When Will Ethiopia Become a Middle Income country?

Ethiopia’s ambition to join the middle income group of countries started after completing the Sustainable Development and Poverty Reduction Program (SDRP) about a decade ago. The SDRP was a precursor to the strategic plan of what is known as the GTP that was launched in 2010.  Accordingly, an attempt to answer the question of, how soon and under what economic growth scenarios is Ethiopia likely to become a middle income country, has been of some interest for some time.
At the time, under some plausible assumptions, this author argued that it is likely that it will take between 22   to 48 years (under best and worst case scenarios, respectively) for Ethiopia to become a middle income country. In the absence of any major initiatives, this was at least what the growth performance of the country at the time suggested. Major changes have taken place and some opportunities and challenges have emerged since then. The purpose of this brief note is, therefore, to update that exercise in light of new developments (a more specific growth target and other economic plans) and  a significant (both potential and actual) boost to the amount of energy that has been and will be potentially generated in the country.

It is true that, in addition to the positive developments that will expedite the time to reach the status of a middle income country, some constraints (such as depreciated currency and inflationary pressures) have also emerged that could potentially delay the speed of meeting that target. In what follows, we calculate the new possible trajectories of GDP per capita by modifying some of the assumptions used about eight years or so ago and see if the conclusions reached then vary or still hold. Among the crucial assumptions revised in this brief note are:
(a) Population growth rate is assumed to average 2 percent (relative to 2.75 that was used then),
(b) The exchange rate will average around 20 Birr/USD for simplicity, and
(c) Based on preliminary estimates (though it is still work-in-progress and too technical to explain it here) an increase in energy consumption has an appreciable and significant positive impact on GDP growth. 
Based on the above modifications the growth of GDP per capita is calculated and the time path examined relative to the target of the income threshold as established by the World Bank to categorize countries as low, middle and high income. 
As shown in Fig. 1, when the initial calculation was made, it was projected that Ethiopia will join the middle income countries as early as 2021 or as late as 2049, assuming best case and worst case scenarios, respectively. As a middle ground (base case) scenario was projected that Ethiopia will become a middle income county by 2028.
The growth rates used in calculating the projection were 10 year (7%), 5 year (9.02%) and 3 year (11%) historical growth averages, for worst, base and best case scenarios, respectively. Clearly, because the first scenario included years when negative growth rates were recorded in Ethiopia, the gap between the first and last scenarios was huge.
But recent developments in Ethiopia seem to have significantly improved the prospect of joining a middle income country sooner assuming the target still remains the same. This is mainly because (as one Member of Parliament at the time asked me why not I focus on the best case than on the base case) the best case growth rate at the time is what has been realized in the last five years. In other words, according to Ethiopia’s Ministry of Finance and Economic Development Data, the Ethiopian economy on average grew by about 11.2 percent between 2007/8 and 2011/12.
Accordingly, based on the assumptions stated above and the recent performance of the economy, the projection is revised to examine the growth path of the Ethiopian economy. The growth rates used are 9.02 (worst case), 11 (base case) and 15 percent (best case) scenarios. In short, as shown in Fig. 2, the projections indicate that Ethiopia will achieve a middle income status (GDP per capita of USD 1025) in 2022/23, 2026/ 27 and 2031/32 under best, base and worst case scenarios.
As could be seen from the figures, Ethiopia’s prospect of becoming a middle income country has significantly improved under the revised projections. In fact, if the revised assumptions and hence projections hold true, Ethiopia will join the middle income group in about 9 years (at best) or in about 18 years at worst. The important question is; which is more likely to be the case? Prudence suggests that the most likely scenario to hold is the base case in which Ethiopia will become a middle income country in about 13 years (or by 2026/7).
It is important to note that the projections of the best case scenario in this note are close to the predictions of the GTP. This is partly because they both used a GDP growth rate of 15%, even though minor adjustments are made in this exercise for population growth, inflation, exchange rate depreciation, to some extent inflation and on the positive impact of energy consumption on GDP.
It is also important to highlight that the time path that Ethiopia will likely take to become a middle income country, as calculated here, will be shorter or longer depending on the realization or management of the following challenges and opportunities. This is of course in addition to possible errors and omissions in the calculation of the projections and the uncontrollable international environment that faces a small country like Ethiopia.
In broad terms, among the crucial challenges and opportunities that are likely to delay or expedite the prospect of Ethiopia becoming a middle income country are the following:
1. Challenges:
Macroeconomic stability due to:
Resource gap
Exchange rate variability/stability
Inflationary pressures
Limitation in Policy implementation capacity
2. Opportunities:
The unleashed growth momentum and what it has created
The physical and human infrastructure recently created
The advances made in procuring relatively more reliable energy sources.

 

The author is Haile Kebret and can be contacted at: Hailekebret@yahoo.com