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Ethiopia - ECONOMY




Ethiopia - The Economy

RESTRUCTURING THE ECONOMY along socialist lines and achieving sustained economic growth were the two major economic objectives of the Provisional Military Administrative Council when it assumed power in l974. After the 1974 revolution, the pace of economic restructuring was accelerated by a barrage of legislation. A key part of the effort to reshape the economy was the implementation of Africa's most ambitious land reform program, which included nationalization of both rural and urban land. Most of Ethiopia's industries, large-scale agricultural farms, and financial institutions were brought under the control of the government, and both rural and urban communities were organized into a hierarchy of associations. Pursuit of the military regime's second objective--sustained economic growth--was less successful. Drought, regional conflicts, inflexible government policy, and lack of confidence by the private sector seriously affected the economy. Falling productivity, soaring inflation, growing dependence on foreign aid and loans, high unemployment, and a deteriorating balance of payments all combined to create a deepening economic crisis. In 1990 Ethiopia had a gross national product of US$6 billion and a per capita income of about US$120, one of the lowest per capita incomes of any country in the world.

Following the 1974 revolution, the socialist government developed a series of annual plans and a ten-year perspective plan to revitalize the war-ravaged economy. Although the annual plans helped the regime deal with some urgent economic problems, such as shortages of food and consumer goods, decline in productivity, lack of foreign exchange, and rising unemployment, these plans failed to move the country significantly closer to attaining its longterm development objectives. In l984/85 ( Ethiopian calendar year) the military government launched a new ten-year perspective plan, which represented a renewed commitment to economic growth and structural transformation of the economy. However, the economy continued to deteriorate. In response, the regime introduced several additional reforms. For instance, the l988 Investment Code allowed unlimited participation of the private sector in certain areas of the economy. In January l988, under pressure from aid donor countries, the government agreed to restructure agricultural and farm price policies. Finally, in March l990 President Mengistu Haile Mariam announced the end of the country's Marxist economic system and the beginning of a mixed economy. Despite these reforms, the economy failed to improve.

Ethiopia - Growth and Structure of the Economy

Developments up to l974

By African standards, Ethiopia is a potentially wealthy country, with fertile soil and good rainfall over large regions. Farmers produce a variety of grains, including wheat, corn, and millet. Coffee also grows well on southern slopes. Herders can raise cattle, sheep, and goats in nearly all parts of the country. Additionally, Ethiopia possesses several valuable minerals, including gold and platinum.

Unlike most sub-Saharan African countries, Ethiopia's resources have enabled the country to maintain contacts with the outside world for centuries. Since ancient times, Ethiopian traders exchanged gold, ivory, musk, and wild animal skins for salt and luxury goods, such as silk and velvet. By the late nineteenth century, coffee had become one of Ethiopia's more important cash crops. At that time, most trade flowed along two major trade routes, both of which terminated in the far southwest in the Kefa-Jima region. From there, one route went north to Mitsiwa via Gonder and Adwa, the other along the Awash River valley to Harer and then on to Berbera or Zeila on the Red Sea.

Despite its many riches, Ethiopia never became a great trading nation. Most Ethiopians despised traders, preferring instead to emulate the country's warriors and priests. After establishing a foothold in the country, Greek, Armenian, and Arab traders became the economic intermediaries between Ethiopia and the outside world. Arabs also settled in the interior and eventually dominated all commercial activity except petty trade.

When their occupation of Ethiopia ended in 1941, the Italians left behind them a country whose economic structure was much as it had been for centuries. There had been some improvements in communications, particularly in the area of road building, and attempts had been made to establish a few small industries and to introduce commercial farming, particularly in Eritrea, which Italy had occupied since 1890. But these changes were limited. With only a small proportion of the population participating in the money economy, trade consisted mostly of barter. Wage labor was limited, economic units were largely self-sufficient, foreign trade was negligible, and the market for manufactured goods was extremely small.

During the late l940s and 1950s, much of the economy remained unchanged. The government focused its development efforts on expansion of the bureaucratic structure and ancillary services. Most farmers cultivated small plots of land or herded cattle. Traditional and primitive farming methods provided the population with a subsistence standard of living. In addition, many nomadic peoples raised livestock and followed a life of seasonal movement in drier areas. The agricultural sector grew slightly, and the industrial sector represented a small part of the total economy.

By the early l950s, Emperor Haile Selassie I (reigned 1930- 74) had renewed calls for a transition from a subsistence economy to an agro-industrial economy. To accomplish this task, Ethiopia needed an infrastructure to exploit resources, a material base to improve living conditions, and better health, education, communications, and other services. A key element of the emperor's new economic policy was the adoption of centrally administered development plans. Between l945 and l957, several technical missions, including one each from the United States, the Food and Agriculture Organization of the United Nations (FAO), and Yugoslavia, prepared a series of development plans. However, these plans failed to achieve any meaningful results, largely because basic statistical data were scarce and the government's administrative and technical capabilities were minimal.

In 1954/55 the government created the National Economic Council to coordinate the state's development plans. This agency, which was a policy-making body chaired by the emperor, devoted its attention to improving agricultural and industrial productivity, eradicating illiteracy and diseases, and improving living standards for all Ethiopians. The National Economic Council helped to prepare Ethiopia's first and second five-year plans.

The First Five-Year Plan (1957-61) sought to develop a strong infrastructure, particularly in transportation, construction, and communications, to link isolated regions. Another goal was the establishment of an indigenous cadre of skilled and semiskilled personnel to work in processing industries to help reduce Ethiopia's dependence on imports. Lastly, the plan aimed to accelerate agricultural development by promoting commercial agricultural ventures. The Second Five-Year Plan (1962-67) signaled the start of a twenty-year program to change Ethiopia's predominantly agricultural economy to an agro-industrial one. The plan's objectives included diversification of production, introduction of modern processing methods, and expansion of the economy's productive capacity to increase the country's growth rate. The Third Five-Year Plan (1968-73) also sought to facilitate Ethiopia's economic well-being by raising manufacturing and agro-industrial performance. However, unlike its predecessors, the third plan expressed the government's willingness to expand educational opportunities and to improve peasant agriculture. Total investment for the First Five-Year Plan reached 839.6 million birr, about 25 percent above the planned 674 million birr figure; total expenditure for the Second Five-Year Plan was 13 percent higher than the planned 1,694 million birr figure. The allocation for the Third Five-Year Plan was 3,115 million birr.

Several factors hindered Ethiopia's development planning. Apart from the fact that the government lacked the administrative and technical capabilities to implement a national development plan, staffing problems plagued the Planning Commission (which prepared the first and second plans) and the Ministry of Planning (which prepared the third). Many project managers failed to achieve plan objectives because they neglected to identify the resources (personnel, equipment, and funds) and to establish the organizational structures necessary to facilitate largescale economic development.

During the First Five-Year Plan, the gross national product ( GNP ) increased at a 3.2 percent annual rate as opposed to the projected figure of 3.7 percent, and growth in economic sectors such as agriculture, manufacturing, and mining failed to meet the national plan's targets. Exports increased at a 3.5 percent annual rate during the first plan, whereas imports grew at a rate of 6.4 percent per annum, thus failing to correct the negative balance of trade that had existed since l95l.

The Second Five-Year Plan and Third Five-Year Plan anticipated that the economy would grow at an annual rate of 4.3 percent and 6.0 percent, respectively. Officials also expected agriculture, manufacturing, and transportation and communications to grow at respective rates of 2.5, 27.3, and 6.7 percent annually during the Second Five-Year Plan and at respective rates of 2.9, l4.9, and l0.9 percent during the Third Five-Year Plan. The Planning Commission never assessed the performance of these two plans, largely because of a shortage of qualified personnel.

However, according to data from the Ethiopian government's Central Statistical Authority, during the 1960/61 to 1973/74 period the economy achieved sustained economic growth. Between 1960 and 1970, for example, Ethiopia enjoyed an annual 4.4 percent average growth rate in per capita gross domestic product ( GDP ). The manufacturing sector's growth rate more than doubled (from 1.9 percent in 1960/61 to 4.4 percent in 1973/74), and the growth rate for the wholesale, retail trade, transportation, and communications sectors increased from 9.3 percent to 15.6 percent.

Relative to its neighbors, Ethiopia's economic performance was mixed. Ethiopia's 4.4 percent average per capita GDP growth rate was higher than Sudan's 1.3 percent rate or Somalia's 1 percent rate. However, Kenya's GDP grew at an estimated 6 percent annual rate, and Uganda achieved a 5.6 percent growth rate during the same 1960/61 to 1972/73 period.

