Burgess COMMENTARY

Peter Burgess

Ethiopia is one of Africa's success stories. Personal disposable income growth has been increasing at an average rate of 6% over the past five years. We forecast that this will edge up to an average of 7% a year from now to the end of the decade, with 2017 being the transition point when personal income grows faster in Ethiopia than in China. For a country long beset by poverty, this rough doubling of real personal income over a decade is great news and is catalysing investment into the country rather than aid flows, with one example being Peugeot's opening of an assembly plant in early July to supply the local market.

One of the key success factors has been an improvement in government policy. There is some evidence of this in the government's latest budget. The largest expenditure item remains capital expenditure, a sensible decision in a country where infrastructure is a barrier to productive livelihoods, and where future growth is expected to be strong. One downside is that the government spends almost as much on subsidies as it does on investment. In a country like Ethiopia where many remain outside of the formal sector, price subsidies can be an effective means of income redistribution, but often the benefits are captured by relatively well-off urban middle-classes. If the ongoing moves to improve revenue collection were combined with a targeted reduction in subsidy spending, the public sector could do even more to contribute to developing the economy and improving livelihoods.

What do you think the Ethiopian government should focus on? Let me know via Twitter @Baptist_Simon or email on simonjbaptist@eiu.com.

Best regards,

Simon Baptist