited by 80% of the population. The predominant agro ecological
zones in these farming systems are Dega and Weyna Dega.
2. Lowland Mixed Agriculture
As the name implies, this is a farming system exercised in the low lands together with animal
husbandry. Farming is usually practiced in the mountain foothills and in the lower valley at
elevations below 1500m above sea level. The area is characterized by hot and dry climate with
mean annual rainfall ranging between 450 and 800mm per year.
3. Pastoral Complex
Pastoral nomads in the low lands of Afar, Somali, Southern regions and Borena zone of Oromia
region, practice this. Animal husbandry is the main economic activity in these sparsely populated
dry areas due to the scanty nature of rainfall. Camels serve as a source of food and as a means of
transport. These nomads also keep goats and smaller number of sheep.

Ethiopian Economy
4. Shifting Cultivation
This is a farming system exercised by leaving farmlands to remain idle for several years. The
land is then cleared by setting fires in the dry season to make it ready for plantation during the
rainy season. It is mostly practiced in the Western and Southwestern parts of Ethiopian highlands
and lowlands.
5. Commercial Agriculture
This is a farming system characterized by the use of large-scale machinery and equipment, other
inputs, extensive land area and hired labor. It was introduced in Ethiopia in the late1950’s. It is
market oriented to meet the growing demand for food in urban areas and to supply agricultural
raw materials for industries
2.2.2. Livestock Sub - Sector
When we come to the livestock sub sector of the economy, we find that the country has the
largest population in Africa. A significant proportion of the livestock potential of the country is
also located in the highlands of Ethiopia. It is also an integrated part of the highland and lowland
mixed farming system.
2.3. Agricultural Sector Policy Issues and Strategies Since 1960
 Examine the specific policies and strategies of the agricultural sector that existed during
the different regimes.
Pre–1974 Agricultural Policies and Strategies
There were two policy paths for the development of the agricultural sector in the late 1960s.
They were large-scale mechanized commercial farms and the establishment of package
projects to assist the sector in diffusing agricultural innovations.
A. Large-Scale Mechanized Commercial Farm
The main objective of this path was to facilitate agricultural exports and to create new
employment opportunities. As the name implies, LSMCF requires bringing extensive area of
land under cultivation with the use of modern agricultural inputs. As can be seen from the inputs
this kind of farming system requires huge amount of capital.
B. Establishment and Development of Package Projects
The basic objective of donors and the government in initiating the package project in Ethiopia
was to repeat the success of the Green Revolution of India in Ethiopia. The Green Revolution
was a type of agrarian revolution characterized by the large-scale use of improved and high yield
variety (HYV) seeds and other inputs. There were two types of package projects:
 Comprehensive package projects and
 Minimum package projects
Comprehensive Package Projects

 These are package projects include integrated rural development.

Ethiopian Economy
 They were designed to supply important inputs such as chemicals, fertilizers, improved
seeds, improved farm tools, credits, pesticides, and know-how.
 The objectives of these package projects include:

 raising the living standard of the poor peasants by raising per capita income;
 creating employment opportunities by encouraging labor intensive technology;
 encouraging peasant participation in the development process to solve problems;
Minimum Package Projects (MPP)
 The comprehensive package projects were found too costly to be duplicated in the
rest of the country.
 As a result, the MPPs were designed
 The projects largely concentrated on the coopertivization process
 These projects were designed in order to raise production and income of
smallholders quickly over a wide area with a minimum reliance on scarce resources
Agricultural Policies and Strategies during Derg
 The Derg the uprising in 1974 led to the overthrow of the imperial regime and to
changing the official national ideology to socialist principles.
In general, the agricultural sector policies of the military government were
characterized by the following:
 Nationalization of all private and commercial farms
 Prohibition of private investment in the agricultural sector
 Involuntary collectivization of peasants into peasant associations, and into producers’
and service cooperatives.
 Forced villagization and settlements;
 Government control of virtually all agricultural markets;
Post-1991 Agricultural Policies and Strategies
 The Transitional Government of Ethiopia adopted a new economic policy in 1991, with a
general objective of replacing the command economy with an economic system driven
by market forces.
Some of the changes observed in the agricultural sector include:
 dissolution of producers’ and service cooperatives;
 encouragement of smallholders and private commercial farms;
 termination of public investment in state farms; and
 Abolition of compulsory food-grain quotas and restoration of freedom of market.
 The government also adopted ADLI in 1993, which revolved around enhancing the
productivity of smallholder agriculture and industrialization.
At the program level, ADLI consists of the following:
i. One of the basic goals of the program is ensuring accelerated economic growth.
ii. Ensuring accelerated economic growth to improve the living standards of urban dwellers
through:

Ethiopian Economy
In general, ADLI aims at improving the productivity and production of smallholders by
improving both allocative and technical efficiency
Performance of the Agricultural Sector of Ethiopia
The agricultural sector of Ethiopia is composed of crop production, livestock, forestry and
fishery sub-sectors.
Problems of and possible remedies for the agricultural sector
Think of the various agricultural policies and strategies adopted, such as package programs and
extension services. To what extent did they transform the agricultural sector? Has the country
achieved self-sufficiency in food production? It has become an every-day saying that agriculture
has been the mainstay of the Ethiopian economy for decades. However, its performance in
achieving food security and generating capital for the other sectors is poor. This situation has
attracted the concern of policy makers, experts, and international organizations, who hope to
change the situation. Why is this so? What are the problems? What are some possible remedies?
Problems of the Agricultural Sector
 Assess the problems of the agricultural sector; and identify possible remedies.
Though agricultural activities are the main stay of the economy, the sector is characterized by
low level of production and productivity for more than three decades. However, for the purpose
of discussion, we classify them as natural and man-made problems and constraints.
 The natural problems include unpredictable weather condition. These problems are
associated with recurrent drought and adverse effects.
 Human-Made Problems - These are negative effects that result from the social and economic
practices.
 Land fragmentation: In rural Ethiopia, where the average landholding size is shrinking over
time, land fragmentation and over-cultivation are inevitable.
 Lack of infrastructure: Transportation and communication facilities are poorly developed in
rural Ethiopia. About 75% of rural household farms are located far away from transportation
and communication lines, and this that prevents farmers from accessing proper markets and
information about prices for their products.
 Lack of credit facilities: This prevented farmers from using even the meagre resources
available at hand. Now, however, reforms have created accesses to micro-finance loans,
opening the gate to increasing small holder productively.
 Lack of effective land-ownership entitlement: Without it we have poor work attitudes, the
improper use of common resources, and poor output.
 Erosion and land degradation: rate of erosion and degradation which in turn, contribute to the
recurrence of drought. Without preventative measures; this situation will accelerate in the
near future, putting millions of hectares out of use.
 Traditional practices: These are rural practices that result in misusing work time,
unproductive consumption and retaining resources especially livestock resources
unscientifically, resulting in very low output per ox, sheep, goat, etc.
 The use of backward technology.

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 Inadequate rural markets.
 The man-made problems are associated with, among other things, lack of institutional
arrangement, lack of conducive agricultural land policy, land fragmentation, uncontrolled
population growth, and lack of rural infrastructure.
Remedies and prospects of the Agricultural Sector
What then are the remedies to the problems?
I. Reduce the prevailing heavy dependence on rain-fed agricultural practices by:
Promoting the use of local streams and lakes for irrigation purposes of various scales.
Promoting and expanding the storage of rain water in shade to reduce the rate of evaporation
and to enable people to store water for longer periods of time.
Expanding the number of afforestation and reforestation schemes through a structured and
financed agency or office.
ii. Production of drought-resistant crops in drought-prone areas so that the recurrence of
acute shortages of food will be minimized. iii. Pursue an effective land-ownership right so
that the farmers will develop long-term developmental commitments.
iv. Promotion of extension services supported with consistent capacity-building tasks.
V. Promote committed literacy campaigns to help farmers understand price and farm-
technique information.
Vi. Promote infrastructure facilities as per their availability.
2.5. The Industrial Sector in Ethiopia
Historical Evolution of the Industrial Sector in Ethiopia
The Ethiopian industrial sector has been small compared to the agricultural and service
sectors. This could be due to the short history of industrialization in the country. Industrial
development on any significant scale is of a very recent origin in Ethiopia. With the
exception of cottage or handicraft industries such as weaving, blacksmithing, pottery and
woodworking.
Industrial sector in Ethiopia classified into sub sectors:
 Manufacturing,
 Mining, quarrying,
 Construction,
 Water and energy supply Ethiopia has a long tradition in the development of handcrafts
and cottage manufacturing activities such as weaving, blacksmithing, pottery, and
woodwork.
The two major early 20th century events contributed to the introduction of modern
manufacturing industries in Ethiopia:
 The emergence of a strong central government, which resulted in political stability and
 The construction of the Ethio-Djibouti railway. These events gave way to the establishment
and expansion of cities and the settlement of foreigners, mainly from Armenia, Greece, Italy,
and India, which in turn increased the demand for imported commodities and hence created
the basis for industrial development. The domestic production of manufactured goods was

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also necessitated by the increasing problems of transporting bulky imported commodities
such as wood, clay, printing products, etc.
Definition of Industrialization
The United Nations Industrial Development Organization (UNIDO) defined industrialization
as follows: Industrialization is a process of economic development in which a growing part
of the national resources are mobilized to develop a technically up-to-date, and diversified
domestic economic structure characterized by a dynamic manufacturing sector having and
producing means of production and consumer goods and capable of assuring a high rate of
growth for the economy as a whole and of achieving economic and social progress. From the
definition given above, some features can be identified as important characteristics of
industrialization:
 Industrialization is not a one-time or sudden occurrence but rather a sustained process. This
means it is a continuous process taking place over a long period of time.
 Industrialization requires the application of modern science and technology to the
production process.
 The manufacturing sector plays the most important and dynamic role in the
industrialization process;
 Industrialization brings about a structural transformation of the national economy,
especially in the composition of output and the pattern of employment.
According to Sutcliff, industrialization is a process by which a non-industrialized country
becomes an industrial one. Sutcliff identified three criteria for a country to be considered to
be an industrialized one.
25% of the GDP should come from the industrial sector.
At least 60% of the industrial output should originate from the manufacturing sector.
At least 10% of the population should be engaged or employed in the industrial sector.
From the above criteria, Ethiopia is one of the least industrialized nations in the world.
Arguments of industrial sector versus the rest of the economic sector
There are five basic arguments, development that maintain the idea that the industrial sector’s
development should be given priority over that of the other sectors. These arguments are:
A. The Development Argument: economic development goes with industry: the more
developed nations are better industrialized, and the less developed nations are less
industrialized.
B. The Employment Argument: The industrial sector has more potential to create job
opportunities for the rapidly growing urban populations of developing countries than any
other sector.
C: The Balance of Payment Argument: A developed industrial sector, in general, generates
more foreign currency, compared to an agricultural sector. That is, industrialization helps
developing nations to alleviate their balance-of-payments problems.
D: The Linkage Argument: If industrial development is directed to use local raw materials, it
can create strong linkages among the different sectors of the domestic economy. For

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instance, the industrial sector can create backward linkages with the agricultural sector for its
raw materials instead of depending on imported raw materials. This gives the sector assured
sources of supplies. Similarly, the sector can also create linkages with the market in order to
assure market for its products. This is what is called forward linkage.
E: The Saving/Surplus Argument: Profit margins in the industrial sector are higher than those
in agriculture, and this may lead to higher levels of saving.
2.5.2. The Role of the industrial sector to the Ethiopian economy
 Discuss the roles of the industrial sector in the Ethiopian economy?
The role of the industrial sector in the Ethiopian economy
According to the International Standards for Industrial Classification (ISIC), the Ethiopian
industrial sector is composed of mining and quarrying, manufacturing, electricity, water supply,
and construction. Since the manufacturing sub-sector is the most dominant and dynamic
component of the industrial sector, and also due to availability of time series data, we will
concentrate on this sub-sector as we analyze the contribution of the industrial sector to the
national economy.
Employment Contribution: the manufacturing sub-sector, in particular, serves as important
sources of employment, especially for the rapidly growing urban population in Ethiopia.
Foreign Exchange Contribution: The poorly developed industrial sector of Ethiopia contributes
very little to the foreign currency earnings of the nation.
Output Contribution: The manufacturing sector is characterized by the physical or chemical
transformation of materials or components into new products, whether the work is performed by
power-driven machines or by hand, and whether it is done in a factory or in the worker’s home.
Industrial sector showed 12.6 percent growth and constituted 28.1 percent of the total GDP.
Manufacturing sector grew 7.7 percent and constituted 24.3 percent of the industrial output.
Construction industry showed a 15 percent expansion and contributed 72.5 percent to the
industrial output, signifying the leading role of the sector in roads, railways, dams and residential
houses construction. Electricity & water and mining & quarrying had 2.7 and 0.5 percent
contribution to the industrial production, respectively
2.5.4. Major Constraints of the Industrial Sector
 Describe the problems of the Ethiopian industrial sector?
Ethiopia’s industrial sector at present is at its infant stage and the insignificant contribution
of this sector to the national economy is a direct reflection of its underdevelopment. There
are a number of factors for the low development of the Ethiopian industrial sector.
Problems and Possible Remedies of the Industrial Sector during Post-Derg Period
1. Lack of Finance: agricultural sector not been capable of generating the required surplus for the
industrial sector. Industries are highly import-dependent. This means that they have not been net
savers and hence have no surplus.
 Given such a low saving rate, it is difficult to undertake industrial investment.
 High collateral requirements by the formal lending institutions have aggravated the problem
of financial shortage.