By the early l970s, Ethiopia's economy not only had started to grow but also had begun to diversify into areas such as manufacturing and services. However, these changes failed to improve the lives of most Ethiopians. About four-fifths of the population were subsistence farmers who lived in poverty because they used most of their meager production to pay taxes, rents, debt payments, and bribes. On a broader level, from 1953 to 1974 the balance of trade registered annual deficits. The only exception was l973, when a combination of unusually large receipts from the export of oilseeds and pulses and an unusually small rise in import values resulted in a favorable balance of payments of 454 million birr. With the country registering trade deficits, the government attempted to restrict imports and to substitute locally produced industrial goods to improve the trade balance. Despite these efforts, however, the unfavorable trade balance continued. As a result, foreign grants and loans financed much of the balance of payments deficit.

Ethiopia - 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.

Ethiopia - Economy - Role of Government

The imperial government presided over what was, even in the mid-twentieth century, essentially a feudal economy, with aristocrats and the church owning most arable land and tenant farmers who paid exorbitant rents making up the majority of the nation's agriculturalists. Acting primarily through the Ministry of Finance, the emperor used fiscal and monetary strategies to direct the local economy. The various ministries, although not always effective, played a key role in developing and implementing programs. The government conducted negotiations with the ministries to allocate resources for plan priorities.

Officials formulated actual operations, however, without adhering to plan priorities. This problem developed partly because the relationship between the Planning Commission, responsible for formulating national objectives and priorities, and the Ministry of Finance, responsible for resource planning and management, was not clearly defined. The Ministry of Finance often played a pivotal role, whereas the Planning Commission was relegated to a minor role. Often the Planning Commission was perceived as merely another bureaucratic layer. The ultimate power to approve budgets and programs rested with the emperor, although the Council of Ministers had the opportunity to review plans.

After the revolution, the government's role in determining economic policies changed dramatically. In January and February l975, the government nationalized or took partial control of more than l00 companies, banks and other financial institutions, and insurance companies. In March l975, the regime nationalized rural land and granted peasants "possessing rights" to parcels of land not to exceed ten hectares per grantee. In December l975, the government issued Proclamation No. 76, which established a 500,000 birr ceiling on private investment and urged Ethiopians to invest in enterprises larger than cottage industries. This policy changed in mid-1989, when the government implemented three special decrees to encourage the development of small-scale industries, the participation of nongovernmental bodies in the hotel industry, and the establishment of joint ventures.

Under the Provisional Military Administrative Council (PMAC; also known as the Derg), Ethiopia's political system and economic structure changed dramatically, and the government embraced a Marxist-Leninist political philosophy. Planning became more ambitious and more pervasive, penetrating all regions and all sectors of the society, in contrast to the imperial period. Article ll of the l987 constitution legitimized these changes by declaring that "the State shall guide the economic and social activities of the country through a central plan." The Office of the National Council for Central Planning (ONCCP), which replaced the Planning Commission and which was chaired by Mengistu as head of state, served as the supreme policy-making body and had the power and responsibility to prepare the directives, strategies, and procedures for short- and long-range plans. The ONCCP played a pivotal role in mediating budget requests between other ministries and the Ministry of Finance. The government also sought to improve Ethiopia's economic performance by expanding the number of state-owned enterprises and encouraging barter and countertrade practices.

On March 5, 1990, President Mengistu delivered a speech to the Workers' Party of Ethiopia (WPE) Central Committee in which he declared the failure of the Marxist economic system imposed by the military regime after the 1974 overthrow of Emperor Haile Selassie. He also announced the adoption of a new strategy for the country's future progress and development. Mengistu's proposals included decentralization in planning and a free-market, mixed economy in which the private and public sectors would play complementary roles. The new strategy would permit Ethiopian and foreign private individuals to invest in foreign and domestic trade, industry, construction, mining, and agriculture and in the country's development in general. Although Mengistu's new economic policy attracted considerable attention, many economists were skeptical about Ethiopia's ability to bring about a quick radical transformation of its economic policies. In any case, the plan proved irrelevant in view of the deteriorating political and military situation that led to the fall of the regime in 1991.

Ethiopia - Economy - Role of Government - The Budgetary Process

During the imperial period, the government initiated the budget cycle each year on the first day of Tikimt (October ll) by issuing a "call for budget proposals." Supposedly, the various ministries and agencies adhered to deadlines in completing the budgetary process. These organizations submitted current and capital budget proposals to the Ministry of Finance; the Council of Ministers reviewed all requests. The ultimate power for approval rested with the emperor.

After the revolution, the government developed new guidelines on budget preparation and approval. Addis Ababa issued annual budget "calls" in July or August, with preliminary information and guidance. The new guidelines required ministries and agencies to complete their proposals by January, when budget hearings would begin. The hearings included discussions with ministries in which requests would be aligned with allocations, and justifications for requests would be evaluated. After the ministries submitted their current budget proposals to the Ministry of Finance for review, with a copy to the ONCCP, the ONCCP executive committee would approve, disapprove, or change the requests. Conversely, ministries would send capital budget proposals to the ONCCP with a copy to the Ministry of Finance. The ONCCP would conclude a similar process of budget hearings, which would include a review of adherence to guidelines, justifications for requests, and conformity to investment priorities identified in the national plan. Thus, under the new system, the Ministry of Finance developed the current budget, and the ONCCP developed the capital budget. Draft current and capital budgets prepared by the Ministry of Finance and the ONCCP, respectively, would then be reconciled with estimates of revenues, domestic resources, and other sources of funding such as loans and aid. The consolidated current and capital budgets then would go to the Council of Ministers for review and recommendations. The final approval was the head of state's prerogative.

Ethiopia - Economy - Revenue and Expenditures

Resources were allocated among the various sectors of the economy differently in the imperial and revolutionary periods. Under the emperor, the government dedicated about 36 percent of the annual budget to national defense and maintenance of internal order. Toward the end of the imperial period, the budgets of the various ministries increased steadily while tax yields stagnated. With a majority of the population living at a subsistence level, there was limited opportunity to increase taxes on personal or agricultural income. Consequently, the imperial government relied on indirect taxes (customs, excise, and sales) to generate revenues. For instance, in the early l970s taxes on foreign trade accounted for close to twofifths of the tax revenues and about one-third of all government revenues, excluding foreign grants. At the same time, direct taxes accounted for less than one-third of tax revenues.

The revolutionary government changed the tax structure in 1976, replacing taxes on agricultural income and rural land with a rural land-use fee and a new tax on income from agricultural activities. The government partially alleviated the tax collection problem that existed during the imperial period by delegating the responsibility for collecting the fee and tax on agriculture to peasant associations, which received a small percentage of revenues as payment. Whereas total revenue increased significantly, to about 24 percent of GDP in EFY l988/89, tax revenues remained stagnant at around l5 percent of GDP. In EFY l974/75, total revenue and tax revenue had been l3 and ll percent of GDP, respectively. Despite the 1976 changes in the tax structure, the government believed that the agricultural income tax was being underpaid, largely because of underassessments by peasant associations.

The government levied taxes on exports and imports. In 1987 Addis Ababa taxed all exports at 2 percent and levied an additional export duty and a surtax on coffee. Import taxes included customs duties and a 19 percent general import transaction tax. Because of a policy of encouraging new capital investment, the government exempted capital goods from all import taxes. Among imports, intermediate goods were taxed on a scale ranging from 0 to 35 percent, consumer goods on a scale of 0 to l00 percent, and luxuries at a flat rate of 200 percent. High taxes on certain consumer goods and luxury items contributed to a flourishing underground economy in which the smuggling of some imports, particularly liquor and electronic goods, played an important part.

Although tax collection procedures proved somewhat ineffective, the government maintained close control of current and capital expenditures. The Ministry of Finance oversaw procurements and audited ministries to ensure that expenditures conformed to budget authorizations.

Current expenditures as a proportion of GDP grew from l3.2 percent in EFY l974/75 to 26.1 percent in EFY l987/88. This growth was largely the result of the increase in expenditures for defense and general services following the 1974 revolution. During the l977-78 Ogaden War, for example, when the Somali counteroffensive was under way, defense took close to 60 percent of the budget. That percentage declined after l979, although it remained relatively higher than the figure for the prerevolutionary period. Between l974 and l988, about 40 to 50 percent of the budget was dedicated to defense and government services.

