Economy - Postrevolution Period

Economy - Postrevolution Period

The l974 revolution resulted in the nationalization and restructuring of the Ethiopian economy. After the revolution, the country's economy can be viewed as having gone through four phases.

Internal political upheaval, armed conflict, and radical institutional reform marked the 1974-78 period of the revolution. There was little economic growth; instead, the government's nationalization measures and the highly unstable political climate caused economic dislocation in sectors such as agriculture and manufacturing. Additionally, the military budget consumed a substantial portion of the nation's resources. As a result of these problems, GDP increased at an average annual rate of only 0.4 percent. Moreover, the current account deficit and the overall fiscal deficit widened, and the retail price index jumped, experiencing a l6.5 percent average annual increase.

In the second phase (1978-80), the economy began to recover as the government consolidated power and implemented institutional reforms. The government's new Development Through Cooperation Campaign (commonly referred to as zemecha) also contributed to the economy's improvement. More important, security conditions improved as internal and external threats subsided. In the aftermath of the 1977-78 Ogaden War and the decline in rebel activity in Eritrea, Addis Ababa set production targets and mobilized the resources needed to improve economic conditions. Consequently, GDP grew at an average annual rate of 5.7 percent. Benefiting from good weather, agricultural production increased at an average annual rate of 3.6 percent, and manufacturing increased at an average annual rate of l8.9 percent, as many closed plants, particularly in Eritrea, reopened. The current account deficit and the overall fiscal deficit remained below 5 percent of GDP during this period.

In the third phase (1980-85), the economy experienced a setback. Except for Ethiopian fiscal year ( EFY) 1982/83, the growth of GDP declined. Manufacturing took a downturn as well, and agriculture reached a crisis stage. Four factors accounted for these developments. First, the 1984-85 drought affected almost all regions of the country. As a result, the government committed scarce resources to famine relief efforts while tabling long-term development projects. Consequently, the external accounts (as shown in the current account deficit and the debt service ratio) and the overall fiscal deficit worsened, despite international drought assistance totaling more than US$450 million. Notwithstanding these efforts, close to 8 million people became famine victims during the drought of the mid-1980s, and about 1 million died. Second, the manufacturing sector stagnated as agricultural inputs declined. Also, many industries exhausted their capacity to increase output; as a result, they failed to meet the rising demand for consumer items. Third, the lack of foreign exchange and declining investment reversed the relatively high manufacturing growth rates of 1978-80. Finally, Ethiopia's large military establishment created a major burden on the economy. Defense expenditures during this time were absorbing 40 to 50 percent of the government's current expenditure.

In the fourth period (1985-90), the economy continued to stagnate, despite an improvement in the weather in EFY l985/86 and EFY l986/87, which helped reverse the agricultural decline. GDP and the manufacturing sector also grew during this period, GDP increasing at an average annual rate of 5 percent. However, the lingering effects of the 1984-85 drought undercut these achievements and contributed to the economy's overall stagnation. During the 1985-90 period, the current account deficit and the overall fiscal deficit worsened to annual rates of l0.6 and l3.5 percent, respectively, and the debt service ratio continued to climb.

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