While Ethiopia’s public sector-led development strategy has delivered strong results over the past decade, it has been facing significant challenges in recent years. A model-based analysis of the country’s investment program indicates that, despite positive long-run growth effects, transition challenges and macroeconomic trade-offs are associated with different financing strategies. Heavy reliance on domestic bank borrowing may require substantial fiscal and macroeconomic adjustments as well as entail a sharp increase in inflation. External commercial borrowing, on the other hand, may ease these adjustments but at the cost of significant increases in debt to GDP ratios.
Comparing Ethiopia’s development experience—especially in terms of structural transformation and competitiveness—with that of selected Asian countries indicates differences which point to possible adjustments in Ethiopia’s development approach. This note argues that for Ethiopia to continue sustaining robust growth, leveraging the transformation power of the private sector, especially entrepreneurs, is essential.
Ethiopia is pursuing a development strategy focused on promoting growth through high public investment. The strategy involves concentrating government expenditures on human capital and social sectors and a dominant role for public enterprises in undertaking critical infrastructure investments. The authorities adopted a 5–year Growth and Transformation Plan (GTP) in November 2010, which aimed at average annual GDP growth of over 11 percent and achieving the Millennium Development Goals (MDGs). Among its main pillars are raising agricultural output and productivity, promoting industrialization, and investing heavily in infrastructure.
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