Economic and social services received less than 30 percent of government funds until EFY l972/73, when a rise in educational outlays pushed them to around 40 percent. Under the Mengistu regime, economic and social service expenditures remained at prerevolutionary levels: agriculture's share was 2 percent, while education and health received an average of l4 and 4 percent, respectively.

Ethiopia - Banking and Monetary Policy

The 1974 revolution brought major changes to the banking system. Prior to the emergence of the Marxist government, Ethiopia had several state-owned banking institutions and private financial institutions. The National Bank of Ethiopia (the country's central bank and financial adviser), the Commercial Bank of Ethiopia (which handled commercial operations), the Agricultural and Industrial Development Bank (established largely to finance state-owned enterprises), the Savings and Mortgage Corporation of Ethiopia, and the Imperial Savings and Home Ownership Public Association (which provided savings and loan services) were the major state-owned banks. Major private commercial institutions, many of which were foreign owned, included the Addis Ababa Bank, the Banco di Napoli, and the Banco di Roma. In addition, there were several insurance companies.

In January and February l975, the government nationalized and subsequently reorganized private banks and insurance companies. By the early l980s, the country's banking system included the National Bank of Ethiopia; the Addis Ababa Bank, which was formed by merging the three commercial banks that existed prior to the revolution; the Ethiopian Insurance Corporation, which incorporated all of the nationalized insurance companies; and the new Housing and Savings Bank, which was responsible for making loans for new housing and home improvement. The government placed all banks and financial institutions under the National Bank of Ethiopia's control and supervision. The National Bank of Ethiopia regulated currency, controlled credit and monetary policy, and administered foreign-currency transactions and the official foreign-exchange reserves. A majority of the banking services were concentrated in major urban areas, although there were efforts to establish more rural bank branches throughout the country. However, the lending strategies of the banks showed that the productive sectors were not given priority. In l988, for example, about 55 percent of all commercial bank credit financed imports and domestic trade and services. Agriculture and industry received only 6 and l3 percent of the commercial credit, respectively.

To combat inflation and reduce the deficit, the government adopted a conservative fiscal management policy in the 1980s. The government limited the budget deficit to an average of about l4 percent of GDP in the five years ending in EFY l988/89 by borrowing from local sources. For instance, in EFY l987/88 domestic borrowing financed about 38 percent of the deficit. Addis Ababa also imposed measures to cut back capital expenditures and to lower inflation. However, price controls, official overvaluing of the birr, and a freeze on the wages of senior government staff have failed to control inflation. By 1988 inflation was averaging 7.1 percent annually, but it turned sharply upward during 1990 as war expenditures increased and was estimated at 45 percent by mid-1991. Moreover, money supply, defined as currency in circulation and demand deposits with banks (except that of the National Bank of Ethiopia), rose with the expansion in government budget deficits, which reached about 1.6 billion birr in EFY 1988/89. To help resolve this deficit problem and numerous other economic difficulties, Addis Ababa relied on foreign aid.

Ethiopia - Labor Force

Ethiopia's first and only national census, conducted in 1984, put the population at 42 million, which made Ethiopia the third most populous country in Africa, after Egypt and Nigeria. The census also showed that by l994 Ethiopia's population would reach 56 million. According to World Bank projections, Ethiopia will have a population of 66 million by the year 2000 (other estimates suggested that the population would be more than 67 million).

The l984 census indicated that 46.6 percent of the population consisted of children under fifteen years of age, which indicated a relatively high rate of dependence on the working population for education, health, and social services. Such a high dependency rate often is characteristic of a country in transition from a subsistence to a monetized economy. Because of limited investment resources in the modern sector, not all the working-age population can be absorbed, with the result that unemployment can become a growing social and economic problem for an economy in transition.

The l988/89 economically active labor force was estimated to be 2l million, of which l9.3 million were in rural areas and l.7 million in urban areas. Estimates of the labor force's annual growth ranged from 1.8 to 2.9 percent.

The labor force's occupational distribution showed that in l990 some 80 percent of the labor force worked in agriculture, 8 percent in industry, and l2 percent in services. These figures had changed slightly from the 1965 figures of 86, 5, and 9 percent, respectively. Thus, while agriculture's proportionate share of the labor force fell, the other two sectors gained. This trend reflects a modernizing society that is diversifying its economy by expanding secondary and tertiary sectors.

Ethiopia - Unemployment

Generally, it is difficult to measure unemployment in less developed countries such as Ethiopia because of the lack of reliable records and the existence of various informal types of work. However, based on Ministry of Labor surveys and numerous other analyses, a general assessment of unemployment in Ethiopia can be made. According to the Ministry of Labor, the unemployment rate increased 11.5 percent annually during the 1979-88 period; by l987/88 there were 715,065 registered unemployed workers in thirty-six major towns. Of those registered, l34,ll7 ultimately found jobs, leaving the remaining 580,948 unemployed. The urban labor force totaled 1.7 million in 1988/89. The Ministry of Labor indicated that the government employed 523,000 of these workers. The rest relied on private employment or self-employment for their livelihood.

According to the government, rural unemployment was virtually nonexistent. A l981/82 rural labor survey revealed that 97.5 percent of the rural labor force worked, 2.4 percent did not work because of social reasons, and 0.l percent had been unemployed during the previous twelve months. However, it is important to note that unemployment, as conventionally defined, records only part of the story; it leaves out disguised unemployment and underemployment, which were prevalent in both urban and rural areas. For instance, the same rural labor force survey found that 50 percent of those working were unpaid family workers. What is important about unemployment in Ethiopia is that with an expansion of the labor force, the public sector--with an already swollen payroll and acute budgetary problems--was unlikely to absorb more than a tiny fraction of those entering the labor market.

Ethiopia - Labor Unions

The 1955 constitution guaranteed the right to form workers' associations. However, it was not until 1962 that the Ethiopian government issued the Labor Relations Decree, which authorized trade unions. In April 1963, the imperial authorities recognized the Confederation of Ethiopian Labor Unions (CELU), which represented twenty-two industrial labor groups. By 1973 CELU had 167 affiliates with approximately 80,000 members, which represented only about 30 percent of all eligible workers.

CELU never evolved into a national federation of unions. Instead, it remained an association of labor groups organized at the local level. The absence of a national constituency, coupled with other problems such as corruption, embezzlement, election fraud, ethnic and regional discrimination, and inadequate finances, prevented CELU from challenging the status quo in the industrial sector. Nevertheless, CELU sponsored several labor protests and strikes during the first decade of its existence. After 1972 CELU became more militant as drought and famine caused the death of up to 200,000 people. The government responded by using force to crush labor protests, strikes, and demonstrations.

Although many of its members supported the overthrow of Haile Selassie, CELU was the first labor organization to reject the military junta and to demand the creation of a people's government. On May 19, 1975, the Derg temporarily closed CELU headquarters on the grounds that the union needed to be reorganized. Furthermore, the military authorities asserted that workers should elect their future leaders according to the aims and objectives of Ethiopian socialism. This order did not rescind traditional workers' rights, such as the right to organize freely, to strike, and to bargain collectively over wages and working conditions. Rather, it sought to control the political activities of the CELU leadership. As expected, CELU rejected these actions and continued to demand democratic changes and civilian rights. In January 1977, the Derg replaced CELU (abolished December 1975) with the All-Ethiopia Trade Union (AETU). The AETU had 1,341 local chapters, known as workers' associations, with a total membership of 287,000. The new union thus was twice as large as CELU had ever been. The government maintained that the AETU's purpose was to educate workers about the need to contribute their share to national development by increasing productivity and building socialism.

In l978 the government replaced the AETU executive committee after charging it with political sabotage, abuse of authority, and failure to abide by the rules of democratic centralism. In l982 a further restructuring of the AETU occurred when Addis Ababa issued the Trade Unions' Organization Proclamation. An uncompromising MarxistLeninist document, this proclamation emphasized the need "to enable workers to discharge their historical responsibility in building the national economy by handling with care the instruments of production as their produce, and by enhancing the production and proper distribution of goods and services." A series of meetings and elections culminated in a national congress in June l982, at which the government replaced the leadership of the AETU. In l986 the government relabeled the AETU the Ethiopia Trade Union (ETU).