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2. Marketing Problems: the market problems arises due to;
 Weak domestic demand for manufacturing output — this is due to the subsistence nature of
agriculture on which the vast majority of the people rely for food, etc. As a result, the purchasing
power of the people is very low.
 Lack of marketing information about both local and export markets.
 Strong competition from cheap imports.
 A consumer bias against local products.
3. Technological Problems: Technological problems may reveal themselves in one of the
following ways: Lack of sufficient information on appropriate technology. This is related to the
shortage of local institutions involved in technological support services.
 The technology we have today is not developed based on available local raw materials. This
limits the linkage. It rather makes the shortage of foreign currency of the country. The ratio of
imported raw material is too high for Ethiopian local manufacturing to flourish. The situation is
worse in basic iron and steel, and motor vehicles, trailers, and semi-trailers
 The technology we use is also capital intensive. This approach is basically not recommended
for economies like Ethiopia where unemployment is rising.
4. Input-Related Problems: high cost and shortage of foreign exchange for imported inputs.
Shortage of raw materials as the second most serious problem, the most serious of which were
market-related problems.
 There are also other problems like policy problems and human-resource-related problems in
relation to lack of skilled manpower and absence of industrial discipline and work ethics. These
and other problems do not only limit new investments, but also reduce the productive capacity of
the already existing enterprises.
Recent Developments:
Development strategies after the over-throw of the socialist government and its replacement
by the Ethiopian People's Revolutionary Democratic Front (EPRDF) in 1991, the
government sought to rationalize its role in the economy while enhancing the active
participation of the private sector. Accordingly, the transitional government of Ethiopia
announced an economic policy which could be described as “cautious capitalism’’. Believed
to be conducive for investment, the government accepted the Structural Adjustment
Programs (SAPs), though with some reservations. With respect to the industrial sector, the
Transitional Government of Ethiopia (TGE) indicated that the role of the state would be
limited to areas of large-scale engineering, metallurgical plants, communications, power, and
pharmaceutical industries from which the private sector was bared. The government,
undertook a Public-Enterprises Reform Program in August 1992, which aimed at enhancing
efficiency, productivity, and competitiveness in public enterprises (most of which were
manufacturing) through the granting of managerial autonomy and responsibility. This was
done by dismantling the sub sectoral corporations under the Ministry of Industry. The overall
management of each manufacturing enterprise was thus put under its own board of directors

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and a general manager responsible for output, price, and investment decisions as well as
appropriate market channels. In general, these measures were designed with the long-term
objective of raising the share of the industrial sector in the economy, both in terms of output
and employment creation and of enhancing the development of strategic industries which
were expected to have multiplier effects through contributing to the expansion and
development of other economic activities. Laws were enacted to give enterprises
management autonomy, a more flexible labor code was proclaimed, prices were largely
decontrolled, foreign trade and financial institutions, including the foreign exchange market,
were particularly taken to encourage private sector participation in the economy. These
include:
The lifting of the restrictions on private-sector investment capital
The easing of licensing requirements and regulations;
The enactment of an investment code. In addition, investment incentives were offered in the
form of tax holidays, duty-free importation of investment goods and the like designed to
favor investment in selected sectors and regions; and
The downward revision of taxes and tariffs from the extremely high levels. The marginal tax rate
on personal income was also slashed from 89% to 40%. Business profit tax was reduced from
59% to 35%, while the maximum tariff on imports was reduced to 50% down from 240%.
 Privatization of state enterprises
 Liberalization of investment regulations to attract foreign investment
 Tax incentives for potential investors
 Modernization of the technological base through technology transfer agreements
 Establishment of industrial estates.
2.6. The Service Sector in Ethiopia
This sector is composed of various sub-sectors likes: trade, hotels and restaurants, transport
and communication, education, banking and insurance, public administration and defense,
health, and other services. The service division includes a wide variety of industries, but they
can be categorized into primarily consumer-oriented (providing a service directly to a
consumer), primarily business-oriented (providing a service directly to another business) or
mixed (providing services to both businesses and individual consumers). Alternately, the
activities of the services division can be described in reference to their economic activities as:
physical, intellectual and aesthetic
i. Physical activities: involve working with objects; examples include repairing cars,
hairdressing, and cooking.
ii. Intellectual activities: involve providing education or training at such levels as university
and vocational school.
iii. The aesthetic activities: entail providing consumers with artistic experiences such as
offered by museums, theater performances, art shows, and musical performances.
2.6.1. The Role of the Service Sector in the Ethiopian Economy
The service sector plays an important role in the country’s economy.

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1. Output contribution: According to NBE (2019/20) Report service sector contributes about
39.8% of country GDP. This mainly the result of the fast growth of education, health, socio
services, tourism, transport service, construction and related engineering services, wholesale and
retail trade, hotel and restaurant sub sectors.
2. Employment contribution: In Ethiopia, the service sector is the second largest sector, next to
agriculture, in terms of absorbing a significant part of the labor force. In Ethiopia, a significant
number of mostly permanent employment opportunities are being created because of the rapidly
growing economy. In particular, employment opportunities are being created by:
 Sustained government efforts to enhance private sector investments;
 The big push in infrastructure development;
 The expanding services industry; and
 The rapid growing horticulture sector
3. Foreign exchange contribution: In 2008/09, foreign exchange income earned from service
providers such as Ethiopian Airlines and Ethiopian Shipping Lines, as well as from various
service sub-sectors such as tourism, communication, insurance and financial services,
collectively reached nearly 2 billion dollars
Education as component of service sector Education is the basic component of human resource
development, which is a means of:
Raising political and social consciousness;
Increasing the number of skilled workers;
Raising the level of trained manpower, thereby facilitating creativity and innovation;
Increasing opportunities to individuals for better lives
The economic and social development of any country depends on the scope and level of the
people's education. Education in Ethiopia dates back to the 4th Century. For about 1,500 years,
the church controlled most of the traditional educational institutions. However, education in
Ethiopia has undergone tremendous changes since the 19th century as a result of government
policies that have attempted to improve basic education. Formal education began in 1908.
Education system in Ethiopia suffered from shortcomings in quality, coverage, efficiency, and
relevance, due to the following four key problems. 1st, the education and training policies that
were in place for many decades focused only on solving immediate problems, rather than
tackling major long-term challenges at the national level. 2nd, children especially girls were not
encouraged to attend school. 3rd, neither the student nor the teacher had a clear vision of what
and why they were learning or teaching. 4th, too many subjects were taught, both at primary and
secondary levels (up to 15 in some cases), which resulted in lessons being too fragmented to
develop necessary skills, attitudes, and behaviors. Education Sector Policies and Strategies Pre-
1974- Generally speaking in this era the government didn’t adopt strategies for the education
sector. But in 1925, the government issued a plan to expand secular education. Ten years later
there were only 8,000 students enrolled in 20 public schools. A few students also studied abroad
on government scholarships. Schools closed during the Italian occupation of January 1936 -
1941. After the restoration of Ethiopian independence, schools reopened, but the system had
shortages of teachers, textbooks and facilities. The government recruited foreign teachers for
primary and secondary schools to off-set the teacher shortage. The Imperial government initiated
a comprehensive study of the education system. The education sector review (ESR)
recommended attaining universal primary education, ruralizing the curricula through the
inclusion of informal training, equalizing educational opportunities, and relating the entire
system to the national development process. However, the ESR was not published until February
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1974. Post-1974: the Military Government dismantled the feudal socioeconomic structure
through a series of reforms that also affected the educational sector. By the early 1975, the
government closed Haile Selassie I University and all senior secondary schools and had
deployed some 60,000 students and teachers to rural areas to participate in the government’s
Development through Cooperation Campaign (commonly referred to as zemecha). In 1975, the
Derg Regime nationalized all private schools. Education for socialist consciousness, education
for production and education for science and research’ became the objectives and directives set
during the Military Government. The Military Government also worked towards a more even
distribution of schools by concentrating its efforts on small towns and rural areas that had been
neglected during the Imperial Regime. Post-1991: The gross enrollment ratios for primary and
secondary education have since showed an upward trend:
Table 2: Trends in Primary Enrolment
Post 1991 the ESDP (Education Sector Development programme) was launched. The program
has the following six components:
1. Primary Education: include: construction, expansion, and rehabilitation of primary schools;
curriculum revision and development; upgrading of teachers’ skills; and increasing the supply of
textbooks.
2. Secondary Education: include: expansion of school services; curriculum revision and
development; and increases in the supply of educational equipment and material.
3. Technical-Vocational Training: Under this component, there are plans to expand programs
that train students in technical and vocational fields.
4. Teacher Training: This component includes: the upgrading and expansion of training
institutions; in-service (on-the-job) training of primary school teachers; curriculum revision and
development; introduction of distance learning and alternative education methods; and the
training of school directors or coordinators in school management.
5. Tertiary Education: the goal is to meet growing demand for teachers, engineers, health
specialists, public administrators, and others.
6. Institutional Capacity Building: upgrading the Ministry’s and Regional Education Bureaus’
skills in planning, financial management, implementation, monitoring and evaluation of policies
and strategies.
Problems, of education sectors are;
 Great disparity between the relatively developed and undeveloped regions and between rural
and urban areas;

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 Enrollment of girls at every level of education is lower than that of boys;
 Inadequate facilities, insufficient training of teachers, overcrowded classes, and shortage of
books and other teaching materials all indicate the low quality of the education provided;
 It is known that our country’s education has complex problems of relevance, quality,
accessibility, and equity;
 Financial and resource constraints;
 Lack of alternatives in resource mobilization in addition to the public budget;
 High drop-out and repetition rate
Possible remedies
Expand the participation of parents, teachers and communities in policy formulation.
 Provide adequate student textbooks, teaching materials and various school facilities.
 Narrow the gap or disparity among regions.
 Inspect the private education sector to ensure the minimum necessary quality, standard of
certification, service fees, etc.
 Improve the quality of teachers, in terms of training and motivation Health Sector The health
status of many Ethiopians remains very poor. The major limitations of progress in the sector are:
 High population growth;
 Low educational and income levels, especially among women;
 Lack of access to clean water and sanitation facilities;
 Nutritional disorders and insufficient access to health services.
The Health Sector Policies and Strategies
The Ethiopian health care delivery system has historically been unable to respond quantitatively
and qualitatively to the health needs of the people. Definite policies and strategies for the
development of health service were not formulated until 1963. However, efforts were made to
include the health sector into the development plans. After the 1974 revolution, Ethiopia
embarked upon different approaches towards solving health-sector problems, through the
declaration of primary health care in a ten-year development plan in 1978. In these approaches,
priority was given to creative types of strategies. It was highly centralized and there was little
collaboration between public and private providers. The Ethiopian Transitional and Federal
Government formulated the 1993 Health Policy and Strategy. Goals of the Federal Government
and the regional administrations included reorganizing health services to make them more cost
effective and efficient so, that they can contribute more to the overall socioeconomic
development effort of the country. Following the change of government in 1991, a number of
political and socioeconomic reform measures were put in place. Two of these were the
development and introduction of a new National Health Policy in 1993 and the formulation of a
comprehensive rolling 20-year Health Sector Development Plan (HSDP) in 1997. Both are the
results of the critical assessment and analysis of the nature and causes of the country’s health
problems. The HSDP is now in its third phase (HSDP III). The major goals of the health policy
are decentralization of the health care system, development of preventive, facilitative, and
curative components of health care, assurance of accessibility of health care for all segments of
the population, and the promotion of private-sector and NGO participation in the health sector.
The national health policy focuses on a comprehensive health service delivery system to address:
Communicable diseases, Malnutrition, Improving maternal and child health. The health service
delivery system is decentralized with the responsibility for implementation being largely
devolved to the districts, which operate on the basis of block funding for the sector. The policy

