The engagement works across government ministries with senior officials at the GOE to: improve understanding of the structure of the Ethiopian economy and the constraints on its sustained growth; inform a new development strategy that addresses economic growth and transformation; and build a research base to analyze how to identify, prioritize, and implement policies and investment opportunities to drive transformation.
This project works in collaboration with the GOE to apply two core frameworks (Growth Diagnostics and Economic Complexity) as part of a central diagnosis of the economy.
More About this project
It works as collaboratively as possible to better understand and address critical problems through activity “workstreams.”
Each workstream involves interaction between Growth Lab researchers and GOE teams in order to work iteratively to understand and address a binding problem and/or latent opportunity. Through workstreams, the activity seeks to relax binding constraints and expand government capabilities through iterative policy research.
Project Theory of Change
In late 2019, Ethiopia launched its Homegrown Economic Reform Agenda to resolve macroeconomic imbalances that threaten the sustainability of economic growth and lay stronger foundations for continued job creation and inclusive development. Project research and capacity building are targeted to support the success of this agenda through core frameworks of Growth Diagnostics and Economic Complexity as well as through problem-based research support and training of policymakers and civil servants.
This diagnosis is made possible by the generous support of the American people through the United States Agency for International Development (USAID). The contents are the responsibility of the Growth Lab and do not necessarily reflect the views of USAID or the United States Government.
Economic growth has slowed in Ethiopia over the past several years and threatens to slow further as a result of a foreign exchange imbalance. The economy is currently unable to generate the amount of foreign exchange that the process of economic growth requires, which has led to a series of increasingly severe macroeconomic imbalances. While Ethiopia’s two Growth and Transformation Plans of the past decade have been targeted to deliver a coordinated push in public infrastructure to allow for more private sector competitiveness, several issues have stood in the way of success. Most importantly, Ethiopia’s access to external sources of government (and SOE) financing has been constrained due to external debt sustainability concerns, which has led to an unsustainable use of domestic financing through financial repression. This has created numerous macroeconomic imbalances, including persistently high and volatile inflation, which have created vicious cycles that have constrained foreign exchange generation further. Without the ability to generate or borrow sufficient foreign exchange to pay for the imports that the economy demands, Ethiopia has been forced to ration imports, which has slowed growth and made the economy increasingly inefficient.
Resolving the fundamental constraint of foreign exchange in the short-term is possible with the support of an IMF program launched alongside Ethiopia’s Homegrown Economic Reform Agenda. However, growth in the medium-term will require accelerating diversification of Ethiopia’s exports such that the economy generates sufficient foreign exchange on its own. The project has applied Economic Complexity tools and frameworks to prioritize key opportunities for more rapid export diversification and has identified key challenges that stand in the way of these opportunities materializing.
Based on core analyses and continuous collaboration with GOE counterparts, the project works across the following areas to help GOE officials better understand economic challenges and design policies and initiatives to address them. Current workstreams include:
- Refinement and sequencing of Homegrown Economic Reform Agenda programs and strategic initiatives based on Growth Diagnostic and Economic Complexity findings
- Macroeconomic policy research to better understand exchange rate, inflation and monetary policy issues
- Improving investment promotion and export development
- Research toward improving the delivery of key public goods and the delivery of public services, including through research on partial privatization modalities
- COVID-19 related research toward coordination of adaptive epidemiological and economic support measures