In l983/84 the AETU claimed a membership of 3l3,434. The organization included nine industrial groups, the largest of which was manufacturing, which had accounted for 29.2 percent of the membership in l982/83, followed by agriculture, forestry, and fishing with 26.6 percent, services with l5.l percent, transportation with 8.l percent, construction with 8.0 percent, trade with 6.2 percent, utilities with 3.7 percent, finance with 2.4 percent, and mining with 0.7 percent. A total of 35.6 percent of the members lived in Addis Ababa and another l8.0 percent in Shewa. Eritrea and Tigray accounted for no more than 7.5 percent of the total membership. By the late 1980s, the AETU had failed to regain the activist reputation its predecessors had won in the 1970s. According to one observer, this political quiescence probably indicated that the government had successfully co-opted the trade unions.

Ethiopia - Wages and Prices

Prior to the revolution, the Central Personnel Agency formulated and regulated wage policies. At the time of the military takeover, there was no minimum wage law; wages and salaries depended much on demand. There was, however, some legislation that defined pay scales. For instance, Notice 49 of l972 defined pay scales and details regarding incremental steps for civil servants. Similarly, the Ethiopian Workers Commission had developed pay-scale guidelines based on skill, experience, and employment. In l974 CELU asked for a 3 birr daily minimum wage, which the imperial government eventually granted.

After the revolution, the government's policy was to control wage growth to reduce pay scales. For parastatal and public enterprise workers earning 650 birr or less per month (real income, i.e., income adjusted for inflation) and civil servants earning 600 birr or less per month, the government allowed incremental pay increases. But for those above these cutoff points, there was a general salary freeze. However, promotions sometimes provided a worker a raise over the cutoff levels.

Given inflation, the salary freeze affected the real income of many workers. For instance, the starting salary of a science graduate in l975 was 600 birr per month. In l984 the real monthly income of a science graduate had dropped to 239 birr. Similarly, the highest civil servant's maximum salary in l975 was l,440 birr per month; the real monthly income of the same civil servant in l984 was 573 birr.

Data on real wages of manufacturing workers and the behavior of price indexes provide further evidence of worsening living standards after the revolution. In l985/86 the average real monthly income of an industrial worker was 65.6 percent of the l974/75 level. The general trend shows that real income fell as consumer prices continued to increase. The retail price index for Addis Ababa rose from 375.2 in l980/8l (l963=100) to 480.0 in l987/88. This rise in the retail price index included increases in the cost of food (27 percent), household items (38 percent), and transportation (l7 percent).

Price increases mainly affected urban wage earners on fixed incomes, as purchases of necessities used larger portions of their pay. The government's wage freeze and the controls it placed on job transfers and changes made it difficult for most urban wage earners to improve their living standards. The freeze on wages and job changes also reduced productivity.

Ethiopia - Agriculture

Accounting for over 40 percent of GDP, 80 percent of exports, and 80 percent of the labor force, agriculture remained in 1991 the economy's most important sector. Ethiopia has great agricultural potential because of its vast areas of fertile land, diverse climate, generally adequate rainfall, and large labor pool. Despite this potential, however, Ethiopian agriculture has remained underdeveloped. Because of drought, which has persistently affected the country since the early 1970s, a poor economic base (low productivity, weak infrastructure, and low level of technology), and the Mengistu government's commitment to Marxism-Leninism, the agricultural sector has performed poorly. For instance, according to the World Bank, between l980 and l987 agricultural production dropped at an annual rate of 2.l percent, while the population grew at an annual rate of 2.4 percent. Consequently, the country faced a tragic famine that resulted in the death of nearly 1 million people from l984 to 1986.

During the imperial period, the development of the agricultural sector was retarded by a number of factors, including tenancy and land reform problems, the government's neglect of the agricultural sector (agriculture received less than 2 percent of budget allocations even though the vast majority of the population depended on agriculture), low productivity, and lack of technological development. Moreover, the emperor's inability to implement meaningful land reform perpetuated a system in which aristocrats and the church owned most of the farmland and in which most farmers were tenants who had to provide as much as 50 percent of their crops as rent. To make matters worse, during the 1972-74 drought and famine the imperial government refused to assist rural Ethiopians and tried to cover up the crisis by refusing international aid. As a result, up to 200,000 Ethiopians perished.

Although the issue of land reform was not addressed until the l974 revolution, the government had tried to introduce programs to improve the condition of farmers. In 1971 the Ministry of Agriculture introduced the Minimum Package Program (MPP) to bring about economic and social changes. The MPP included credit for the purchase of items such as fertilizers, improved seeds, and pesticides; innovative extension services; the establishment of cooperatives; and the provision of infrastructure, mainly water supply and all-weather roads. The program, designed for rural development, was first introduced in a project called the Chilalo Agricultural Development Unit (CADU). The program later facilitated the establishment of similar internationally supported and financed projects at Ada (just south of Addis Ababa), Welamo, and Humera. By l974 the Ministry of Agriculture's Extension and Project Implementation Department (EPID) had more than twenty-eight areas with more than 200 extension and marketing centers. Although the MPPs improved the agricultural productivity of farmers, particularly in the project areas, there were many problems associated with discrimination against small farmers (because of a restrictive credit system that favored big landowners) and tenant eviction.

Imperial government policy permitting investors to import fertilizers, pesticides, tractors and combines, and (until 1973) fuel free of import duties encouraged the rapid expansion of large-scale commercial farming. As a result, agriculture continued to grow, albeit below the population growth rate. According to the World Bank, agricultural production increased at an average annual rate of 2.l percent between l965 and 1973, while population increased at an average annual rate of 2.6 percent during the same period.

Agricultural productivity under the Derg continued to decline. According to the World Bank, agricultural production increased at an average annual rate of 0.6 percent between 1973 and 1980 but then decreased at an average annual rate of 2.1 percent between l980 and l987. During the same period (l973-87), population increased at an average annual rate of 2.6 percent (2.4 percent for 1980- 87). The poor performance of agriculture was related to several factors, including drought; a government policy of controlling prices and the free movement of agricultural products from surplus to deficit areas; the unstable political climate; the dislocation of the rural community caused by resettlement, villagization, and conscription of young farmers to meet military obligations; land tenure difficulties and the problem of land fragmentation; the lack of resources such as farm equipment, better seeds, and fertilizers; and the overall low level of technology.

President Mengistu's 1990 decision to allow free movement of goods, to lift price controls, and to provide farmers with security of tenure was designed to reverse the decline in Ethiopia's agricultural sector. There was much debate as to whether or not these reforms were genuine and how effectively they could be implemented. Nonetheless, agricultural output rose by an estimated 3 percent in 1990- 91, almost certainly in response to the relaxation of government regulation. This modest increase, however, was not enough to offset a general decrease in GDP during the same period.

Ethiopia - Land Use

Of Ethiopia's total land area of l,22l,480 square kilometers, the government estimated in the late 1980s that l5 percent was under cultivation and 5l percent was pastureland. It was also estimated that over 60 percent of the cultivated area was cropland. Forestland, most of it in the southwestern part of the country, accounted for 4 percent of the total land area, according to the government. These figures varied from those provided by the World Bank, which estimated that cropland, pastureland, and forestland accounted for l3, 4l, and 25 percent, respectively, of the total land area in l987.

Inaccessibility, water shortages, and infestations of disease-causing insects, mainly mosquitoes, prevented the use of large parcels of potentially productive land. In Ethiopia's lowlands, for example, the presence of malaria kept farmers from settling in many areas.

Most agricultural producers were subsistence farmers with small holdings, often broken into several plots. Most of these farmers lived on the highlands, mainly at elevations of 1,500 to 3,000 meters. The population in the lowland peripheries (below l,500 meters) was nomadic, engaged mainly in livestock raising.

There are two predominant soil types in the highlands. The first, found in areas with relatively good drainage, consists of red-to-reddish-brown clayey loams that hold moisture and are well endowed with needed minerals, with the exception of phosphorus. These types of soils are found in much of Ilubabor, Kefa, and Gamo Gofa. The second type consists of brownish-to-gray and black soils with a high clay content. These soils are found in both the northern and the southern highlands in areas with poor drainage. They are sticky when wet, hard when dry, and difficult to work. But with proper drainage and conditioning, these soils have excellent agricultural potential.

Sandy desert soils cover much of the arid lowlands in the northeast and in the Ogaden area of southeastern Ethiopia. Because of low rainfall, these soils have limited agricultural potential, except in some areas where rainfall is sufficient for the growth of natural forage at certain times of the year. These areas are used by pastoralists who move back and forth in the area following the availability of pasture for their animals.