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emphasizes inter-sectoral collaboration, particularly in ensuring family planning for efficient
family health and population planning, in formulating and implementing an appropriate food and
nutritional policy, and in accelerating the provision of safe and adequate water for the urban and
rural populations. The health policy has also identified the priority intervention areas and
strategies to be employed to achieve the health policy objectives. Major components of the
health care strategies are:
 Preventive and curative health service
 Curative and rehabilitative care
 Drugs and medical supplies
 Health information, documentation, and processing
 Organization and management of the health delivery system
 Human-resource development and management
 Research and development
 Financing the health care delivery system
The most significant childhood and maternal illnesses and communicable diseases are:
HIV/AIDS, Malaria and Tuberculosis (TB) The major indicators of health status prevailing in
Ethiopia are presented below: 1. Infant mortality rate (IMR): it indicates the number of deaths of
babies under one year of age per 1,000 live births. 2. Maternal Mortality Ratio (MMR): is the
ratio of the number of maternal deaths per 100,000 live births. 3. Life Expectancy at Birth
(LEB): is the probable number of years a person will live after a given age, as determined by
mortality in a specific geographic area. 4. Child mortality rate (CMR): is the number of children
dying between the first and the fifth birthday per 1000 live births. 5. Access to safe water: is
measured by the number of people getting an adequate amount of water that is safe for drinking,
washing, and essential household activities. It reflects the health of a country’s people and the
country’s capacity to collect, clean, and distribute water to consumers.
Problems of and Possible Remedies for the Health Sector Problems
 Limited physical access to health facilities, the absence of health care facilities. .
 The available health care facilities are unevenly distributed across regions.
 Inadequate budgetary allocation and low levels of management.
 Low quality of the facilities.
 Maternal, infant, and child mortality rates are still high.
 Inadequate and poorly maintained infrastructure and equipment, shortage of trained health
personnel, and the unavailability of drugs and pharmaceutical supplies.
Possible Remedies
 Strengthen and expand existing health programs.
 Provide family planning services at all levels of health service delivery stations.
Strengthen reproductive health content in health education programs.
 Strengthen and expand training of health personnel in collaboration with relevant institutions.
 Set standards for the provision of family planning services. The Transport Sector
Transportation can be defined as the movement of commodities, materials, people and animals
from one place to another with a specified objective. Transportation is fundamental to
civilization. The roles of transportation in socio-economic development are that it allows for:
Division of labor and labor specialization, Procurement of raw materials from various sources,
Dispatch of goods to marketplaces, etc. In Ethiopia, the early means of transportation were foot
and pack animals like donkeys, horses, and camels. However, this set of transportation constrains

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the socio-economic development of the country because it is time-taking and tiresome. During
the Military Government, the transport sector was put under close state regulation and control.
The entire commercial truck and passenger transport system was under strict control of the
government through Proclamation No.107/1976. The policy changes in the sector that occurred
on May 8, 1992 heralded the deregulation of the freight transport industry. Major liberalization
of the transport industry began with government Proclamation No. 14/1992. It emphasizes the
promotion of efficiency and equitable distribution. Following the 1992 Proclamation, many of
the private commercial freight and passenger transport activities left the corporation and formed
their own independent association. Some, however, continued as associates of government
enterprises. The other content of the new policy allows:
 Free entry into existing associations,
 Obtaining licenses to form new associations. Transport sector includes road transport,
Railways Transport, Air Transport and Ethiopian Shipping Lines S.C
i. Road Transport the Ethiopian Road Transport Authority (RTA.) is a public authority
responsible for the use of all roads within Ethiopia, vehicles using these roads, and all matters
relating to road transport activities. The Road Transport Administration was established in 1967
by Proclamation No 256/67 to administer the control and regulation of road travel and transport
in 1976, after having undergone restructuring, it was reorganized as the Road and Transport
Authority (RTA) by Proclamation No 107/76. The authority replaced and took over the rights
and obligations of the former Roads Transport Administration. It was again road restructured and
replaced by Proclamation No. 14/92. Poverty reduction and addressing vulnerability have been
and still are the overriding agenda of the government. It is well known that the success of
development strategies heavily depends on the efficiency of the infrastructure sector in general
and the road sub-sector in particular. Accordingly, substantial improvements have been achieved
in the expansion of road infrastructure.
ii. Railways Transport For more than a century, the Ethio-Djibouti Railway has been the nation’s
the only railway and one of the most important means of transportation and link to the outside
world for Ethiopia. The railway company plays an important role in transporting import, export,
and internal freight, and passengers (international and local). In contrast to air transport, Ethiopia
has a limited railway service that stretches 781 km, linking Addis Ababa with the port of
Djibouti via the eastern Ethiopian cities of Dire Dawa and Adama.
iii. Air Transport According to Ethiopian Airlines Annual Report 2008/09, Ethiopian Airlines
was founded on December 29, 1945, by Emperor Haile Selassie I with assistance from Trans-
Continental and Western Airlines (TWA). It commenced operations on April 8, 1946, with
weekly service between Addis Ababa and Cairo with five Douglas DC-3 propeller-driven
aircraft. The airline started long flight services to Frankfurt in 1958 and inaugurated its first jet
service in January 1963 from Addis Ababa to Nairobi. In the early 1960s it provided some initial
aviation support to the Ethio-United States Mapping Mission in its operation to provide
topographic maps of Ethiopia. It is wholly owned by the government of Ethiopia and had 4,700
employees as of March 2007. Although it relied on American pilots and technicians at the
beginning, by its 25th anniversary in 1971, Ethiopian Airlines was managed and staffed by
Ethiopian personnel. Ethiopian Airlines provided basic pilot and aviation maintenance training to
trainees from African countries including Rwanda, Tanzania, Chad, Djibouti, Madagascar and
the Sudan. Other training was given to employees of Kenyan Airways, Air Zimbabwe, Cape
Verde Airlines and Air Madagascar. Ethiopian Airlines has a very good reputation. In its 64
years of service, it has offered excellent passenger and cargo air transport. The airline and all its

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technical and training activities have provided an opportunity for building Addis Ababa as a
regional hub for air transport. Ethiopia had three international and 18 domestic airports. Its
international flights link the country with over 45 cities in four continents: 26 in Africa, 12 in
Asia, five in Europe and two in North America. It has been expanding its intercontinental
services to realize its motto of being “Africa’s Link to the World.” In 2010, Ethiopian Airlines
traveled to 59 international destinations, 39 of which were in Africa. According to Ethiopian
Airlines Annual Report (2008/09), the operational aircraft of Ethiopia airline was 41.
iv. Ethiopian Shipping Lines S.C. The main purpose of the establishment of the company has
been to: Render coastal and international marine transport service, and engage in other related
activities necessary for the attainment of its charter. The Communication Sector Communication
is one of the most fundamental elements necessary for the economic, social, and political
development of any country. Communication services include telecommunication, postal and
media services. Upgrading and expanding the telecommunications network and services have
been essential to modernizing the sector and bringing about national growth as well as greatly
supporting the rural economy. For example, having basic telephone access in villages:
 Allows farmers to get information on prices for their crops and livestock products;
 Improves the efficiency of local administration;
 Encourages the development of trade and small businesses;
 Facilitates the provision of social services such as health, education, and agricultural extension.
a. Telecommunication In today’s world, the telecommunication infrastructure of a country is one
of the most important factors affecting development. It is therefore important to evaluate a
country’s national telecommunication infrastructure prior to embarking on a major national
development program. Telecommunication plays a major role in the exchange of views and in
information dissemination among various socio-cultural and economic groups. The Ethiopia
Telecommunication Corporation (ETC) has been expanding its network within the country and
to the rest of the world. A modern communication system, especially telecommunication, is one
of the conditions for attracting foreign capital and encouraging competition in the world market.
The Ethiopia telecommunication (ETC) is making continuous efforts to extend its services
throughout the country b. Postal Service Postal services are important for expanding
communication infrastructures. The Ethiopian Postal Service was introduced in 1886 E.C. Even
though the service has been in place for a long time, its services are limited to only parts of in the
country. Postal service has been expanding since 1991/92, with increasing volumes of both
domestic and international postal traffic. c. Broadcasting and Press Broadcasting plays a vital
role in reaching the masses living in remote areas. Although owning of a radio and TV is not
affordable for many Ethiopians, broadcasting definitely has a much bigger audience than press,
as illiteracy and physical inaccessibility do not seriously affect it. The Tourism Sector in
Ethiopia Tourism deals with the movement of people away from their normal residence for:
Business, Transit, Conference, Visiting relatives, Vacation, Other purposes. Tourism is the
activity of providing services for these people, and it is also an important source of foreign
currency and employment for citizens of many countries. Ethiopia has great tourism potential. It
was the recognition of this great potential that encouraged Ethiopia in the 1960’s to start a
tourism industry. After an initial period of rapid growth, the industry underwent a fast decline
and stagnation for many years due to the political and economic problems that prevailed for a
long time in the history of the country. During the Derg government (from 1974 to 1991),
Ethiopia’s tourism industry suffered from the adverse effects of a prolonged civil war, recurrent

Ethiopian Economy
drought and famine, strained government relations with tourist-generating countries, and
restrictions on the entry and movements of tourists.
However, tourism is now operating in a more conducive climate for growth and development, as
evidenced by statistics compiled by the Ethiopian Tourism Commission. Because Ethiopia has so
many historical and natural sites and diverse cultural tourism attractions, tourism should have
been one of the country’s largest industries, but unfortunately the country has been unable to
realize the economic benefits it deserves from the sector. Nonetheless, in recent years, due to the
development of infrastructures, like roads and hotels, and to the crucial role of the government in
marketing and changing the image of the country through its embassies, tourism has shown
significant growth despite the economic crisis in the world. But still there is a long way ahead
before we will fully exploit the benefits of the tourism sector efficiently and secure its
appropriate position in the economic sectors. Tourism in Ethiopia contributes to the national
economy in:
 GDP
 Employment
 Foreign exchange earnings
 Development of new infrastructure in ways that complement or help to full fill local needs (for
example, water, transport, and electricity)
 Improving living standards and reducing poverty. Challenges to tourism sectors are; shortage
of tourist facilities, limited promotion, and lack of professional and skilled personnel.
Remedies: Improving transportation facilities, Allocating an adequate government budget,
Improving management to enhance the quality of the sector, providing manpower training and
promoting the country’s tourism resources
CHAPTER THREE
3. SOCIO-ECONOMIC CONDITIONS
Introduction
In spite of its long history and rich potential in terms of resources, Ethiopia is one of the poorest
and least developed countries in the world in terms of economic and social indicators. High
incidence of poverty, exponential population growth, low social service facilities,
unemployment and under-employment, backward technology and low productivity,
environmental degradation, etc. are the challenges that need to be tackled in order to improve the
grim realities in the years to come. Some of the manifestations of the poor socioeconomic
realities are presented below.
3.1. Low Level of Production and Capital Formation
An important measure of the level of economic development of a country is its total as well as its
per capita production. A country's annual production or income can be measured using variables
such as GDP and GNP.
 Gross Domestic Product (GDP) is the value of all final goods and services produced in
a country in one year. GDP can be measured by adding up all of an economy's incomes
(i.e., wages, interest, profits, and rents). This is known as the income approach to
measuring GDP. GDP can also be measured by adding expenditures (consumption,
investment, government purchases, and net exports). This method of measuring GDP is

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known as the expenditure approach. Both approaches should result in the same amount
because one person's expenditure is always another person's income, so the sum of all
incomes must equal the sum of all expenditures.
 Gross National Product (GNP) is GDP plus income that residents have received from
abroad, minus income claimed by non-residents. GNP may be less than GDP if much of
the income from a country's production flows to foreign persons or firms. But if the
people or firms of a country hold large amounts of the stocks and bonds of firms or
governments of other countries, and receive income from them, GNP may be greater than
GDP.
 GNP Per Capita (also called Income per capita) is a country's GNP divided by its
population. It shows the income each person would have if GNP were divided equally.
GNP per capita is a useful measure of economic productivity, but by itself it does not
measure people's well-being or a country's success in development. It does not show how
equally or unequally a country's income is distributed among its citizens. It does not
reflect damage made by production process to natural resources and the environment. It
does not take into account any unpaid work done within households or communities or
production taking place in the gray (shadow) economy. It attributes value to anything
being produced whether it harms or contributes to general welfare (for example,
medicines and chemical weapons). However, in spite of all these limitations, GNP per
capita is still important measure of the level of development a country has attained, and it
is the most frequently used one.
What Is Capital Formation? It’s Role in Economic Development
Capital formation is one of the major factors in economic development. Capital

formation refers to net additions of capital stock such as equipment, buildings and other
intermediate goods. It is the process of building up the capital stock of a country through
investing in productive plants and equipment’s. Capital formation, in other words, involves the
increasing of capital assets by efficient utilization of the available and human resources of the
country. A nation uses capital stock in combination with labor to provide services and produce
goods; an increase in this capital stock is known as capital formation. It is the increase in the
stock of both material and human capital by making available a part of society's currently
available resources. Capital formation results when some proportion of society's present income
is saved and invested in order to increase material as well as human capital. The meaning of
capital formation is that society does not apply to the needs and desires of immediate
consumption but directs a part of it the making of capital goods, tools and instruments, machines
and transport facilities, plants and equipment, all the various forms of real capital that can so
greatly increase the efficiency of productive effort.''
Generally, the higher the capital formation of an economy, the faster an economy can grow its
aggregate income. Increasing an economy's capital stock also increases its capacity for
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production, which means an economy can produce more. Producing more goods and services can
lead to an increase in national income levels. In the modern economic life the importance of
capital has increased. As human life depends upon circulation of blood likewise
modern industrial system is running on the basis of capital.
Process of Capital Formation
In order to accumulate capital goods some current consumption has to be sacrificed. The greater
the extent to which the people are willing to abstain from present consumption, the greater the
extent that society will devote resources to new capital formation. If society consumes all that it
produces and saves nothing, future productive capacity of the economy will fall as the present
capital equipment wears out. In other words, if whole of the current productive activity is used to
produce consumer goods and no new capital goods are made, production of consumer goods in
the future will greatly decline. To cut down some of the present consumption and wait for more
consumption in the future require far-sightedness on the part of the people. There is an old
Chinese proverb, “He who cannot see beyond the dawn will have much good wine to drink at
noon, much green wine to cure his headache at dark, and only rain water to drink for the rest of
his days.” Three Stages in Capital Formation: Although saving is essential for capital formation,
but in a monetized economy, saving may not directly and automatically result in the production
of capital goods. Savings must be invested in order to have capital goods. In a modern economy,
where saving and investment are done mainly by two different classes of people, there must be
certain means or mechanism whereby the savings of the people are obtained and mobilized in
order to give them to the businessmen or entrepreneurs to invest in capital. Therefore, in a
modern free enterprise economy, the process of capital formation consists of the following three
stages:
A. Creation of Savings: An increase in the volume of real savings so that resources that would
have been devoted to the production of consumption goods, should be released for purposes of
capital formation.
 The level of savings in a country depends upon the power to save and the will to save. The
power to save or saving capacity of an economy mainly depends upon the average level of
income and the distribution of national income. The higher the level of income, the greater will
be the amount of savings.
Savings may be either voluntary or forced. Voluntary savings are those savings which people do
of their own free will. On the other hand, pension cut from employee salary by the Government
represent forced savings.  The greater the amount of taxes collected and profits made, the
greater will be the government savings. The savings so made can be used by the government for
building up new capital goods like factories, machines, roads, etc., or it can lend them to private
enterprise to invest in capital goods.

