Economic Growth and Income Inequality in Ethiopia

By Lakech A
March 13th, 2009

Since 2003, Ethiopia’s economy has been registering high rates of growth ranging from 7 to 10% per year (depending upon different sources of information).

High government officials have never missed an opportunity in telling the world that the party’s agriculture-led industrial development program has brought about an expansion of the productive capacity of the country’s economy to such an extent that it could join the rank of mid- income countries in a few years. In fact, the current president of the World Bank, Zoelleck, in his recent visit to the country had lauded the excellent performance of the government for its poverty reduction program. Of course, one has to temper such wild thoughts and diplomatic platitudes with a sober analysis of basic economic realities of average per capita incomes both in real gross domestic product and purchasing power parity terms and the attendant problem of high inflation rate for every major commodity and service that matters most. Ground realities on critical socio-economic indicators clearly dispel any hallucination on the part of those who generate such politically-motivated and grossly exaggerated claims.
Indeed, the high rate of economic growth over the past five or so years has manifested itself in a construction boom in the capital city and a significant expansion in the road infrastructure of the country. Likewise, a narrow class of business people, political cadres, and bureaucrats has struck it rich through a wide range of entitlements that its positions have garnered for it in the new political economy of the country. The gap between this tiny fraction of Ethiopia’s population and the overwhelmingly poor people is growing with astounding scale and intensity. This is a critical economic and political problem that needs to be systematically addressed by the government, civil society institutions and the international development partners that provide much of the foreign exchange support to the country.
Income inequality or more broadly opportunity inequality is a concomitant of economic growth and development of nations. Whether it expresses itself in income inequalities between persons, regions, social classes or ethnic identities is a matter of specific cultural contexts and stages of development. Ethiopia is one of the poorest countries in the world both in terms of GDP/capita income or PPP/capita. World Bank and other international sources of economic and social information suggest that close to 80% of Ethiopia’s population lives in extreme poverty (less than $1/person/day). If the 2$/person/day benchmark is taken, more than 90% of the country’s population could be legitimately categorized as living in absolute poverty. In such condition of income homogeneity, it may sound absurd to talk about inequality as a major concern in this initial phase of development. However, income inequality becomes a retardant factor in the dynamics of economic growth and development largely due to the fact that market forces are weakly developed and cannot serve as effective resource allocation mechanisms. When coupled with poor governance structures and inadequate manpower capacity, the problem becomes detrimental to sound socio-economic growth and broad-based national development.
Thus the issue of income and opportunity inequality in the economy becomes a critical one not only from the practical purchasing power differential that it creates but also its actual and potential impact on the expansion of the productive capacity of the economy. The lack of systematic income related studies on a national level makes it difficult to draw objective conclusions. This condition cannot however, preclude meaningful discourse on the subject matter. The daily realities of life for the vast majority of Ethiopians seem to suggest that the major beneficiaries of the fast pace of economic growth are the politicians, well-connected business people and bureaucrats. The massive housing program in the capital city has definitely benefitted a narrow group of bureaucrats and party affiliated individuals who may not fit into the category of the rich. The employment generation impact of the significant construction activity in the housing and transport sectors cannot be underestimated either. Elsewhere, in the economy, the political propaganda about “millionaire” peasants is undoubtedly either a product of lack of sound socio-economic imagination of scale or an overzealous political posturing by ill-informed and poorly-educated cadres of the governing party. In a country where 12 million people or 15%t of the estimated 80 million people face food insecurity bordering on famine, such simplistic assertions about the prosperity of the Ethiopian peasant cannot be anything but entertaining. Undoubtedly, many peasants could have improved their lots through the application of production increasing technologies and the politically manipulated local market system for grains and agricultural produce in general