The plains and low foothills west of the highlands have sandy and gray-to-black clay soils. Where the topography permits, they are suitable for farming. The soils of the Great Rift Valley often are conducive to agriculture if water is available for irrigation. The Awash River basin supports many large-scale commercial farms and several irrigated small farms.

Soil erosion has been one of the country's major problems. Over the centuries, deforestation, overgrazing, and practices such as cultivation of slopes not suited to agriculture have eroded the soil, a situation that worsened considerably during the 1970s and 1980s, especially in Eritrea, Tigray, and parts of Gonder and Welo. In addition, the rugged topography of the highlands, the brief but extremely heavy rainfalls that characterize many areas, and centuries-old farming practices that do not include conservation measures have accelerated soil erosion in much of Ethiopia's highland areas. In the dry lowlands, persistent winds also contribute to soil erosion.

During the imperial era, the government failed to implement widespread conservation measures, largely because the country's complex land tenure system stymied attempts to halt soil erosion and improve the land. After 1975 the revolutionary government used peasant associations to accelerate conservation work throughout rural areas. The 1977 famine also provided an impetus to promote conservation. The government mobilized farmers and organized "food for work" projects to build terraces and plant trees. During 1983-84 the Ministry of Agriculture used "food for work" projects to raise 65 million tree seedlings, plant 18,000 hectares of land, and terrace 9,500 hectares of land. Peasant associations used 361 nurseries to plant 11,000 hectares of land in community forest. Between 1976 and 1985, the government constructed 600,000 kilometers of agricultural embankments on cultivated land and 470,000 kilometers of hillside terraces, and it closed 80,000 hectares of steep slopes for regeneration. However, the removal of arable land for conservation projects has threatened the welfare of increasing numbers of rural poor. For this reason, some environmental experts maintain that large-scale conservation work in Ethiopia has been ineffective.

Ethiopia - Land Reform

Until the l974 revolution, Ethiopia had a complex land tenure system. In Welo Province, for example, there were an estimated 111 types of land tenure. The existence of so many land tenure systems, coupled with the lack of reliable data, has made it difficult to give a comprehensive assessment of landownership in Ethiopia. However, the tenure system can be understood in a rudimentary way if one examines it in the context of the basic distinction between landownership patterns in the north and those in the south.

Historically, Ethiopia was divided into the northern highlands, which constituted the core of the old Christian kingdom, and the southern highlands, most of which were brought under imperial rule by conquest. This north-south distinction was reflected in land tenure differences. In the northern provinces--particularly Gojam, Begemdir and Simen (called Gonder after 1974), Tigray, highland Eritrea, parts of Welo, and northern Shewa--the major form of ownership was a type of communal system known as rist. According to this system, all descendants (both male and female) of an individual founder were entitled to a share, and individuals had the right to use (a usufruct right) a plot of family land. Rist was hereditary, inalienable, and inviolable. No user of any piece of land could sell his or her share outside the family or mortgage or bequeath his or her share as a gift, as the land belonged not to the individual but to the descent group. Most peasants in the northern highlands held at least some rist land, but there were some members belonging to minority ethnic groups who were tenant farmers.

The other major form of tenure was gult , an ownership right acquired from the monarch or from provincial rulers who were empowered to make land grants. Gult owners collected tribute from the peasantry and, until l966 (when gult rights were abolished in principle), exacted labor service as payment in kind from the peasants. Until the government instituted salaries in the twentieth century, gult rights were the typical form of compensation for an official.

Other forms of tenure included samon, mengist, and maderia land. Samon was land the government had granted to the Ethiopian Orthodox Church in perpetuity. Traditionally, the church had claimed about one-third of Ethiopia's land; however, actual ownership probably never reached this figure. Estimates of church holdings range from l0 to 20 percent of the country's cultivated land. Peasants who worked on church land paid tribute to the church (or monastery) rather than to the emperor. The church lost all its land after the 1974 revolution. The state owned large tracts of agricultural land known as mengist and maderia. Mengist was land registered as government property, and maderia was land granted mainly to government officials, war veterans, and other patriots in lieu of a pension or salary. Although it granted maderia land for life, the state possessed a reversionary right over all land grants. Government land comprised about 12 percent of the country's agricultural land.

In general, absentee landlordism in the north was rare, and landless tenants were few. For instance, tenancy in Begemdir and Simen and in Gojam was estimated at about 2 percent of holdings. In the southern provinces, however, few farmers owned the land on which they worked. Southern landownership patterns developed as a result of land measurement and land grants following the Ethiopian conquest of the region in the late nineteenth and early twentieth centuries. After conquest, officials divided southern land equally among the state, the church, and the indigenous population. Warlords who administered the occupied regions received the state's share. They, in turn, redistributed part of their share to their officers and soldiers. The government distributed the church's share among the church hierarchy in the same manner. Officials divided the rest between the traditional leaders ( balabats ) and the indigenous people. Thus, the loss of two-thirds of the land to the new landlords and the church made many local people tenants (gebbars). Tenancy in the southern provinces ranged between 65 and 80 percent of the holdings, and tenant payments to landowners averaged as high as 50 percent of the produce.

In the lowland periphery and the Great Rift Valley, the traditional practice of transhumance and the allocation of pastoral land according to tribal custom remained undisturbed until after World War II. These two areas are inhabited by pastoralists, including the Afar and Isa in eastern Eritrea, Welo, and Harerge; the Somali in the Ogaden; the Borana in Sidamo and Bale; and the Kereyu in the Great Rift Valley area of Shewa. The pastoral social structure is based on a kinship system with strong interclan connections; grazing and water rights are regulated by custom. Until the l950s, this pastoral life remained largely undisturbed by the highlanders, who intensely disliked the hot and humid lowland climate and feared malaria. Beginning in the l950s, however, the malaria eradication programs made irrigation agriculture in these areas possible. The government's desire to promote such agriculture, combined with its policy of creating new tax revenues, created pressure on many pastoralists, especially the Afar and the Arsi (a division of the Oromo). Major concessionaires, such as the Tendaho Cotton Plantation (managed until the 1974 revolution by the British firm Mitchell Cotts) and the Wonji Sugar Plantation (managed by HVA, a Dutch company), acquired large tracts of traditional Afar and Arsi grazing land and converted it into large-scale commercial farms. The loss of grazing land to these concessions significantly affected traditional migration patterns for grazing and water.

In the northern and southern parts of Ethiopia, peasant farmers lacked the means to improve production because of the fragmentation of holdings, a lack of credit, and the absence of modern facilities. Particularly in the south, the insecurity of tenure and high rents killed the peasants' incentive to improve production.

By the mid-l960s, many sectors of Ethiopian society favored land reform. University students led the land reform movement and campaigned against the government's reluctance to introduce land reform programs and the lack of commitment to integrated rural development. By l974 it was clear that the archaic land tenure system was one of the major factors responsible for the backward condition of Ethiopia's agriculture and the onset of the revolution. On March 4, l975, the Derg announced its land reform program. The government nationalized rural land without compensation, abolished tenancy, forbade the hiring of wage labor on private farms, ordered all commercial farms to remain under state control, and granted each peasant family so-called "possessing rights" to a plot of land not to exceed ten hectares.

Tenant farmers in southern Ethiopia, where the average tenancy was as high as 55 percent and rural elites exploited farmers, welcomed the land reform. But in the northern highlands, where communal ownership (rist) dominated and large holdings and tenancy were exceptions, many people resisted land reform. Despite the special provision for communal areas (Article l9 of the proclamation gave peasants in the communal areas "possessing rights" to the land they were tilling at the time of the proclamation) and the PMAC's efforts to reassure farmers that land reform would not affect them negatively, northerners remained suspicious of the new government's intentions. The reform held no promise of gain for most northerners; rather, many northern farmers perceived land reform as an attack on their rights to rist land. Resistance intensified when zemecha  members campaigned for collectivization of land and oxen.

Land reform had the least impact on the lowland peripheries, where nomads traditionally maintained their claims over grazing lands. The new proclamation gave them rights of possession to land they used for grazing. Therefore, the nomads did not perceive the new program as a threat. However, in the Afar area of the lower Awash Valley, where large-scale commercial estates had thrived, there was opposition to land reform, led mainly by tribal leaders (and large landowners), such as Ali Mirah, the sultan of Aussa.

The land reform destroyed the feudal order; changed landowning patterns, particularly in the south, in favor of peasants and small landowners; and provided the opportunity for peasants to participate in local matters by permitting them to form associations. However, problems associated with declining agricultural productivity and poor farming techniques still were prevalent.