Ethiopian Economy
B. Mobilization of Savings: A finance and credit mechanism, so that the available resources are
obtained by private investors or government for capital formation
C. Investment of Savings: The act of investment itself so that resources are actually used for the
production of capital goods. There must be a good number of honest and dynamic entrepreneurs
in the country who are able to take risks and bear uncertainty of production.
 The two determinants of incentive to invest are the marginal efficiency of capital and the rate
of interest
 The size of the market for goods determine expectations regarding profits (marginal
efficiency) and low interest rate forced investors to choose investment rather than depositing
money in Bank.
Significance of Capital formation
The importance or significance of capital formation in the process of economic development of a

country is briefly given below.
 Building up of infrastructures. The building up of sound infrastructure like, road,

railways, communication system, power etc. is an important significance of capital
formation.
 Adoption of modern techniques of production. Capital formation helps in the use of
modern techniques and adoption of complex methods of production for rapid growth in
production in large scale industries.
 Qualitative improvement of human resources. Capital formation plays an important role
in the qualities improvement of human resources. The expenditure incurred on
human resource development like educations, health, environmental protection, social
welfare etc., contributes to better health of the people and in the total productivity of the
country.
 Proper utilization of natural resources. The adequate volume of capital formation makes
it possible to utilize the natural resources of a country to the maximum extent and thus
increase the rate of economic growth rapidly at a higher rate.
 Technological progress. Technological progress requires higher rate of capital formation.
The technological improvement helps in getting more output from the same resources.
 Development of agriculture and industrial sectors. Capital formation helps in the
modernization of agriculture and industrial sectors in a country. The use of latest techniques
of production helps in lowering cost of production and increasing production.

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 Higher rate of growth in national income. Capital formation is playing an important role
in raising the real per capital income and GDP of the country through improved productions
in different sectors of the economy.
 Expansion of economic activates. Capital formation helps in increasing the supply of
goods in a country. It thus helps in controlling inflation and bringing stability in the
economy in the long run. Capital formation leads to increase in effective demand and also in
investment.
 Reduction of foreign debt. Higher rate of capital formation makes a country self-sufficient
in the production of goods and reduces the burden of foreign debt.
 Higher Living Standard. Capital helps in increasing agricultural, industrial, mineral,
production and services development i.e., National Income. If the rate of increase in
national income is greater than the population growth rate, living standard improves.
 Efficiency of Labor. Capital increases the efficiency of labor. Labor can increase
production with capital many times.
 Decrease in the Cost of Production. With the involvement of capital, cost of production
decreases, production increases and quality of product improves and people get it at lower
price.
Sources of Capital Formation

There are two sources of capital formation:
(a) Internal Sources (b) External Sources
 Internal Sources: Internal sources consist of domestic savings, borrowing from the public,
taxes; deficit financing and external sources consist of grants, loan, investment and foreign
aids.
A. Internal Sources
 Use of Hoardings: Due to limited banking facilities people keep their savings in the shape
of hoardings. They also keep gold and silver in the shape of ornaments for the sake of their
dignity, pride and social status.
 Through Taxes: If sufficient quantity of capital is not available through voluntary savings
and by the use of hoardings the government receives amount through direct and indirect
taxes for capital formation and for this purpose either new taxes are imposed or tax rate is
increased. While imposing new taxes it is necessary that it should not affect private
investment nor the burden of tax is as such that it lowers the purchasing power of the
people. It is also necessary that tax collecting staff is honest hardworking and efficient and
people do not avoid taxes.

Ethiopian Economy
 Through Borrowing: Government can increase rate of capital formation through
borrowing from the general public and financial institution but these borrowings should not
hinder the private investment.
 Domestic Savings: In developing countries saving rate is about 12% to 15% while it should
be raised from 15% to 20% of GNP. Increase in voluntary savings is to restrict domestic
consumption. Rigorous enforcement of existing taxes allows the government to force
savings and reduce disposable income
 Public Borrowing: Government borrows from the individuals, by selling them its securities
through central bank.
 Restriction on Consumer's Imports: Restriction on imports will increase the savings of
the individuals and this increase in savings will increase the rate of capital accumulation. To
curtail consumption through inflation is also dangerous for development process.
 To Remove Disguised Unemployment: To remove disguised unemployment is another
way to increase capital formation. These unproductive workers can be employed on projects
e. g. Roads, irrigation and construction with the nominal amount of capital. A shift of labor
from agricultural sector to industrial sector would make possible higher rate of
development. It is a difficult approach as it involves the training for new jobs, additional
capital equipment houses and other overhead capital. Capital formation can be increased by
removing disguised unemployment in rural sector. These unproductive workers can be
employed on big projects like roads, irrigation and construction etc. with nominal
investment. It will increase the income level of the people in rural sector. This technique
will increase production and there will be no danger of inflation.
 Deficit Financing: Deficit financing is regarded an important source of capital formation.
In the developed countries this method is used for increasing effective demand and ensuring
continued high levels of economic activity. In the less developed countries, it is used for
generating savings by activating unemployed or underemployed resources. If capital is not
available through traditional sources the government borrows from the Central Bank.
Central Bank issues currency notes for this purpose without any guarantee which is called
deficit financing. But this process is not free from danger because it creates inflation, if
supply of goods and services does not match with economic activity (does not match the
existing demand).
B. External Sources
If internal sources are insufficient then rate of capital formation can be increased through
external sources which include the following:
 Foreign Aid and Loans: In present times some of the countries receive aid loans for
development programmers and for other long term projects. These aids and loans can be
received from governments, international financial institutions and other consortium

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countries. But these aids and loans should not be conditional and the rate of interest should
be low.
 Foreign Investment: Some of the International financial agencies have invested in Pakistan
and have provided services of trained persons to increase the capital formation.
 Decreasing Consumer Goods Imports: Foreign exchange can be saved by decreasing
import of consumer goods and the saved foreign exchange can be used for the import of
industrial raw material, machinery and modern technology.
3.3. Poverty
Poverty is general scarcity or dearth, or the state of one who lacks a certain amount of material
possessions or money. It is the state or condition of having little or no money, goods, or means of
support; condition of being poor. It is also defined as the deficiency of necessary or desirable
ingredients, etc.: poverty of soil. It is the state of one who lacks a usual or socially acceptable
amount of money or material possessions. Poverty is said to exist when people lack the means to
satisfy their basic needs. In this context, the identification of poor people first requires a
determination of what constitutes basic needs. It includes low incomes and the inability to
acquire the basic goods and services necessary for survival with dignity. Poverty also
encompasses low levels of health and education, poor access to clean water and sanitation,
inadequate physical security, lack of voice, and insufficient capacity and opportunity to better
one’s life.
The classification between poor people and those who are not poor, in accordance with this last
criterion, depends on the degree of development of the society under study and cannot be
transferred to a different society. For example, one country may consider poor people to be all
those whose annual income is less than 3,000 Euros, whereas another country may classify a
person as being poor whose income is below 7,000 Euros. Thus, a supposedly poor person in the
second country may not be classified as such if the first country's criteria are used. Poverty is not
a static phenomenon however and a person's situation may change with time, moving in and out
of poverty. It is therefore essential to carry out dynamic poverty studies that take into
consideration changes and transitions and analyze a population over a sufficiently long enough
period, not only during specific years and in an isolated way.
Objective Approach Poverty

By applying an objective focus, an analysis of both absolute and relative poverty is carried out.
Absolute poverty, extreme poverty, or abject poverty, serious poverty is a condition
characterized by severe deprivation of basic human needs, including food, safe drinking water,
sanitation facilities, health, shelter, education and information. It depends not only on income but
also on access to social services. It is defined as a situation in which the individual's basic needs
are not covered, in other words, there is a lack of basic goods and services (normally related to
food, housing and clothes). Absolute poverty or destitution refers to the deprivation of basic

Ethiopian Economy
human needs, which commonly includes food, water, sanitation, clothing, shelter, health care and
education.
Relative poverty: It refers to the inadequate lack of income when compared to the average
standards living. As such, relative poverty implies that the individual has the ability to sustain his
or her basic needs, but may lack the resources to engage in various social activities. Relative
poverty locates the phenomenon of poverty in the society under study. From this perspective, a
person is considered poor when they are in a clearly disadvantaged situation, either financially or
socially, with regards other people in their environment. This idea of poverty is closely linked to
the notion of inequality. Relative poverty views poverty as socially defined and dependent
on social context, hence relative poverty is a measure of income inequality. Usually, relative
poverty is measured as the percentage of population with income less than some fixed proportion
of median income.
Causes of Poverty
 War  Lack of land resources
 Famine  Unemployment
 Disease  Drug
 Lack of education
 Fathers leaving the
family
 Divorce
 Minority status
 Prejudice (narrow
mindedness,
discrimination)
 Physical and mental
disability
 Loss of job
 Theft
 Disasters
 Fires
 Lack of or inability to
afford adequate health
insurance
 Overpopulation
 Dictatorships
 Racism
 High taxation
 Polygamies
 High growth rate of
population
 Income inequalities

Ethiopian Economy
Poverty in Ethiopia
 In 1973 during imperial period about 3 million Ethiopians were affected by food shortages. A
prolonged drought between 1984 and 1986 plunged the country into famine. During the 1980s,
an estimated 1 million Ethiopians died from starvation as a result of famine.  The present
government of Ethiopia has taken various steps of reduction of poverty especially in rural areas,
such as, Agricultural Development-Led Industrialization (ADLI), Sustainable Development and
Poverty Reduction Program (SDPRP), etc. The government has stressed on the development of
agriculture, food security and vulnerability, export development, private sector development,
tourism, mining, infrastructure, health and education. The main causes of poverty in Ethiopia are
as follows:
1. The dynamics of population growth.
2. Very low productivity, structural bottlenecks.
3. Dependence on unreliable rainfall.
4. Being land locked combine to pose serious challenges.
Poverty Measures
Absolute poverty lines
These lines reflect the value of the resources needed to maintain a minimum level of welfare.
The aim is to measure the cost involved in purchasing a basket of essential products (goods and
services), which allow a person to reach minimum levels of satisfaction in terms of basic needs.
One of the characteristics of the absolute poverty lines is that results can be taken from them that
are sensitive to economic development, although this is shared out homogeneously amongst the
population. For example, if there is an increase in income levels in a society, even though this
increase is distributed homogeneously amongst the population, the percentage of poor people
calculated with absolute poverty lines will decrease.
One of these absolute lines that are widely used fixes a dollar per capita a day as the value of
minimum resources needed for a person to not be considered in poverty. This line can be used in
a world context with the implication therefore that any person who lives on less than a dollar a
day is poor.
Relative poverty lines

Relative poverty lines classify people in the society under study into two groups; those that are
most disadvantaged, who are called poor, and the rest.
If there is a homogenous increase of income in a society, for example a rise of 5% in the income
of all households, the relative poverty lines provide the same poverty rates before and after this
rise. The poverty threshold will be greater, but the proportion of poor people will remain the
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same. The number of poor people depends on the relative position of each household or
individual in the society. If these relative positions are maintained, the relative poverty lines do
not reflect changes that could result in economic development shared out equally. In order for the
percentages of poor people calculated with this type of line to diminish, it is necessary for there
to be changes in income distribution.
Relative poverty lines usually use indicators based on monetary variables such as income or
expenditure. In both cases, a minimum variable level is fixed below which people are classified
as poor and above which as not poor. If we suppose for example that the chosen variable is
income, the level will depend on the population's income distribution. In fact, it is usually fixed
at a certain percentage of a distribution measure, normally the average or the median.
Poverty Reduction/ Poverty Alleviation
 Enabling the poor to create wealth for them as a means for ending poverty forever.
 Improving the living conditions of people who are already poor.
 Improving water management is an effective way to help reduce poverty among farmers.
 With better water management, they can improve productivity and potentially move
beyond subsistence-level farming
 Good institutions
Efficient institutions that are not corrupt and obey the rule of law make and enforce good laws
that provide security to property and businesses. Efficient and fair governments would work to
invest in the long-term interests of the nation rather than plunder resources through corruption.
Good governance (such as accountability, effectiveness, rule of law, low corruption) to be related
to higher rates of economic development. Having understood the severity of the level of poverty
the world over, leaders of the world have in their Millennium Summit of September 2000 have
pledged to reduce people below poverty line by half by the year 2015 as part of the Millennium
Development Goals (MDGs) agreed by 191 countries. (The MDGs are shown on the next page).
With nearly half of its population below poverty line, the challenge for Ethiopia is very huge.
The Ethiopian Government has put poverty reduction high on its agenda, and the Poverty
Reduction Strategy Paper (PRSP) is issued on July 2002 under the title " Ethiopia: Sustainable
Development and Poverty Reduction Strategy".
The Millennium Development Goals (MDGs)
(By the year 2015, all 191 United Nations Member States have pledged to meet these goals)
1 Eradicate extreme  Reduce by half the proportion of people living on
poverty and hunger less than a dollar a day
 Reduce by half the proportion of people who suffer
from hunger
2 Achieve Universal  Ensure that all boys and girls complete a full course
Primary Education of primary schooling
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3 Promote Gender  Eliminate Gender disparity in primary and

