Ethiopia’s Trade and Investment: Policy Priorities for the New Government

Abstract

As Ethiopia’s new government begins work in September 2010, it is armed with a new plan: the Growth and Transformation Plan (GTP). Trade and foreign direct investment (FDI) figure in the new plan but less reliance is placed on FDI inflows than in the past and as much emphasis appears to be placed on import substitution as on export expansion to reduce the trade deficit. Ethiopia has tried different trade strategies in the past, the perennial goal being to diversify its exports to reduce dependence on coffee and other cash crops. Nonetheless, Ethiopia has a low share of trade in GDP, its exports continue to have limited diversification, and its trade deficit has widened significantly. This paper argues that Ethiopia’s trade performance has been held back by a combination of factors that are amenable to policy treatment, including very high trade costs due to poor trade logistics and burdensome official requirements, an unsupportive macroeconomic policy mix, and private sector under-development that is at least partially attributable to weaknesses in the microeconomic framework. By the same token, it argues that targeted infrastructure and regional cooperation developments, in conjunction with a trade friendly macroeconomic policy and domestic administrative reforms would, properly sequenced, enable Ethiopia to use its abundant factor of production – cheap labour – to drive its development on a basis less vulnerable to the risks inherent in rain-based agricultural production, including participation in processing trade. On this basis, it identifies a set of priority initiatives for the new government.

Keywords: Ethiopia, trade policy, liberalization, facilitation

JEL Classification: F13, F14, F15