Government attempts to implement land reform also created problems related to land fragmentation, insecurity of tenure, and shortages of farm inputs and tools. Peasant associations often were periodically compelled to redistribute land to accommodate young families or new households moving into their area. The process meant not only smaller farms but also the fragmentation of holdings, which were often scattered into small plots to give families land of comparable quality. Consequently, individual holdings were frequently far smaller than the permitted maximum allotment of ten hectares. A l979 study showed that around Addis Ababa individual holdings ranged from l.0 to l.6 hectares and that about 48 percent of the parcels were less than one-fourth of a hectare in size. Another study, of Dejen awraja (subregion) in Gojam, found that land fragmentation had been exacerbated since the revolution. For example, during the pre-reform period, sixty-one out of 200 farmer respondents owned three or four parcels of land; after the reform, the corresponding number was 135 farmers.

The second problem related to security of tenure, which was threatened by increasing pressure to redistribute land and to collectivize farms. Many peasants were reluctant to improve their land because they were afraid that they would not receive adequate compensation for upgrades. The third problem developed as a result of the military government's failure to provide farmers with basic items like seeds, oxen, and fertilizer. For instance, one study of four communities in different parts of Ethiopia found that up to 50 percent of the peasants in some areas lacked oxen and about 40 percent did not have plows.

Ethiopia - Government Rural Programs

In l984 the founding congress of the Workers' Party of Ethiopia (WPE) emphasized the need for a coordinated strategy based on socialist principles to accelerate agricultural development. To implement this strategy, the government relied on peasant associations and rural development, cooperatives and state farms, resettlement and villagization, increased food production, and a new marketing policy.

Peasant Associations and Rural Devlopment

Articles 8 and l0 of the l975 Land Reform Proclamation required that peasants be organized into a hierarchy of associations that would facilitate the implementation of rural development programs and policies. Accordingly, after the land reform announcement, the government mobilized more than 60,000 students to organize peasants into associations. By the end of l987, there were 20,367 peasant associations with a membership of 5.7 million farmers. Each association covered an area of 800 hectares, and members included tenants, landless laborers, and landowners holding fewer than ten hectares. Former landowners who had held more than ten hectares of land could join an association only after the completion of land redistribution. An umbrella organization known as the All-Ethiopia Peasants' Association (AEPA) represented local associations. Peasant associations assumed a wide range of responsibilities, including implementation of government land use directives; adjudication of land disputes; encouragement of development programs, such as water and land conservation; construction of schools, clinics, and cooperatives; organization of defense squads; and tax collection. Peasant associations also became involved in organizing forestry programs, local service and production cooperatives, road construction, and data collection projects, such as the l984 census.

Ethiopia - Cooperatives and State Farms

Starting in l976, the government encouraged farmers to form cooperatives. Between l978 and l98l, the PMAC issued a series of proclamations and directives outlining procedures for the formation of service cooperatives and producers' cooperatives. Service cooperatives provided basic services, such as the sale of farm inputs and consumer items that were often rationed, the provision of loans, the education of peasant association members in socialist philosophy, and the promotion of cottage industries.

The producers' cooperatives alleviated shortages of inputs (because farmers could pool resources) and problems associated with the fragmentation of landholdings. The government ordered the creation of these cooperatives because of its belief that small farmers were inefficient and were unable to take advantage of economies of scale.

The producers' cooperatives developed in three stages. The first stage was the melba, an elementary type of cooperative that required members to pool land (with the exception of plots of up to 2,000 square meters, which could be set aside for private use) and to share oxen and farm implements. The second stage, welba, required members to transfer their resources to the cooperative and reduce private plots to l,000 square meters. The third stage, the weland, abolished private land use and established advanced forms of cooperatives, whose goal was to use mechanized farming with members organized into production brigades. Under this system, income would be distributed based on labor contributions.

The government provided a number of inducements to producers' cooperatives, including priority for credits, fertilizers, improved seed, and access to consumer items and building materials. According to the ten-year plan, more than half of the country's cultivated land would be organized into producers' cooperatives by l994.

Despite the incentives, farmers responded less than enthusiastically. Farmers saw the move to form cooperatives as a prelude to the destruction of their "family farms." By l985/86 there were only 2,323 producers' cooperatives, of which only 255 were registered. Some critics argued that the resistance of farmers caused the government to formulate its resettlement and villagization programs.

A major component of the government's agricultural policy since the l974 revolution has been the development of largescale state farms. After the l975 land reform, the Derg converted a majority of the estimated 75,000 hectares of large, commercial farms owned by individuals and cooperatives into state farms. Since then, the government has expanded the size of state farms. In l987/88 there were about 2l6,000 hectares of state farmland, accounting for 3.3 percent of the total cultivated area. The ten-year plan indicated that state farms would be expanded to 468,000 hectares by l994, accounting for 6.4 percent of the cultivated land.

The primary motive for the expansion of state farms was the desire to reverse the drop in food production that has continued since the revolution. After the l975 land reform, peasants began withholding grain from the market to drive up prices because government price-control measures had created shortages of consumer items such as coffee, cooking oil, salt, and sugar. Additionally, increased peasant consumption caused shortages of food items such as teff, wheat, corn, and other grains in urban areas. The problem became so serious that Mengistu lashed out against the individual and petit burgeois tendencies of the peasantry and their capitalist mentality on the occasion of the fourth anniversary of military rule in September l978. Mengistu and his advisers believed that state farms would produce grain for urban areas and raw materials for domestic industry and would also increase production of cash crops such as coffee to generate badly needed foreign exchange. Accordingly, state farms received a large share of the country's resources for agriculture; from 1982 to 1990, this totaled about 43 percent of the government's agricultural investment. In l983 state farms received 76 percent of the total allocation of chemical fertilizers, 95 percent of the improved seeds, and 8l percent of agricultural credit. In terms of subsidies, between l982/83 and l985/86 the various state farm corporations received more than 90 million birr in direct subsidies. Despite the emphasis on state farms, state farm production accounted for only 6 percent of total agricultural output in l987 (although meeting 65 percent of urban needs), leaving peasant farmers responsible for over 90 percent of production.

The stress on large-scale state farms was under attack by Western donors, who channeled their agricultural aid to the peasant sector. These donors maintained that experiences elsewhere in Africa and in Eastern Europe and the Soviet Union had shown that state farms were inefficient and a drain on scare resources.

Ethiopia - Resettlement and Villagization

The policy of encouraging voluntary resettlement went back to 1958, when the government established the first known planned resettlement in Sidamo. Shortly after the 1974 revolution, it became Derg policy to accelerate resettlement. Article l8 of the l975 Land Reform Proclamation stated that "the government shall have the responsibility to settle peasants or to establish cottage industries to accommodate those who, as a result of distribution of land . . . remain with little or no land." Accordingly, in l975/76 there were eighty-eight settlement centers accommodating 38,8l8 households. The government conducted most of these resettlement programs under the auspices of the Relief and Rehabilitation Commission (RRC) and the Ministry of Agriculture. By l982 there were ll2 planned settlements populated by more than l20,000 people. The settlements were concentrated mainly in the south and southwest. In l984 Addis Ababa announced its intention to resettle l.5 million people from the drought-affected northern regions to the south and southwest, where arable land was plentiful. By l986 the government had resettled more than 600,000 people to three settlement areas. More than 250,000 went to Welega; about l50,000 settled in the Gambela area of Ilubabor; and just over l00,000 went to Pawe, the largest planned resettlement in Gojam and largely sustained by Italian financial support. In addition, another 78,000 went to Kefa, Shewa, and western Gonder.

In mid-l986 the government halted the resettlement program, largely to fend off the negative reaction from the international community. But in November l987 the program resumed, and in March l988 Mengistu spoke of the need to move at least 7 million people. He claimed resettlement would resolve the country's recurring drought problem and would ease population pressure from northern areas where the land had been badly overused. Western donors and governments, whom Addis Ababa expected to help with the program, remained apprehensive of the government's intentions, however. Some believed that the plan to resettle l.5 million people by l994 was unrealistic, given the country's strained finances. Others argued that resettlement was a ploy to depopulate areas of resistance, weaken the guerrillas' support base, and deny them access to recruits, particularly in Eritrea and Tigray. Additional arguments against resettlement included charges of human rights violations, forced separations of families, and lack of medical attention in resettlement centers, which resulted in thousands of deaths from malaria and sleeping sickness.