Equality and Empower secondary education preferably by 2005, and at all
Women levels by 2015
4 Reduce Child Mortality  Reduce by two thirds the mortality rate among
children under five
5 Improve Maternal  Reduce by three quarters the maternal mortality

Health ratio
6 Combat HIV/AIDS,  Halt and begin to reverse the spread of HIV/AIDS

malaria and other  Halt and begin to reverse the incidence of malaria
diseases and other major diseases
7 Ensure Environmental  Integrate the principles of sustainable development

sustainability into country policies and programs, reverse loss of
environmental resources
 Reduce by half the proportion of people without
sustainable access to safe drinking water
 Achieve significant improvement in lives of at least
100 million slum dwellers, by 2020
8 Develop a global  Develop further an open trading and financial

partnership for system that is rule-based, predictable and non-
development discriminatory. Includes a commitment to good
governance, development and poverty reduction -
nationally and internationally.
 Address the least developed country's special needs.
This includes tariff- and quota- free access for their
exports; enhanced debt relief for heavily indebted
poor countries; cancellation of official bilateral debt;
and more generous official development assistance
for countries committed to poverty reduction
 Address the special needs of landlocked and small
island developing states
 Deal comprehensively with developing countries'
debt problems through national and international
measures to make debt sustainable in the long term
 In cooperation with the developing counties,
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develop decent and productive work for youth.

 In cooperation with pharmaceutical companies,
provide access to affordable essential drugs in
developing countries.
 In cooperation with the private sector, make
available the benefits of new technologies -
especially information and communication
technologies.
3.4. Poor Socio Economic Infrastructure

The social and economic infrastructure in the country are both insufficient and in poor shape. For
instance, the road network of Ethiopia is the lowest even by the standards of Sub-Saharan Africa,
with a road density of 29 km per 1000 square km or 0.48 km per 1000 persons (in 2001/02). It is
currently estimated that 70% of the country's land area is not served by modern transport system.
Access to safe potable water in the year 2000 for urban areas in Ethiopia was 72%, and if Addis
Ababa is excluded the figure drops to 38%. Access to safe potable water for rural Ethiopia is
about 24%. Except for Addis Ababa and a few urban centers, sanitation facilities are non-
existent. The current access to electricity in the country is estimated at 13% of the population.
Constraints include insufficient generation power, unsatisfactory quality of supply, and weak
customer service. There have been sizable improvements in enrollment rates over the past few
years with Gross Enrollment Rate (GER) for the complete primary (Grades 1 to 8) at 57.4% in
the year 2002. Similar improvements have been observed in the health sector also but a lot
remains to be done.
3.5. High level of Unemployment and Underemployment
There exist widespread unemployment (some estimates show that urban unemployment is over
30) and underemployment (i.e., disguised unemployment) particularly in rural areas and in urban
areas. While labor, undoubtedly, is the most abundantly available resource for populated
developing countries like Ethiopia, if it is not properly used for productive purposes the
opportunity cost would be high.
Underemployment refers to people who are working in a lower capacity than they are qualified
for, including in a lower-paid job or for fewer hours than they would like to work, part-time job
instead of a full-time one, or if they are overqualified and have education, experience, and skills
that exceed the requirements of the job. Person is in fact, working, just not as much as they’d like
or to the full extent of their abilities, skills, or education.
 When you try to change jobs competing with underemployed you have less bargaining power
when it comes time to negotiate salary.
Unemployment: a person who is actively searching for employment is unable to find work
Reasons for Being Underemployed
 Lack of Skills: workers with skilled backgrounds in low-wage or hourly jobs that do not
require such prerequisites.
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 Lack of Experience: Recent graduates may find themselves underemployed while looking for
their first job after college. Even entry-level jobs sometimes require more experience than
students may have to offer right after graduation. Take part-time work while doing internships,
taking classes, or networking their way to a new position.
 Credentials Aren't Acceptable: In many cases, highly skilled individuals come to work in a
new country, but face underemployment because their foreign credentials are not be accepted nor
considered to be an equivalent fit for the position in question. Few employers are willing to send
foreign documents for evaluation by a third party, so many professional individuals such as
doctors, lawyers, or engineers take necessary jobs that would otherwise be seen as inferior
positions.
 Discrimination Issues: In addition to students, foreign nationals, and trade workers, those with
disabilities, mental illnesses, or former inmates are often discriminated against and are forced to
take the first job available for fear of not finding another.
 Low Demand: Some individuals with acceptable experience and skills are underemployed
because of low demand in their local job market. For example, computer science BSc graduate
may employed as secretary because there is no demand for computer science
 Poor Economy: During a recession, many skilled workers who would ordinarily have little
trouble landing a good job in their field may wind up underemployed.
 Market Changes: Underemployment can also be caused by larger market changes. For
example, automation has affected workers in industries, as employers cut hours and workers lose
bargaining power in the market.
Problems of unemployment in Ethiopia
 Employment is expected to play the sustained political and economic stability of the country
 Unemployment rate in Ethiopia averaged 19.88% until 2015, but the actual figure may go up
further than projected by government
 Urban unemployment is more severe than rural unemployment, rural youth lacks land which
support his living thus migrate to urban create overcrowded cities.
 Effects of unemployment in Ethiopia
 Immediate effect is starvation
 Create very serious social problem, crime, violence
 Vulnerable to substance abuse
 Youth hopeless in education
 Easily manipulated by armed rebel groups
Briefly, the socioeconomic infrastructure is still at a very low level of development even
compared with other Sub-Saharan African Countries, which are regarded as the least developed
countries of the world.
Many factors have contributed to the poor socioeconomic realities of the country some of the
major reasons are outlined below:
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a) Ethiopia has for a longer period maintained a traditional economic base that has missed
the benefits of modern scientific and technological revolution.
b) Despite its huge potential, the agricultural sector has remained sluggish due to
inappropriate policies and practices.
c) For an extended period in the past, Ethiopia has been a land of social upheavals, civil war
and other forms of instability.
d) The low productivity and saving rate (capital formation) coupled with unsound utilization
of the country's available resources have resulted in the deterioration of the standards of
living of the population.
To summarize development is both a physical reality and a state of mind in which society has,
through some combination of social, economic and institutional process, secured the means for
obtaining a better life. Development must be conceived as a multidimensional process involving
major changes in social structures, popular attitudes and national institutions, as well as the
acceleration of economic growth, minimize inequality and the eradication of absolute poverty.
Absolute poverty is a situation where a population is able to meet only its bare subsistence
essentials of food, clothing and shelter in order to maintain minimum levels of living. This
absolute poverty is in many cases calculated on the basis of the international poverty line which
is an arbitrary international real income measure, usually expressed in constant dollars used for
estimating the proportion of the world’s population that exist at bare levels of subsistence that
is those whose incomes fall below this poverty line.
This absolute poverty is found in many developing countries of the world with varied degrees of
scale. In fact, there are common economic features that illustrate developing countries in a
broadly similar framework. These common features can be classified in six broad categories.
a) Low levels of living as expressed by their low per capita national incomes,
slow or stagnant growth rates of Gross National Product (GNP), the degree of
inequality and extent of poverty and poor social services like health, education etc.
b) Low levels of productivity that is the absence or severe lack of complementary factor
inputs such as physical capital and /or experienced and rational management.
c) High rates of population growth and dependency burdens, which affect all economic
gains to be annulled or quickly wiped out.
d) High and rising levels of unemployment and underemployment this arises from the
inadequate or inefficient utilization of labor.
e) Substantial dependence of agricultural production and primary product exports which is
based on primitive technologies, poor organizations and limited physical and human
capital inputs.
f) Dominance, dependence and vulnerability in international relations due to the highly
unequal distribution of economic and political power between rich and poor nations. This
includes the dominant power of rich nations to control international trade, dictate the
terms in which technology, foreign aid and private capital transfers.
CHAPTER FOUR
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4. IMPORT AND EXPORT PERFORMANCE
4.1. Trade in the Ethiopian Economy
Trade is the buying and selling of goods and services in the market. It is the exchange
of goods between individuals or groups either directly through barter or indirectly
through a medium of exchange. Trade has two types: Domestic and International.
Domestic trade: - is the exchange of goods and services within the territory of a country.
International Trade: - Is the exchange of goods and services between and/or among different
countries.
Why nations trade?
1. Earth's resources are not equally distributed among nations. Different countries have
different factor of productions. i.e., one nation is rich in labor and other nation is rich in
capital. Therefore, trade is important to acquire what the nation lacks.
2. Level of technological development
If one nation (USA) is rich in technology advancement, those nations have to export this
technology to the rest of the world like Ethiopia.
3. Increasing Return to Scale (IRTS)
IRTS happens when if input is increasing by 5% and output is increasing by more than
5%, there is IRTS.
4. Difference in demand
In developed nations, there is high demand and price is high as well. Exporters from developed
nation imports input from developing nations and exports raw material and import finished
products from developed nations.
4.1.1. Historical Background of Trade in Ethiopia
Trade was started during Axumite kingdom. Both domestic and international trade was
conducted. The major trading ports were Adulis on Red sea coast. After Italian invasion,
modernization of trade achieved land mark. Ministry backed by rules and regulations were set
up. Institutions were also set up for training Ethiopians who wants to trade. Commercial code
was introduced in order to enforce laws governing business transactions. During the Derg,
There was change in economic management, including domestic trade. There was also mass
nationalization. The economic activity was guided by central planning. The profit motive was
given way to social objectives and every measure to strengthen socialism was subsidized.
During EPRDF, the government took a radical change in all spheres, a business environment
governed by market law.
4.1.2. Role and Importance of Trade in Economic Development
Role of Domestic Trade
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 Encourages diffusion of knowledge, religion, culture, etc.

 Fosters or accelerates specialization
 Trade strengthens interdependence of regions
Role of International Trade
 Variety of goods trade enables someone to consume many products.
 Availability of inputs. One nation may acquire a raw material from another nation
through international trade.
 Trade allows specialization
 Lower prices
Trade allows a nation to specialize and export those goods and services that it can produce
at lower cost and import goods and services whose domestic production is costly. Trade
allows someone to consume foreign products and enlarges consumption.
Trade Theory
A. Absolute Advantage
It was a theory of Adam Smith.

A nation can produce goods that it can produce cheaply and have to import the remaining goods
from other country at lower price. A nation is said to be absolute advantage if that country can
produce at a least cost.
Country Days of labor required to produce
Cloth (1 meter) Shoes (1 pair)
Ethiopia 2 days 10 days
Sudan 10 days 2 days
Ethiopia Takes 2 days to produce 1 meter of cloth but Sudan takes 10 days.
Ethiopia has an absolute advantage in the production of cloths.
Ethiopia should specialize on cloth production and should export. Ethiopia should also import
shoes production from Sudan because Ethiopia has an absolute disadvantage over Sudan on
shoes.
Sudan Takes 2 days to produce 1 pair of shoes, but Ethiopia takes 10 days to produce 1 pair of
shoes. Sudan has an absolute advantage on shoes production and should export to Ethiopia and
Sudan also should import cloth production from Ethiopia.
B. Comparative Advantage
Comparative advantage happens when one nation have full efficient cost advantage than its
trading partner. Here, mutual beneficial trade still exists. Less efficient nation should export
goods (where its absolute disadvantage is the least). The country still gains even the other
country can produce at low cost.
Country Days of labor required to produce

Cloth (1 meter) Shoes (1 pair)
Korea 1 days 2 days
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Djibouti 4 days 10 days

Cloth
Korea takes 1 day to produce 1 meter of clothes, but Djibouti takes 4 days.
Korea has an absolute advantage in cloth production shoes
Korea takes 2 days to produce 1 pair of shoes, but Djibouti takes 10 days to produce the same
product.
Korea has an absolute advantage on shoes production. Here, Korea has an absolute advantage
on both productions and Djibouti has an absolute disadvantage on both productions.
Korea has absolute advantage is much higher on shoes productions, so Korea should export
shoe production to Djibouti and import cloth from Djibouti. Djibouti have less absolute
disadvantage on cloth productions, hence Djibouti should specialize on cloth production and
should export to Korea. Also, Djibouti government should import shoe from Korea.
This comparative advantage is applicable to individuals. E.g., Dr Nebiat earns 100 birr/day by
examining patients and earns 25 birr /day by designing a garden. Misses Eden earns zero salary
on examining patients but earns 20 birr/day by designing a garden. Here, Dr. Nebiat is more
efficient in both economic activities and has an absolute advantage on both productions. The Dr.
Advantage is greater than Misses Eden on trading patients. Missies Eden has to design the
garden for Dr. Nebiat and Dr. Nebiat have to specialize in treating patients.
As a result, a given country exports goods that it can produce most efficiently. i.e., at a least
cost and have to import goods in which it has a higher cost when the product is produced
domestically.
4.1.3. Restrictions and Modes of Payment in Foreign Trade