The urban scene is where the contrast between the newly rich and the absurdly poor is most stark and disconcerting. Addis Ababa, the capital city, has definitely registered commendable and significant quantitative and qualitative growth in its housing amenities and basic infrastructures and services. It is also here where massive unemployment and underemployment, beggary, prostitution, vagrancy and a host of other social problems manifest themselves with vexing scale and tenacity. The gap between the well-heeled and wheeled ‘nouveau riche’ and the vast majority of the urban population expresses itself in absurdities of conspicuous consumerism with all the trappings of western gated- communities on one hand and the gut-wrenching poverty of the unemployed, the street children, orphans, the aged and the homeless. Gas guzzling hammers and other four wheel drive vehicles have become the signs of success as has the mindless mimicry of western dresses, fashions and gadgets. Multi-million birr homes with swimming pools and all the outlandish design concepts of American middle class and upper class homes are vying for space amid the hundreds of thousands of substandard mud and wood hovels that house the majority of urban dwellers and have earned the capital city the ignonym of the “slum capital of Africa”. The new elite leaves no stone unturned in displaying its wealth through a cacophony of gross and crass displays of wealth and other ‘signifiers’ of social worth. The moral bankruptcy of those who cherish this obscene exhibitionism of wealth is quite obvious and does not bode well with the rather austere and subdued living styles of most Ethiopians. With the mindless aping of western consumption patterns, we may soon celebrate ‘Thanksgiving Day”, “Valentine’s Day”, “Halloween” and even “Columbus Day”. That is what happens when a nation loses its moral compass.
The growing inequality of wealth, income and opportunity is particularly more pernicious when it is tinged with ethnic and party affiliation. It is widely alleged that ethnic identity and party affiliation have become significant factors in determining access to employment, business and decision-making power. If true, it not only creates resentment among the poor and the broad segment of other identities but also insecurity among the rich who use all forms of subterfuges to transfer their wealth to foreign banks and countries. The positive incentive effect that income inequality is often credited with can only bear system-wide results when it motivates people to work harder, produce more, generate employment and make innovations. Unfortunately, such creative dimensions of inequality do not seem to operate with any degree of efficacy in Ethiopia where government is basically suspended in political thin air and markets are not strong enough to reward effort and innovation. Thus the inequality in Ethiopia is what some scholars call destructive in that it bestows privileges to the already well-off without increasing the possibility of lesser rich and poor people to contribute to growth and development. This form of inequality leads to broader societal moral lapse into systemic and widespread corruption at the work place, the market and even the spiritual institutions of society such as churches, mosques and civil society organizations. Poor public policy and failure of government programs are results that emanate from a condition in which the rich and their close associates face no systematic checks and balances. Selfish interests in society know no physical and moral bounds for their behavior. What Ethiopia is facing today is a very difficult type of economic growth in which benefits are inordinately concentrated in a thin layer of well-connected political, business and bureaucratic groups and their hangers-on. Economic growth and development that does little to uplift the millions of poor people who recurrently suffer from food insecurity, poor level of consumption of basic goods and services can neither be sustainable in its process nor politically and socially uniting and elevating in its purpose. It has all the ingredients that make discord and corruption norms of social behavior and civic moral standard. The role of government should be to create opportunities to the widest possible horizon so that economic growth and development can become both wealth generating and socially uplifting. High rates of economic growth are definitely indicators of a positive trend in any society’s production and consumption functions. However, they can have significant negative externalities if the benefits are concentrated in the hands of the few who have entitled themselves to the booty through unfair political, business and ethnic affiliations and machinations. That is why the struggle for democracy and social accountability holds ever more urgency and public resolve in present day Ethiopia than ever before. It is a time when every Ethiopian has a moral and patriotic obligation to pose the higher question of the direction that the country is currently going in the economic, political and cultural spheres of national life. Economic growth is necessary and supportable to the extent that it promotes the reproduction of wealth for the benefit of all Ethiopians. Economic Growth that accumulates wealth for a tiny minority of internal and external speculators and rent-seekers and mercilessly exploits the labor and natural resources of the country cannot be anything but destructive and unsustainable.