Although many of these charges were valid, some criticisms may have been unfounded. For instance, the claim that the resettlement was a ploy to depopulate the rebel areas may not have been valid, given that by 1986 only l5 percent of the 600,000 resettled peasants were from Tigray and none were from Eritrea. More than 80 percent of those resettled were from Welo and Shewa.

In l985 the government initiated a new relocation program known as villagization. The objectives of the program, which grouped scattered farming communities throughout the country into small village clusters, were to promote rational land use; conserve resources; provide access to clean water and to health and education services; and strengthen security. Government guidelines stipulated that villages were to house 200 to 300 households, with l00-square-meter compounds for each family.

In 1985 Addis Ababa established a national coordinating committee to oversee the villagization plan's implementation. By March l986, about 4.6 million people in Shewa, Arsi, and Harerge had been relocated into more than 4,500 villages. Although the government had villagized about l3 million people by l989, international criticism, deteriorating security conditions, and lack of resources doomed the plan to failure. Nevertheless, Mengistu remained committed to the villagization concept.

Opponents of villagization argued that the scheme was disruptive to agricultural production because the government moved many farmers during the planting and harvesting seasons. There also was concern that villagization could have a negative impact on fragile local resources, particularly on water and grazing land; accelerate the spread of communicable diseases; and increase problems with plant pests and diseases. In early 1990, the government essentially abandoned villagization when it announced new economic policies that called for free-market reforms and a relaxation of centralized planning.

Ethiopia - Agricultural Production

The effect of the PMAC's land reform program on food production and its marketing and distribution policies were among two of the major controversies surrounding the revolution. Available data on crop production show that land reform and the various government rural programs had a minimal impact on increasing the food supply, as production levels displayed considerable fluctuations and low growth rates at best.

Major Cash Crops

The most important cash crop in Ethiopia was coffee. During the l970s, coffee exports accounted for 50 to 60 percent of the total value of all exports, although coffee's share dropped to 25 percent as a result of the economic dislocation following the l974 revolution. By l976 coffee exports had recovered, and in the five years ending in l988/89, coffee accounted for about 63 percent of the value of exports. Domestically, coffee contributed about 20 percent of the government's revenue. Approximately 25 percent of Ethiopia's population depended directly or indirectly on coffee for its livelihood.

Ethiopia's coffee is almost exclusively of the arabica type, which grows best at altitudes between l,000 and 2,000 meters. Coffee grows wild in many parts of the country, although most Ethiopian coffee is produced in the southern and western regions of Kefa, Sidamo, Ilubabor, Gamo Gofa, Welega, and Harerge.

Reliable estimates of coffee production in Ethiopia were unavailable as of mid-1991. However, some observers indicated that Ethiopia produced between l40,000 and l80,000 tons annually. The Ethiopian government placed coffee production at l87,000 tons in l979/80, 233,000 tons in l983/84, and l72,000 tons in l985/86. Estimates for l986/87 and l987/88 were put at l86,000 and l89,000 tons, respectively. Preliminary figures from other sources indicated that coffee production continued to rise in 1988/89 and 1989/90 but registered a sharp decline of perhaps as much as one-third during 1990/91. About 44 percent of the coffee produced was exported. Although the potential for local coffee consumption was high, the government, eager to increase its hard-currency reserves, suppressed domestic consumption by controlling coffee sales. The government also restricted the transfer of coffee from coffee-producing areas to other parts of the country. This practice made the price of local coffee two to three times higher than the price of exported coffee.

About 98 percent of the coffee was produced by peasants on smallholdings of less than a hectare, and the remaining 2 percent was produced by state farms. Some estimates indicated that yields on peasant farms were higher than those on state farms. In the 1980s, as part of an effort to increase production and to improve the cultivation and harvesting of coffee, the government created the Ministry of Coffee and Tea Development, which was responsible for production and marketing. The ten-year plan called for an increase in the size of state farms producing coffee from l4,000-l5,000 hectares to 50,000 hectares by l994. However, given the strain on the government's financial resources and the consistently declining coffee price in the world market, this may have been an unrealistic goal.

The decline in world coffee prices, which began in 1987, reduced Ethiopia's foreign-exchange earnings. In early 1989, for example, the price of one kilogram/US$0.58; of coffee was by June it had dropped to US$0.32. Mengistu told the 1989 WPE party congress that at US$0.32 per kilogram, foreign-exchange earnings from coffee would have dropped by 240 million birr, and government revenue would have been reduced by l40 million birr by the end of l989. Such declines not only hampered the government's ability to implement its political, economic, and social programs but also reduced Addis Ababa's capacity to prosecute its war against various rebel groups in northern Ethiopia.

Before the revolution, pulses and oilseeds played an important role, second only to coffee, in Ethiopia's exports. In EFY l974/75, pulses and oilseeds accounted for 34 percent of export earnings (about l63 million birr), but this share declined to about 3 percent (about 30 million birr) in EFY l988/89. Three factors contributed to the decline in the relative importance of pulses and oilseeds. First, the recurring droughts had devastated the country's main areas where pulses and oilseeds were produced. Second, because peasants faced food shortages, they gave priority to cereal staples to sustain themselves. Finally, although the production cost of pulses and oilseeds continued to rise, the government's price control policy left virtually unchanged the official procurement price of these crops, thus substantially reducing net income from them. The Ethiopian Pulses and Oilseeds Corporation, the agency responsible for exporting two-thirds of these crops, reported losses in EFY l982/83 and EFY 1983/84. In EFY l983/84, the corporation received export subsidies of more than 9 million birr. Subsequently, production of both crops failed to improve; by 1988 the output index, whose base year was 1972 (100), was 85.3 for pulses and 15.8 for oilseeds. Given the country's economic and political problems and the ongoing war in the north, there was little prospect of improvement.

Cotton is grown throughout Ethiopia below elevations of about l,400 meters. Because most of the lowlands lack adequate rainfall, cotton cultivation depends largely on irrigation. Before the revolution, large-scale commercial cotton plantations were developed in the Awash Valley and the Humera areas. The Tendaho Cotton Plantation in the lower Awash Valley was one of Ethiopia's largest cotton plantations. Rain-fed cotton also grew in Humera, Bilate (in Sidamo), and Arba Minch (in Gamo Gofa).

Since the revolution, most commercial cotton has been grown on irrigated state farms, mostly in the Awash Valley area. Production jumped from 43,500 tons in l974/75 to 74,900 tons in l984/85. Similarly, the area of cultivation increased from 22,600 hectares in l974/75 to 33,900 hectares in l984/85.

Ethiopia - Major Staple Crops

Ethiopia's major staple crops include a variety of cereals, pulses, oilseeds, and coffee. Grains are the most important field crops and the chief element in the diet of most Ethiopians. The principal grains are teff, wheat, barley, corn, sorghum, and millet. The first three are primarily cool-weather crops cultivated at altitudes generally above l,500 meters. Teff, indigenous to Ethiopia, furnishes the flour for injera, an unleavened bread that is the principal form in which grain is consumed in the highlands and in urban centers throughout the country. Barley is grown mostly between 2,000 and 3,500 meters. A major subsistence crop, barley is used as food and in the production of tella, a locally produced beer.

Sorghum, millet, and corn are cultivated mostly in warmer areas at lower altitudes along the country's western, southwestern, and eastern peripheries. Sorghum and millet, which are drought resistant, grow well at low elevations where rainfall is less reliable. Corn is grown chiefly between elevations of l,500 and 2,200 meters and requires large amounts of rainfall to ensure good harvests. These three grains constitute the staple foods of a good part of the population and are major items in the diet of the nomads.

Pulses are the second most important element in the national diet and a principal protein source. They are boiled, roasted, or included in a stew-like dish known as wot, which is sometimes a main dish and sometimes a supplementary food. Pulses, grown widely at all altitudes from sea level to about 3,000 meters, are more prevalent in the northern and central highlands. Pulses were a particularly important export item before the revolution.

The Ethiopian Orthodox Church traditionally has forbidden consumption of animal fats on many days of the year. As a result, vegetable oils are widely used, and oilseed cultivation is an important agricultural activity. The most important oilseed is the indigenous niger seed (neug), which is grown on 50 percent or more of the area devoted to oilseeds. Niger seed is found mostly in the northern and central highlands at elevations between 1,800 and 2,500 meters. Flaxseed, also indigenous, is cultivated in the same general area as niger seed. The third most important oilseed is sesame, which grows at elevations from sea level to about l,500 meters. In addition to its domestic use, sesame is also the principal export oilseed. Oilseeds of lesser significance include castor beans, rapeseed, groundnuts (peanuts), and safflower and sunflower seeds. Most oilseeds are raised by small-scale farmers, but sesame was also grown by large-scale commercial farms before the era of land reform and the nationalization of agribusiness.