A. Restrictions on international trade
On international trade, there is import and export. Nations use different policy on international
trade (Free trade vs. international trade)
Free trade is a trade policy without any tariff, quota, and exchange control, etc. on import or
exported items. It is a complete freedom of international trade without any restriction on
movement of goods between nations.
Restriction Is imposing some level of restriction on international trade. Usually, most nations
follow trade restrictions on international trade. This trade restriction may be non-tariff such as
labeling requirements, food safety regulations, etc.
Why nations restrict international trade?
1. To protect weak industries

2. Revenue of the government. E.g., tariff as one way of restriction for international
trade, is one source of government revenue
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3. To protect the health of citizens. Some products may be embargoed if the

imported product is more likely dangerous or unhealthy.
4. Protection of national security. E.g., USA may not sale sophisticated arm
machineries for Iran due to national security purposes.
Types of trade restrictions
1. Quota
Quota is a limit on the amount of the product that can enter into a country. Quota has a limit, so
that entrance of the good into a country is stopped when the quota is met.
2. Tariff
Tariff is duties or taxes imposed by the government of a nation on goods entering that country.
Tariff will increase the price of imported product.
Objectives of Tariff
(Why tariff is levied?)
1. tariff is one of the source of government revenue
2. Tariff is also levied to protect locally produced goods. If the imported good is cheap as
compared to domestic, domestic producers will shut down their plants or factories, hence,
tariff is necessary to equalize the selling price of domestically produced goods and
imported products. Tariff in general discourages import of product.
There are three types of tariffs
A. Specific tariff Are type of tariffs imposed on each unit imported or based on physical
quantity. It’s levied irrespective of quality, price, etc.
B. Ad valorem tariff is imposed based on the monetary value of the product.
C. Compound tariffs a combination of both specific and ad valorem duties. E.g., if the Ethiopian
government taxes Sony TV 5% + 500 birr/1 TV.
3. Exchange control
Government can use exchange control to limit or avoid import of some goods by not giving the
foreign currency that the importer needs.
B. Mode of Payment in International Trade
Payment in domestic trade is quite simple because the distance between the buyer and seller is
very close to each other. Payment in international trade can be made in one of the following
ways.
1. Bankers transfer
This is simple transfer of money from the bank account of the buyer (importer) to the bank
account of the seller in the seller’s country.
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2. Bill of exchange
Bill of exchange is an order in written form addressed by a creditor (seller) to a debtor (buyer)
and signed by the creditor, requiring the person to whom it is addressed to pay either on demand
or at fixed date, or at a determinable future time, a certain sum of money to the person named on
the bill or to his order. The bill is drawn by the creditor on the debtor and is sent to the debtor (or
his agent) for the letter to pay or accept. The debtor accepts by signing his name on the face
(front) of the bill together with the date.
3. Letter of credit
Letter of credit is a document-containing guarantee of a bank to make payment to the exporter,
under certain conditions and up to a certain amount, provided the conditions contained in the LC
and compiled with.
How letter of credit functions?

1. The importer < applicant> approaches the bank < domestic> and requests <importer> the
bank to open letter of credit.
2. The banker who issues the LC at the request of importer is referred to as opening banker who
undertakes to make payment to the exporter.
3. The bank to which LC is sent for delivery is called Advising Bank.
There is an importer. This importer wants to import goods from other country. This importer
deals from exporter on payment and goods, which is imported. The importer directly goes to
the banks <Abyssinia> that have a connection with the exporting countries bank called
negotiating bank. Or the domestic banks have the access to the international banks. This importer
receives an application form from the domestic bank called opening bank an application form,
the domestic bank opens LC for the importer then this domestic bank must deal the exporting
nations bank <negotiating bank>. The negotiating bank see the form written by the importer,
accepts and opens LC for the exporter, then the payment will be made by the LC that means
between the domestic bank <opening bank> and foreign bank <negotiating bank>.
4.1. Trade policies, strategies and the structure and performance of trade in Ethiopia (self-
read assignment)
4.2. Balance of Payment
4.2.1 Development in the BOP in Ethiopia
In the modern world, there is no country, which is self-sufficient, so, import and export is must.
Some nations import if and only if they have cost disadvantage in producing that specific type
of the product and others export if and only if they have cost advantage. This indicates that there
is a relationship between one countries with the rest of the world. This is called BOP.
Definitions of BOP
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The principal tool for the analysis of the monetary aspects of international trade is the balance of
international payment statement. This statement, also simply known as the balance of payment
(BOP), is a systematic record of all international economic transactions, visible and invisible, of
a country during a given period, usually a year. In other words, the statement is a device for
recording all the economic transactions within a given period between the residents of a country
and the residents of other countries.
All payments and receipts of foreign exchange arising from such transactions are listed in the
balance of payment accounts. It is, thus, a complete statement of a country`s payments and
receipts of foreign exchange in the given period of one year. Note that the trade of merchandise
(goods) is only one of the many items on account of which a country makes payment or receives
it. There are many other items, such as shipping and insurance services, interest and dividends,
tourist traffic, etc., which give rise to payments or receipts of foreign exchange. They too are
recorded, along with many others, to make a complete statement of accounts of how much
foreign currency of a country has to pay and how much of it is to receive in a given year.
Balance of payments accounts are prepared using the double-entry system of accounting, in
which the sum of all debits equals the sum of all credits, and the accounts are always in balance.
If a transaction earns foreign currency for the country, it is called a credit and recorded using a
plus sign. On the other hand, if a transaction refers to a spending of foreign currency by the
country, it is called a debit and is recorded in BOP accounts using a minus sign.
In other words, all receipts of foreign currency are credit items, whereas all payments of foreign
currency are debit items. If the total of the debit items and the total of the credit items are equal
in value, the country`s international payments are balanced. If the credit items are larger, so that
there is a net balance due to it, the country is said to have a favorable balance. If the debit items
are larger, so that there is a net balance due to foreigners, the country is said to have an
unfavorable balance.
 It is an accounting record of one nation with the rest of the world.

 It is the receipt and payment of FOREX of one nation in a given years.
 It is an accounting record because it is prepared by double-entry system of accounting.
Double entry system of accounting
Debit Credit
When Ethiopia imports when Ethiopia exports
Carries negative sign carries positive sign
Outflow of foreign exchange Inflow of foreign exchange
The aim of having BOP
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 To inform the government of the country’s international position. (What will be the level
of export and import).
 To help the country in receiving decision on monitory and fiscal policy.
Component (Elements) of BOP
The balance of payment account is divided in to two parts:
1. Current account
2. Capital account
1. Current account
The current account records inflows and outflows of foreign currency resulting from flow of
goods, flow of services and unrequited (or unilateral) transfers. Accordingly, a current account
has three parts: trade balance, net services and net transfers.
Trade balance: The difference between the export and import of goods is called the trade
balance. The export and import of goods is also called visible trade, since goods are visible
items.
Net services: The difference between the export and import of services is called net services.
There are many services that are made use of in international trade, for example, shipping,
insurance, and banking services. Ships have to be hired for transporting goods from one country
to another. The merchandise carried by the ships has to be insured for any loss and damage in
transit. Banking services are used to facilitate receipts from and payments to foreign dealers.
When foreign ships ( for example, ships from a company in the USA) are hired by a country to
bring in goods imported from the USA, then, in addition to the payment for the imported goods,
payment has to be made to the US shipping company in foreign currency. Conversely, if foreign
countries use the services of, say Ethiopian insurance companies and banks, Ethiopia will receive
foreign currency from such countries an account of these services.
Nowadays, tourism and travel among countries has also become an important item on balance of
payments. When foreign tourists come to Ethiopia, they bring foreign currency in with them and
convert it into our currency to spend it in our domestic market. The country thus receives foreign
currency. Similarly, when Ethiopian tourists go abroad, they have to convert Ethiopian currency
in to foreign currency to spend it abroad. This involves outflow or payment of foreign exchange.
We may conclude that the difference between the inflow and outflow of foreign currency
because of the export and import of services, such as banking, insurance, transport, tourism, etc.,
constitutes what we call net services Note that the export and import of services is called
invisible trade.
Net transfers: Transactions such as gifts, remittance, donations, etc., are unreturned or unilateral
receipts and payments, because residents of a country receive them ‘for free’. Nothing has to be
paid in return, either at present or in the future, for such receipts. The difference between the
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receipts and payments of such transfers is known as net transfers. The sum of the three
components such as trade balance, net services and net transfers is called balance of payment on
current account or simply current account balance (CAB).
2. Capital account
The capital account of BOP records all such transactions between residents of a country and the
rest of the world that causes a change in the assets or liability status of residents of a country or
its government. It represents the international flow of loans and investments that changes the
country`s foreign assets and liabilities. A capital account is made up two major parts: the
country`s assets held abroad (which are recorded as a negative entry) and the assets held by
foreigners in the country (recorded as a positive entry). The sum total of these two components
gives the balance of payments on capital account or simply the capital account balance.
Various forms of capital account transactions are as given below:
a) Private Transactions: These are transactions, which affect the assets and liabilities of
individuals, businesses, and other non-government entities.
b) Official transactions: These include transactions affecting the assets and liabilities of the
government and its agencies.
c) Direct Investment: It means purchasing as asset and, at the same time, acquiring control
of. For example, the acquisition of a firm in one country by a firm in another country or
the purchase of a house by individual abroad.
Portfolio Investment: It is the acquisition of an asset that does not give the purchaser
control over the asset. Examples are the purchase of shares in a foreign country or the
purchase of bonds issued by a foreign government
BOP= CURRENT ACCOUNT + CAPITAL ACCOUNT + SD
CURRENT ACCOUNT BALANCE= CAB is the international transaction on currently

produced goods and services and net income from abroad.
CAB = BOT + NS + NTP
BOT = Balance of trade is the difference b/n export and import. (Export-Import).
NS = Net Service = Export of service – import of service.
NTP = Net Transfer Payment = is transaction such as gifts, remittances, donations, etc., are
unrequited or unilateral receipts and payments, because residents of a county receive them free.
Nothing has to be paid in return, either in present or in future, for such receipts.
Service account has been the only component of foreign trade in Ethiopia showing positive
BOP because transaction earning from shipping lines were increased and due to decline in net
interest payment to the rest of the world because of two reasons:
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a) Reduced in interest payment on external debt, which is attributed to debt cancellation

and rescheduling.
b) Interest received on our foreign reserves in foreign banks and rise in interest earned on
foreign securities since 1994/95.
CAB continued to experience deficit from 1992-2009.
Balance of Payments: Complete Account
By adding the balance on the capital account and the balance on current accounts, we get the
complete balance of the payments account. When receipts and payments are equal, the
balance of payments is said to be in balance. If the total BOP receipts are more than the
payments, the excess goes to a third account, the Foreign Exchange Reserves. When
payments exceed receipt, there is a depletion of foreign exchange reserves.
4.3.Foreign Exchange Rate
Every country has its own currency, which is used as a medium of exchange with in the
national borders of that country (and not outside the country). For instance, the currency of
Ethiopia is the Birr; of America it is the US dollar that of the UK is the British pound that of
Japan is the Yen, etc. There is no problem of payment if transactions (sales and purchases)
are made within the national border of a country. For instance, if a seller in Addis Ababa
sells goods to a buyer in Dire Dawa, he/she is paid in Birr. There is no problem because both
use the same currency. Nevertheless, if a seller sells goods to a buyer in England, the
problem of foreign currency occurs because the seller wants to receive payment in birr,
whereas the buyer wants to pay in Pounds. Payments across national borders give rise to a
new situation that of international payments. Currency that is used for making international
payments is called Foreign Exchange. Thus, foreign exchange refers to all currencies other
than the domestic currency of a given country. For instance, for Ethiopia, all currencies other
than birr are foreign exchange, and similarly for America, all currencies other than its US
dollar are foreign exchange.
Foreign Exchange Rate and its Types
Foreign Exchange Rate
The price of one currency in terms of another is known as the foreign exchange rate. One unit
of a foreign currency is exchanged for domestic currency at the rate. Since there is symmetry
between two currencies, their exchange rate can be quoted in two ways, i.e., foreign
currency expressed in terms of domestic currency or domestic currency expressed in terms of
foreign currency. There are various concepts of exchange rate system. Its two broad types
are Fixed Exchange Rate and Floating Exchange Rate.
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1. Fixed Exchange Rate: It is the rate at which is officially fixed (or pegged) in terms of
gold or any other currency by the government and adjusted only infrequently. Only a very
small deviation from this fixed value is possible. In this system, foreign central banks
stand ready to buy and sell their currencies at a fixed price. In case there is disequilibrium
in the balance of payment, causing excess demand or excess supply of foreign exchange,
the central bank of the country has to buy or sell the quantities of foreign exchange
required to eliminate the excess demand or supply. Note that the value of a currency fixed
in terms of another currency or in terms of gold is known as the parity value of the
currency.
2. Floating Exchange Rate: It is the rate at which is determined by forces of supply and
demand in the foreign exchange market. There is no (official) government intervention.
Here the value a currency is to be left completely free to be determined by market forces
of demand and supply of foreign exchange. Under this system, the central banks, without
intervention, allow the exchange rate to adjust to equate the demand and supply for
foreign currency. The foreign exchange market is busy at all times with changes in the
exchange rate. Just like the market price of a commodity, the exchange rate of a currency
is determined by demand and supply of foreign exchange in a freely fluctuating exchange
market.
Determinants of Exchange Rate
a) Foreign demand for export

