Rebalancing Economic Growth in Ethiopia

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Albeit impressive economic growth which is hailed for reducing absolute poverty by half, Ethiopia stands among the crowd to be challenged by sharing the benefits of this growth among its vulnerable urban poor, a group which has grown in size in the past decade.

Accordingly, the issue of the vulnerable and the destitute looks to be creeping on to the policymakers and their development partners in preceding months. Both the IMF and WB in their recent research works regarding Ethiopia has dealt with the issue of urban poverty and associated income inequality. Almost equally alert is the Government of Ethiopia which has finalized its preparation to roll out a USD 559 million Urban Productive Safety Net Program, write Asrat Seyoum and Birhanu Fikade.

Solomon Eshetu, mid-thirties and a father of two, is one of the new inductees to Addis Ababa’s used car import business. Prior to his newly found line of work, Solomon worked in the construction sector where he struggled to make ends meet. On one occasion, he managed to travel to Europe invited by a friend with whom he grew up with.

“I was not fully sure if I was going to come back,” Solomon remembers. But, little did he know that this occasion would open his eyes to get into the used car import business which resulted in significantly altering his income trajectory.

What has started as a small business where he imported two or three cars a year to supply mostly the domestic car dealers, eventually evolved to a sizable car market around Meskel flower. His first car dealership, Sol G, opened doors only a year-and-a-half ago. And, he says he has experienced nothing but success since he started his own dealership.

Automobiles are selling like hotcakes these days, Solomon told The Reporter. It is not only the traditional car brands like Toyota which are doing so well either. In fact, lesser known brands in Ethiopia like like Mitsubishi are penetrating the Addis Ababa market by his account.

“I have to admit, the modern Yaris-Vitz models, hatchback subcompact cars, are the most favorite in the Ethiopian market. Nevertheless, these days, Mitsubishi pickup trucks are growing to be the new favorite of the people,” he says.

They are not that cheaper in price either. According to the current market trend, an average pickup truck is priced well above 600,000 birr (USD 30,000 at 20 birr/dollar exchange rate). Sol G is one of many mushrooming car dealerships in town. These days, it has become common to see big residential compounds in prime locations of the city turning into modern car markets and dealerships.


These auto shops are also slowly changing in terms of the composition of cars that they carry in the dealerships. Previously, these dealerships dominantly sold Japan made Toyota automobiles which are both fuel efficient and reasonably priced. If one notices, nowadays, some dealerships in town are carrying fast sports cars and luxury convertibles.

The irrefutable fact, however, is that automobiles and real estate properties are two consumption items which are largely accorded a luxury status in the current Ethiopian reality. It seems that reality is shifting slightly in recent years and the likes of Solomon and his used car business more than attest to this emerging trend.

Ugly face of urban poverty

The overall income levels in Ethiopia have seen a significant leap in a timespan of two decades. This is evident from the double digit economic growth and the improvement of per capita income from around USD 100 to USD 710 in the specified period of time. More than the overall growth and improvement in income, decline in poverty levels seems to be a laudable achievement for the government.

Ethiopia struggled with poverty for many years. For instance, according to the official data, some 60 percent of the overall Ethiopian population lived in poverty two decades ago. Fast forward to the present day, the poverty head count has declined to 29 percent, realizing poverty reduction target of the Millennium Development Goals (MDGs). For instance, since 2005, some 2.5 million people have been lifted out of poverty in Ethiopia using the World Bank poverty metric of 1.25 dollars/day.

Needless to say, the impact of poverty alleviation in rural areas is highly pronounced in the Ethiopian context since 80 percent of the population live and work in the rural setting. This too is slightly shifting across the years. During the last population census conducted in 2007, the total number of urban population in Ethiopia was recorded to be 11.7 million; but this figure is fast evolving and currently total urban population has reached a 19 million accounting for 20 percent of overall population.

This too is projected to grow to 30 percent by 2034 by some estimates. This trend is corroborated by the high rate of urbanization in Ethiopia which is close to 4.8 percent almost double the population number.

With a growing number of people living in urban centers, urban poverty is becoming something of a concern for the government and development partners alike. For instance, in 2011, according to official figures, the overall, urban poverty headcount was 25.7 percent and was declining at a rate that is lower than that of rural areas. In fact, actual reverse in consumption growth has been recorded in large cities especially during the high inflation period of 2005 to 2011 as wages from non-agricultural sectors was not improving at a rate that commensurate soaring food and living expenses. For instance, in Addis Ababa and Dire Dawa poverty incidence still looks to be quite high at 28 percent.


Timely response

As to why the speed of poverty reduction is not uniform across rural and urban settings, one primary departure point seems to be the existence of the Productive Safety Net Program (PSNP). This program was hailed as one of the biggest in Africa, which aimed to encompassed close to 10 million people since its inception 2005. The program was started on a twin goal of bridging consumption gap in rural and farm households created by the seasonal variation in harvest and food production. On top of that, the program carried a goal of building household assets by offering cash and in-kind transfers for public work in between harvest seasons.

The program from design took into consideration the unique nature of rainfall patterns and food production in Ethiopia and filling the gap with work for pay program.

Attesting to the growing concern of the authorities over poverty levels in urban areas, recently, the government has decided to take a step to extend the PSNP to some 972 cities, towns and urban centers. The program dubbed the Urban Productive Safety Net Program (UPSNP) is currently in its design phases and is expected to roll out in the current fiscal year.