An increase in foreign demand for domestic exportable products increases the supply of foreign
currency and reduces the Exchange Rate.
b) Domestic demand for imported goods

An increase in domestic demand for imported goods requires more foreign exchange and
increase Exchange Rate.
c) Relative real interest rate of a nation

If real interest rate in domestic country increases, foreigners likes to save their money in
domestic country that, increase the supply of foreign currency.
d) The profitability of direct investment in the country

If investment is more profitable in domestic country, investors like to invest in domestic country
that increases foreign currency.
e) Expectation
When people expect the value of foreign currency will increase, they reduce the supply of
foreign currency that increases the Exchange Rate.
Changes in the Value of a Currency
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The value of a currency in terms of foreign currency may increase or decrease under these two
systems of exchange rate, i.e., fixed and floating. Under the fixed exchange rate system, these
changes take place because of a policy decision by the monetary authority (government) of the
country, whereas under the floating exchange rate system, these changes are the result of changes
in the demand and supply of the currency in the free exchange market.
Under a fixed exchange regime, when a country raises the value of its currency in terms of
foreign currency, it is called revaluation. On the other hand, when a country brings down the
value of its currency in terms of foreign currency it is called devaluation. For example, in 1983
E.C., the Ethiopian transitional government devaluated the exchange rate of birr from birr 2.07
per US dollar to birr 5 per US dollar. Thus, because of devaluation, more birr were required to
buy one US dollar, i.e., the value of birr in terms of dollar went down. Under the floating
exchange rate system, an increase in the value of a currency in terms of foreign currency is called
appreciation. On the other hand, a fall in the value of a currency in terms of foreign currency is
called depreciation.
Remarks:
 Under the floating exchange system, the exchange value of a currency frequently
appreciates or depreciates, depending up on the exchange in the demand for and supply
of the currency in the free exchange market.
 Managed Floating is a hybrid of the fixed and floating exchange rate systems. It is
characterized by some intervention in the exchange rate movements by the government of
the country when a particular situation requires it. Currently the exchange rate of the birr
is determined by the managed floating exchange rate system.
 The US dollar, British pound, French franc, and Japanese yen are considered to be strong
or hard currencies because, worldwide, people have faith in their general acceptance as
money. The Ethiopian birr and currencies of other developing countries are called soft
currencies since their exchange value is weak.
Impacts of Foreign Exchange Rate on BOP
The balance of payments account of a country largely indicates the monetary aspect of its
foreign trade, i.e., exports and imports. In addition, exports earn foreign currency for a
country, whereas imports imply the spending of foreign currency by the country. Naturally,
a change in the value of the currency of the country, in terms of the foreign currency, has an
impact on its balance of payments. An increase in the value of the currency of a country
makes its imports cheaper and its exports costlier (for foreign countries). In such a situation,
imports increases and exports decreases, thus leading to a trade deficit, i.e., an unfavorable
balance of payments. On the other hand, a decrease in the value of the currency of a country
in terms of foreign currency makes its imports costlier (for the local buyers) and exports
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cheaper (for the foreign buyers). In this situation, imports decreases and export increases,
thus leading to a trade surplus or favorable balance of payments.
Thus, for example, under a fixed exchange rate system
 If countries face a deficit in trade balance, they devalue their currency.

 If countries have a surplus in their trade balance, they revalue their currency.
CHAPTER-5
PUBLIC FINANCE AND FINANCIAL SECTOR IN ETHIOPIA

5.1. Public finance in Ethiopia
Definition: Public finance means public economics. Public finance deals with the financial
activity of the government such as collection of taxes, from those who benefited from the
provision of public good by the government, and use of those taxes for production and
distribution of public good and social services. Nevertheless, private finance deals with
individual financial activities.
5.2 Economic role of the government
The private firms may not provide certain goods and services. The reason is they are unwilling or
not allowed to produce. Therefore, the solution will be the government should have to take
responsibility.
1. Maintenance of law and order

So that property rights can be secured. This will increases the confidence of investors to
invest in the nation.
2. Achieving macro-economic stability
Controlling inflation, equal distribution of income, reducing unemployment…
3. Provision of public good and social services
Public goods- are goods, which all enjoy or consume in common. Some of the
characteristics of public good includes no subtraction non-rival, non-excludable, e.g.,
defense, judiciary, streetlight…
4. Adoption of sound economic and social policies
E.g. effective macroeconomic policies
5. Promotion of stabilizing economic growth
5.2 Historical Background of Public Finance
During the Derg
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The aim of the government was expanding public sector. The major characteristic of Derg in
public finance includes:
Government adopted special tax policies (high direct and indirect taxes to discourage
private sector)
Raised government expense on defense
Strong involvement of the government into the economy
High degree of centralization
Mismanagement of economic resources
Post 1991
EPRDF takes reforms to increase government revenue and reduced expenses. The government`s
aim was to reduce budget deficit.
Fiscal policy:-is a careful or a deliberate change in government expenditure and taxation to

achieve government objective.
Fiscal policy has two parts: Expansionary and contractionary fiscal policy
Expansionary Fiscal policy: Happens when the revenue of the government is decreasing, such
as reduction of taxes and when the expenditure pattern of the government was reducing.
Contractionary Fiscal policy: Happens when the revenue of the government was increasing and
the expense of the government was reduced.
Role and function of fiscal policy
1. Allocation of resources
The government collects taxes in order to provide public goods to the society.
2. Distribution of income
The government uses fiscal policy to narrow the income inequality.
3. Promotion of economic growth
When the expense of the government increases, aggregate demand increases, production rises,
employment and economic growth will also increases.
4. Stabilizing of the economy
This includes the balancing revenue and expense of the government, reducing fluctuation in
price, output and employment level.
5.3 Structure and performance of revenue and expenditure
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5.3.1 Government Revenue
Source of government revenue can be classified into tax and non-tax. Taxes from wage (salary),
agricultural income tax, and rural land use fee, business profit tax, Are examples of tax sources
of government revenues. The government revenue was increased from 21.79 billion in 2006/07
to 40.6 billion in 2008/09.
5.3.2 Government Expenditure
Data from MOFED (ministry of finance and economic development) indicates that the following
sectors absorb more than 90% of total expenditure in all regions: general administration (organ
of state, public order and security and justice), primary and secondary education (including
TVET), public health, agriculture and natural resources, clean water supply and rural road
construction and maintenance. In today`s economy, the importance of micro and small scale
enterprise and urban development are getting more attention in government policy. The major
reason is that they address urban problems like unemployment and poverty. On table 6.2, from
the period 2007-09, the share of recurrent expenditure shows increasing trend. From 2006-07,
government`s capital expenditure is increased and greater than recurrent expense.
5.4 Analysis of Government Budget and Deficit Financing
Government Budget:-is a financial plan of the government revenue and expenditure for a
specific period, usually for one fiscal year. Fiscal year of Ethiopia were starts on Hamle 01 (July
7) and Sene 30 (July 6).
The objectives of government budget includes: relating expenditure decision to policies, to

current and future resources
To efficiently implement programs
Budgeting
Revenue Expenditure
Revenue Budget
Annual forecast of government budget from tax, non-tax external assistance and capital
sources of revenues:
A. Ordinary Revenue
Tax Source of Government Revenue
1. Direct tax: - means a tax paid directly to the government by the persons on whom it’s
imposed. Some of its parts are:
A. Personal Income tax: - every person deriving income from employment in any
government or other private organization or NGO and income from employment were
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including any payments or gains in cash or in kind which he/she receives from
employees.
B. Business Income Tax: - is a tax imposed on firms or vocational activity or other
activity recognized as trade pays tax based on their profit.
C. Corporate tax: - is a direct tax levied on profits made by companies and often includes
capital gains of a company.
D. Inheritance Tax (Estate Tax):- it arises on the death of individual. It is a tax on the
property of a person who has died.
E. Transfer Tax: - a tax on passing of title of property from one person to another.
F. Tax on Dividends is income tax on dividend payments to the stockholders
(shareholders) of a company. It is a tax on the profit of shareholders.
G. Income from Games of chance: - is a tax on the winning at games of chance. E.g.,
lotteries are subject to tax at the rate of 15% who wins more than 100 birr.
H. Rental Income Tax: - is any payment you receive for the use or occupation of
property.
I. Interest Income on Deposits: - every person deriving income from interest on deposits
shall pay tax at the rate of 5%.
2. Indirect Tax: - are types of tax levied indirectly by consumer at the time of
purchase.
A. VAT (Value Added Tax)’- is a sales tax levied based on increase in value or price
of product at each stage in its manufacture and distribution and the cost of tax in
added at the final price and eventually paid by consumer on the purchase price of
15%.
B. Sales Tax: - is a consumption tax charged at the point of purchase for certain goods
and services.
C. Turn over Tax (TOT):- it is similar to sales tax or TOT. However, TOT is
imposed on those who are not registered for VAT in which their annual taxable
transaction is under the total value of birr 500,000.
D. Withholding Tax: - is a government requirement for the payer of an item of
income to withhold or deduct tax from the payment, and pay that tax to the
government.
E. Stamp Duty: - is a tax levied on documents. E.g. on majority of legal documents
like cheques, receipts, marriage licenses and land transactions. A physical stamp
(tax stamp) had to be attached to or impressed up on the document to denote that
stamp duty had been paid before the document was legally effective.
F. Excise duties: - are taxes imposed on selected goods, like luxury and basic goods,
which are demand inelastic. It is a tax on gasoline and other fuel and tax on tobacco
and alcohol.
3.Foreign trade tax: - it is a tax on export and import of products.
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Ethiopian Economy
A. Import Tax: - is a tax collected on imported goods. E.g., tariff is a tax levied mostly
on imported goods.
B. Export Tax: - is a tax collected on exported goods.
Non-Tax Source of Government Revenues
e.g., charges and fees, sales of government assets, government investment income,
privatization process.
B. External assistance
Capital revenue
5.4.2 Government Expenditure Budget expenditure
Recurrent Capital
ExpenditurEx
A. Recurrent expenditure
e
It consists of wages/salaries of government employees, operating expenses of government

ministries, subsidy, and miscellaneous expenses.
The highest share goes to general services (defense, order and security)
B. Capital expenditure
It is spending on economic development, social development; compensation payment…Is
spending on projects in mining and energy, road, public health and community services. The
highest share goes for economic development, which accounted 70% and followed by social
development, which accounted 20%.
5.4.3 Budgetary Deficit Financing
It occurs when expenditure of the government is greater than revenue. The most important aspect
of fiscal policy is management of budget deficit financing. Good government finances deficit by
non-inflationary method. E.g., by borrowing from commercial banking or foreign sources.
Unhealthy way of budget financing is printing paper money. There are three ways to finance
budget deficit:-
I. Domestic borrowing
II. External borrowing
III. Printing money
I. Domestic Borrowing
The government may borrow money from domestic sources like banks. When the government
borrows money from domestic sources, problem occurs called “crouding out effect” which
means when the government borrows money from domestic financial sources, lending capacity
of the commercial banks and insurance were reduced; so that they will increase, the interest rate
will increase. This will finally reduce investment. The reduction of investment due to domestic
borrowing is called croud out effect.
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Ethiopian Economy
II. External Borrowing

It happens when the government borrows money from foreign sources and multi-lateral
institutions. The consequence for this type of borrowing is it widens BOP and reduces a
country’s FOREX-reserves.
III. Issuing currency (printing money)
It is the creation of additional money and it’s not advisable because it aggravates inflation by
increasing money supply. In general, financing from foreign source is good than that of
borrowing from domestic sources or printing money. Because heavy reliance on domestic bank
is occurred and it excuses high money supply when the money is paid when the government
borrows from domestic sources. In Ethiopia, the overall fiscal deficit were improved and
reduced. The government finances by domestic and foreign loans.
5.5 Fiscal Decentralization and Public Sector Reform In Ethiopia
During The Derg

Economic management was characterized by high degree of centralization. Economic decisions
were come from top level and the government follows top-bottom approach.
During The Current Government

The government follows decentralization, which is a systematic delegation of authority at all
levels of management and in all of the organizations. Top management takes only major
decisions and formulates policies and the rest may be delegated to lower and middle level of
management. It is the extension of delegation.
Fiscal Decentralization
It is the sharing of revenue between regions and central government and introduced transfers and
subsidies.
Advantages of Fiscal Decentralization

 Through self-initiative program, each region may boost their capacity for
development of their regions.
 Narrows the gap between economic growth and development among regions.
 Regional governments are empowered to the extent levying taxes, and preparing and
administering their own budgets.
 Regions also entitled to collect their defined revenues, draw budget subsidies from
federal government and borrow from domestic sources.
This fiscal decentralization was initiated before adoption of constitution, during transitional
government of Ethiopia.
5.5.1 Personal Income Tax

It’s a part of direct tax levied on income of a person. The highest marginal Tax Rate on
income is 35%
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Ethiopian Economy
Monthly income (birr) percentage of income

1-150 No charge
151-650 10
651-1400 15
1401-2350 20
2351-3550 25
3551-5000 30
>5000 35
Personal income tax increases as personal earning increases.
e.g., Mss. Bethlehem earns 3000 birr. Calculate Personal income tax;
(150-0)×0 % = 150×0% = 0
(650-150) ×10% =500×10% =50
(1400-650) ×15% = 750×15% = 112.5
(2350-3000) ×25% = 650×25% = 162.5
Total income tax= 0+50+112.5+190+162.5 = 515
Total income = 3000 birr, income after income tax = 3000-515= 2485 birr.
Income taxes are of three types:
1. Progressive Tax
The tax rate increases as income increases. There is a direct relationship between income
and tax rate. It reduces tax burden on low-income people.
2. Regressive Tax
It has inverse relationship with income. The tax rate decreases as income increases. It
reduces the tax burden of high income peoples.
3. Proportional tax: - the tax rate is fixed and it imposes equal burden on both high and low
income people.
5.5.2 Business Income Tax
It is a tax imposed on commercial, professional or vocational activities recognized as trade

by commercial code f Ethiopia and carried on by any person for profit.
5.5.3 Indirect Tax
It is a type of tax levied on goods and services rather than persons. The consumer ultimately
pays in the form of higher price.
5.5.4 Foreign Trade Tax
It is a type of tax levied on export and import of a product.
Strengthening Institutional Framework
o The total revenue as a percentage of GDP reached 16.2%.

o Tax collection remains weak.
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Ethiopian Economy
Target of Fiscal Policy

 To reduce fiscal deficit as % of GDP
 Government want to expand provision of socio-economic services and expansion of
critical infrastructure
 Rationalizing public expenditure(making an expense with reasons)
 Adjusting public sector salaries
 Import exemption and limiting the number of zero-tariff related items
 Broadening tax base of society (introducing new tax systems e.g., VAT, rental
income tax)
Monetary policy and Financial Sectors in Ethiopia Monetary policy-refers to the management
of the money supply and its link to prices, interest rates and other economic variables. by central
bank for maintaining price and exchange rate stability and support sustainable economic growth
of Ethiopia
Historical Background of Money and Financial Sector in Ethiopia
Money –is anything that people are willing to accept in payment for goods and services or to
pay off debt. Before money was used as a medium of exchange, barter system was used. Then
metallic money made up of precious metals and paper money was used as money. Coins made
up of precious metals were disappeared because the intrinsic values of these metals were greater
than their face value. Exchange with the help of money was dated back to Axumite Kingdom.
Coins, minted from gold, silver and bronze were used to facilitate international trade. After the
fall of Axumite kingdom, salt and iron bar were used to conduct domestic trade. From 1789-
1887, Harari inhabitants used coins to conduct economic activities. The name of coins called
Mahlek and Ashrafi. Amole chew (salt bar) served as a medium of Exchange for a long period.
In the 19th century, Maria Theresa served as a medium of exchange in Ethiopia. Maria Theresa
were first minted in Vienna, Austria in 1741 and it contains 80% pure silver. It was widely
accepted as money in Ethiopia until 1945.
5.1.3 The role and function of central and commercial banks
Role and functions of National bank of Ethiopia
Central banks-is a common name for other nation and not established for seeking of profit.
It does not transact directly with public. In Ethiopia, it was established in 1964 with 10
million birr of capital. The bank is owned and operated by the government.
Responsibility of National Bank of Ethiopia
 Currency issue-the bank has an exclusive or monopolistic right to mint coins and print
money to bring uniformity in currency circulation.
 Bank of the government –the bank accepts cash and check, advice make draft, supplies
cash for salaries to the government.
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Ethiopian Economy
 Bankers of banks- it supervises and monitors the activity of commercial banks.

Commercial banks deposit their excess reserve in central bank and they put money as
RRR.
 Lender of the last resort- commercial banks borrow money from central bank at the time
of shortage of cash, central bank lend money with discount rate.
 Regulates FOREX- the bank keeps the national reserve of foreign currency and it
maintains monetary standards of a nation through exchange rate.
 The bank designs, issues and implements monetary policy of a nation through OMO,
DR and RRR.
 Manages and administers international reserve of a country, e.g., gold, valuable
goods like diamond.
 Others activity like issuing of debt instruments like t-bills, encouraging for the
formation of financial institutions, promotion of a balanced and accelerated economic
growth.
Roles and functions of commercial banks
Banks are established for the purpose of profit, they are profit oriented. Banks gain profit
through interest differential.
 Banks encourage people to save money

By paying interest rate, advertisement and by opening different branches, they
encourage people to save money.
 Accept deposits of different kind
Demand deposit-is a type of deposit, which is repayable by the bank on demand. E.g.
saving deposit.
Time deposit-is accepted by the bank for fixed time. If someone saves, he cannot withdraw
money until maturity date. The longer the date, the higher the interest rate will be. If the
person who deposited wants to withdraw the money for emergency, penalty on interest rate
will be levied.
 Advancing loans-deposits received by banks will be lent; the money is not kept idle.
 Help to expand money supply-through lending and saving process, they help to expand
flow of money. In addition, whenever a bank gives a loan, the bank creates saving account
on the name of the lender.
 Provision of general utility
A. Safe custody of valuables- e.g., locker facilities for customer to store valuable
products, and the bank charges annual rental payment.
B. Credit card-this card helps someone to purchase goods without direct cash payment.
C. Letter of credit- banks open letter of credit for importers and exporters.
D. Checks and travelers check-this check is issued at the time of travelling. It doesn’t
have interest rate
E. Sell and purchase foreign currencies
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Ethiopian Economy
F. Agency functions-banks travel funds from place to place, they pay insurance fee for
its customers, and they sell and purchase shares and t-bills of their customers…
Commercial bank of Ethiopia
It is the biggest and leading bank in Ethiopia. The bank has more than 171 branches. It was
established in 1963. The bank was merged with Addis bank in 1980. The bank performs what
other commercial bank performs.
Development bank of Ethiopia
In 1945 Agricultural bank was established, and in 1963 investment bank was established. In
1974, these two banks were merged together and renamed as Agriculture and Industrial
Development Bank. Its initial capital was 100,000 birr. From its important function, the bank
gives loan to agriculture investment development projects, controls, supervises and monitors
activities of projects financed by the bank.
Construction and business bank
Its first name was Housing and Saving Bank, which was established in 1975.its main role
includes advancing of loan to construction of house in urban areas. The bank also performs
similar activities that other commercial banks are doing.
Insurance service in Ethiopia
Insurance is needed because the future is uncertain and risky. e.g., accident, damage, so for these
causalities, insurance companies pay a return and it is called premium. In Ethiopia, since
Axumite era, there were traditional self-helping groups were existed like idir, equb and mahber.
Europeans started modern types of insurance in Ethiopia in 1920. The first insurance company
established in 1923 by an Austrian named Muzinger. The first insurance company owned by
Ethiopian government was established in 1951 with was named imperial insurance company of
Ethiopia.
5.2 Financial policy sector policy and reforms in Ethiopia
During Imperial period
The financial policy of the government was like capitalist economic system. There were private
banks owned by foreigners and Ethiopians. There was no capital ceiling by the government.
During the Derg period
The government nationalized all financial institutions. The National bank of Ethiopia
performs-
 Regulatory activity- the government regulates interest rates, FOREX.
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Ethiopian Economy
 Discriminates Lending Rate-the government charges high lending rate for private
borrowers and low lending rate for socialized sectors and cooperatives. Also the
government has low saving rate policy. For a deposit less than or equals to 100,000,
saving rate was 6% and for 100,000 and more, saving rate was 2%.
 Over-valued birr- Derg kept the exchange rate at low level and applied fixed exchange
rate system. The consequence is it damages export because foreigners were not willing
to trade with Ethiopia due to exchange rate policy.
 Followed high restrictive FOREX policy. The government restricted import of luxury
goods and levy high imported duty to stop outflow of FOREX. Consequently, due to the
above policy, smuggling of goods was increased. In addition, black market of FOREX
was increased as well. However, Derg achieved relative macroeconomic stability
through forced saving and the government raised FOREX reserve.
Financial policies of EPRDF
The objective of financial policy is achieving macroeconomic stability and bringing low level
of inflation. There is a conducive environment for private sectors in financial areas. The
government abolished discriminatory lending rate. The government fixed minimum deposit
and maximum lending rates since 1994, but later the ceiling was abolished in January 1998.
The government use indirect monetary policy like OMO and other monetary policy
instruments. In addition, the government devaluated birr in 1992 to increase export. i.e., the
value of birr in terms of foreign nation was decreased.
5.3. performance of the financial sector in Ethiopia
During the Derg period, the performance of governmental owned banks were poor. The
reason was that the government followed restrictive and discriminatory policy. The private
sectors were highly discriminated, e.g. advancement of credit to public enterprises at low
interest rate.
 Collection of loan from public have problems –the money that was borrowed from was
used improperly and the public unable to return back money. Here there are two concepts,
Narrow money and broad money.
A. Narrow money-includes currency in circulation + demand deposit. Alternatively, an asset
can be used as money directly.
B. Broad money-includes money one (M1) + saving +time deposit. It includes money that is
not used directly as money. Saving + time deposit are called quasi (near) money. Quasi
money shows annual growth rate of 10%. Also broad money shows annual growth rate of
13.4% during Derg regime.
During EPRDF government followed tight monetary policy until 1996, like
contractionary monetary policy. The performance of national bank was increasing after
1991. The performance of financial sector during EPRDF was high as compared to Derg
regime.
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Ethiopian Economy
5.4. problems and possible remedies for the financial sector in Ethiopia
Major problems
Financial sector in Ethiopia is under developed. The economy is less monetized; i.e. limited
circulation of money and financial institutions throughout the country. Transactions are
mainly conducted informally.
A. Some borrowers fails to repay back loans at the maturity date

B. Banks are forced to sell collateral that takes time, a long process and effort.
C. Weak competition in financial areas due to small number of bank
D. Shortage of efficient and skilled labor force
E. Small number of banks that convert cash to credit
F. Lackluster financial deepening in the country
G. Low innovation in financial products
H. Limited availability of medium-term financing loan for agriculture and other sectors of
the economy.
Remedies- expanding small financial institutions throughout the country can help to channel
surplus fund from saver to borrowers. In addition, effort is needed to expand type of financial
services provided by existing financial institutions.
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Ethiopian Economy

Department of Agricultural Economics; OBU Page 1

Department of Agricultural Economics; OBU Page 2

1.2.2. Land and Climate

Department of Agricultural Economics; OBU Page 3

Department of Agricultural Economics; OBU Page 4

Department of Agricultural Economics; OBU Page 5

Department of Agricultural Economics; OBU Page 6

Department of Agricultural Economics; OBU Page 7

Department of Agricultural Economics; OBU Page 8

Department of Agricultural Economics; OBU Page 9

Department of Agricultural Economics; OBU Page 10

Comprehensive Package Projects

Department of Agricultural Economics; OBU Page 11

 The objectives of these package projects include:

Department of Agricultural Economics; OBU Page 12

Department of Agricultural Economics; OBU Page 13

Department of Agricultural Economics; OBU Page 14

Department of Agricultural Economics; OBU Page 15

Department of Agricultural Economics; OBU Page 16

Department of Agricultural Economics; OBU Page 17

Department of Agricultural Economics; OBU Page 18

Department of Agricultural Economics; OBU Page 20

Department of Agricultural Economics; OBU Page 21

Department of Agricultural Economics; OBU Page 22

Department of Agricultural Economics; OBU Page 23

Department of Agricultural Economics; OBU Page 24

Department of Agricultural Economics; OBU Page 25

What Is Capital Formation? It’s Role in Economic Development

Capital formation is one of the major factors in economic development. Capital

Process of Capital Formation

Department of Agricultural Economics; OBU Page 27

Significance of Capital formation

The importance or significance of capital formation in the process of economic development of a

 Building up of infrastructures. The building up of sound infrastructure like, road,

Department of Agricultural Economics; OBU Page 28

Sources of Capital Formation

(a) Internal Sources (b) External Sources

Department of Agricultural Economics; OBU Page 29

Department of Agricultural Economics; OBU Page 30

Objective Approach Poverty

Department of Agricultural Economics; OBU Page 31

Department of Agricultural Economics; OBU Page 32

1. The dynamics of population growth.

2. Very low productivity, structural bottlenecks.

3. Dependence on unreliable rainfall.

4. Being land locked combine to pose serious challenges.

Relative poverty lines

3 Promote Gender  Eliminate Gender disparity in primary and

5 Improve Maternal  Reduce by three quarters the maternal mortality

6 Combat HIV/AIDS,  Halt and begin to reverse the spread of HIV/AIDS

7 Ensure Environmental  Integrate the principles of sustainable development

8 Develop a global  Develop further an open trading and financial

develop decent and productive work for youth.

3.4. Poor Socio Economic Infrastructure

4. IMPORT AND EXPORT PERFORMANCE

4.1. Trade in the Ethiopian Economy

Why nations trade?