Abraham Petros is the chairman of the committee, which is appointed to prepare the UPSNP strategy at Ministry of Urban Development and Housing (MoUDH). And by his estimates, the program will commence around July this year, the latest. Thus far, the safety net program is planning to incorporate 4.7 million people who are classified as poor urbanites and is expected to run for 10 consecutive years in two distinct phases. The first phase of the program will entail a financial outlay of USD 559 million birr of which the USD 259 million will be covered by the government while the rest – USD 300 million – will be covered by the World Bank (International Development Association IDA credit facility).


The primary target for UPSNP would be the so-called vulnerable section of society and the urban “destitute” that accounts for two percent of the overall urban poor and are found in worst conditions than the poor in the rural areas. Largely, the “destitute” are the faces of urban poverty, according to the project document; and these group incorporate those living on the streets comprising street children, the homeless, and beggars. The vulnerable mainly include the chronically ill, the elderly and the people with disabilities. On top of that, able bodied, who have no means of employment and generating income, would be the primary targets of the program.

Targeting the very poor

According to Abraham, his ministry is in charge of the preparation of the strategy while the implementation would also involve the Ministry of Labor and Social Affairs (MoLSA). Thus far, what is known about the project is that it will have three components which include in-kind or cash transfers to the urban poor, livelihood support and institutional strengthening and program management.

Obviously, the larger portion of the finances, more than USD 400 million will be allocated to the in-kind or cash transfer that will be made to the people who are incorporated in this program. In this component, there are two subcomponents of unconditional and conditional transfer. The latter ties the transfer of benefit to public work that would include a menu of society asset building projects such as urban greenery development, solid waste management, construction of cobblestone roads, building of drainage and other public infrastructures.

Meanwhile, those who cannot get involved with work due to age, disability and ill-health would also not be left out; rather a monthly unconditional transfer of 170 birr per person (8.25 dollars) would be allotted to them under the unconditional subcomponent. The case of the “destitute” is quite different, according to the project document.

Their need would not be limited to marginal support for their income as they need psycho-emotional support on top of housing and health care facilities. The monthly transfer for this group could go as high as 600 birr/month/person. Abraham told The Reporter that at least 70 percent of overall transfer should be conditional where payment is made based on the public work, which will be designed to be largely labor intensive.


Nevertheless, the rate of transfer for the conditional subcomponent would determine on the basis that it would discourage involved parties from seeking employment in the labor market. The rates should be low enough not to discourage work in the relatively unskilled and semi-skilled employment sectors, the document says. According to Abraham, these conditions would definitely depend on the condition of each cities and urban centers that implements the program. At the current market conditions, a daily rate of 60 birr (2.91 dollars) is considered to be a fair compensator rate for the conditional transfer category.

On the other hand, the livelihood component seems to be possible exist strategy of the program where the authorities invest in both soft and hard skills of the participant to ensure their graduation from the program in five years time. Abraham looks rather optimistic regarding graduation from poverty. He argues, if all goes well, the program will lift 70 percent of the overall urban poor from poverty by the end of the first phase.


The fact remains, however, that Ethiopia is still a country that is showing great progress in terms of poverty reduction whether rural or urban. The incidence of poverty and reduction over the past decades are not seen to be going in tandem with severity and depth of poverty in the country, according to the recent report by the World Bank Group dubbed Poverty Assessment, 2014.

The assessment shed light on the growth in consumption and resulting reduction in poverty both in rural and urban areas; but it argued that the pattern of consumption resulted in rise of urban inequality. It added that the benefit from growth is not uniform among the high income and lower income groups especially in the urban areas.

While, customers of Solomon and his business associate scramble to get access to better model cars or choose between the sedan and pickup trucks, the urban poor to the contrary is at different end of this picture. Measured at 30 percent by consumption Gini coefficient, Ethiopia is dubbed as one of the most egalitarian societies in the continent and world alike. Traditionally, the inequality was face of neither rural nor urban societies in Ethiopia.

However, if there is one trend that both authorities and partners observe is the inequality is emerging especially in urban centers of Ethiopia. Berihu Assefa (PhD), researcher at Ethiopia Development Research Institute (EDRI), deems that inequality in Ethiopia depends highly on access to land. He argues that land is relatively fairly distributed among the rural community and hence it will be less of factor to explain disparities in income. However, we cannot say the same for urban areas, especially Addis Ababa, Berihu says. In the majority of cases, in urban areas those who have access to plot of land would automatically be promoted to high-income category. This creates great difference in income.

Nevertheless, most including the authorities argue that, the income inequality is becoming an issue for Ethiopia in recent years. And this is pronounced more in urban centers mainly the capital, Addis Ababa, where one-fifth of urban population in Ethiopia resides. Recent reports by international institutions like the IMF as well shows an emerging trend of income inequality in a country which is rather known for egalitarian consumption behavior.

Inequality is deemed “macro-important” in recent years according to IMF’s report. It further argued that any and all policies should be studied for their potential impact on income distribution and effect on inequality. Nevertheless, some scholars also argue that low consumption Gini coefficient do not capture the whole story when it comes to income inequality. They argue that rather than considering consumption expenditure alone to measure the disparity, wealth and income level based measures would be superior. In fact, they argue that the level of urban inequality in Ethiopia would be quite higher above 50 percent if wealth and/or income based Gini is the measure.

For now, Solomon and his friends would stand to reap the benefits of the boom almost completely unaware or unconcerned about the huge disparities in the overall economy.

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