Ensete, known locally as false banana, is an important food source in Ethiopia's southern and southwestern highlands. It is cultivated principally by the Gurage, Sidama, and several other ethnic groups in the region. Resembling the banana but bearing an inedible fruit, the plant produces large quantities of starch in its underground rhizome and an above-ground stem that can reach a height of several meters. Ensete flour constitutes the staple food of the local people. Taro, yams, and sweet potatoes are commonly grown in the same region as the ensete.

The consumption of vegetables and fruits is relatively limited, largely because of their high cost. Common vegetables include onions, peppers, squash, and a cabbage similar to kale. Demand for vegetables has stimulated truck farming around the main urban areas such as Addis Ababa and Asmera. Prior to the revolution, urbanization increased the demand for fruit, leading to the establishment of citrus orchards in areas with access to irrigation in Shewa, Arsi, Harerge, and Eritrea. The Mengistu regime encouraged fruit and vegetable production. Fresh fruits, including citrus and bananas, as well as fresh and frozen vegetables, became important export items, but their profitability was marginal. The Ethiopian Fruit and Vegetable Marketing Enterprise (EFVME), which handled about 75 percent of Ethiopia's exports of fruits and vegetables in l984-85, had to receive government subsidies because of losses.

Ethiopia's demand for grain continued to increase because of population pressures, while supply remained short, largely because of drought and government agricultural policies, such as price controls, which adversely affected crop production. Food production had consistently declined throughout the 1980s. Consequently, Ethiopia became a net importer of grain worth about 243 million birr annually from l983/84 to l987/88. The food deficit estimate for the l985/89 period indicated that production averaged about 6 million tons while demand reached about 10 million tons, thus creating an annual deficit of roughly 4 million tons. Much of the food deficit was covered through food aid. Between l984/85 and l986/87, at the height of the drought, Ethiopia received more than l.7 million tons of grain, about l4 percent of the total food aid for Africa. In addition, Ethiopia spent 341 million birr on food purchases during the l985-87 period.

Ethiopia - Livestock

Livestock production plays an important role in Ethiopia's economy. Estimates for l987 indicated that livestock production contributed one-third of agriculture's share of GDP, or nearly l5 percent of total GDP. Hides and skins constituted the second largest export earner, averaging about l5 percent of the total export value during the period l984/85 to l988/89; live animals averaged around 3 percent of the total value of exports during the same period.

Although varying from region to region, the role of livestock in the Ethiopian economy was greater than the figures suggest. Almost the entire rural population was involved in some way with animal husbandry, whose role included the provision of draft power, food, cash, transportation, fuel, and, especially in pastoral areas, social prestige. In the highlands, oxen provided draft power in crop production. In pastoral areas, livestock formed the basis of the economy. Per capita meat consumption was high by developing countries' standards, an estimated thirteen kilograms annually. According to a l987 estimate, beef accounted for about 5l percent of all meat consumption, followed by mutton and lamb (l9 percent), poultry (l5 percent), and goat (l4 percent).

Ethiopia's estimated livestock population of about 78.4 million in l988 was believed to be Africa's largest. There were approximately 31 million cattle, 23.4 million sheep, l7.5 million goats, 5.5 million horses and mules, l million camels, and 57 million poultry. Livestock was distributed throughout the country, with the greatest concentration in the highlands, where more than 90 percent of these animals were located. The raising of livestock always has been largely a subsistence activity.

Ethiopia has great potential for increased livestock production, both for local use and for export. However, expansion was constrained by inadequate nutrition, disease, a lack of support services such as extension services, insufficient data with which to plan improved services, and inadequate information on how to improve animal breeding, marketing, and processing. The high concentration of animals in the highlands, together with the fact that cattle are often kept for status, reduces the economic potential of Ethiopian livestock.

Both the imperial and the Marxist governments tried to improve livestock production by instituting programs such as free vaccination, well-digging, construction of feeder roads, and improvement of pastureland, largely through international organizations such as the World Bank and the African Development Bank. The Mengistu regime also opened veterinary stations at Bahir Dar, Buno Bedele, and Debre Zeyit to provide treatment and vaccination services.

Cattle in Ethiopia are almost entirely of the zebu type and are poor sources of milk and meat. However, these cattle do relatively well under the traditional production system. About 70 percent of the cattle in l987 were in the highlands, and the remaining 30 percent were kept by nomadic pastoralists in the lowland areas. Meat and milk yields are low and losses high, especially among calves and young stock. Contagious diseases and parasitic infections are major causes of death, factors that are exacerbated by malnutrition and starvation. Recurring drought takes a heavy toll on the animal population, although it is difficult to determine the extent of losses. Practically all animals are range-fed. During the rainy seasons, water and grass are generally plentiful, but with the onset of the dry season, forage is generally insufficient to keep animals nourished and able to resist disease.

Most of Ethiopia's estimated 41 million sheep and goats are raised by small farmers who used them as a major source of meat and cash income. About three-quarters of the total sheep flock is in the highlands, whereas lowland pastoralists maintain about three-quarters of the goat herd. Both animals have high sales value in urban centers, particularly during holidays such as Easter and New Year's Day.

Most of the estimated 7 million equines (horses, mules, and donkeys) are used to transport produce and other agricultural goods. Camels also play a key role as pack animals in areas below l,500 meters in elevation. Additionally, camels provide pastoralists in those areas with milk and meat.

Poultry farming is widely practiced in Ethiopia; almost every farmstead keeps some poultry for consumption and for cash sale. The highest concentration of poultry is in Shewa, in central Welo, and in northwestern Tigray. Individual poultry farms supply eggs and meat to urban dwellers. By 1990 the state had begun to develop large poultry farms, mostly around Addis Ababa, to supply hotels and government institutions.

Ethiopia - Fishing

Ethiopia's many lakes, rivers, and reservoirs and its approximately 960 kilometers of Red Sea coastline are fertile fishing grounds. However, fishing contributed less than l percent of GDP in l987. The ten-year plan in l983/84 estimated that the country had the potential to produce more than 92,000 tons of fish--66,000 tons from the Red Sea and the remaining 26,000 tons from lakes and rivers. But actual production in l983/84 was estimated at 600 to l,200 tons.

Fresh fish are consumed along the Red Sea coast, in Asmera, and in the vicinity of the Great Rift Valley lakes. Outside these areas, however, the domestic market for fish is small. Two factors account for this low level of local fish consumption. First, fish has not been integrated into the diet of most of the population. Second, because of religious influences on consumption patterns, the demand for fish is only seasonal. During Lent, for example, Christians who abstain from eating meat, milk, and eggs consume fish.

There was considerable commercial fishing activity in the Red Sea prior to l974, chiefly consisting of private foreign companies that exported most of their catch after processing the fish onshore. For instance, in l970 private companies exported about 9,l40 tons of fish. After the l974 revolution, most commercial fishing companies left Ethiopia, which reduced fish exports.

The Mengistu regime encouraged the establishment of fishery associations and cooperatives along the Red Sea coast and in the Great Rift Valley lakes area. In l978 the government established the Fish Production and Marketing Corporation (FPMC) to help improve the Ethiopian fish industry. The following year, the Ministry of Agriculture created the Fisheries Resources Development Department to help improve fish breeding, control, and marketing. The FPMC received loans from the Agricultural and Industrial Development Bank and aid from the European Economic Community (EEC) to purchase various types of transportation equipment and to establish modern shops and cold storage.

In late 1990, the Red Sea Fishery Resources Development Project, which is managed by the Food and Agriculture Organization of the United Nations (FAO), received funding from the United Nations Development Programme (UNDP) and the Capital Development Fund to purchase motor boats, fishing nets, and other accessories for five fishermen's cooperatives in Aseb. The government hoped this equipment would help increase production and eventually enable the five cooperatives to extract 450 tons of fish annually. Nevertheless, the 1988/89 fish production of sixty tons fell by more than half in 1989/90 because of security problems in the area.

Ethiopia - Forestry

In the late nineteenth century, about 30 percent of the country was covered with forest. The clearing of land for agricultural use and the cutting of trees for fuel gradually changed the scene, and today forest areas have dwindled to less than 4 percent of Ethiopia's total land. The northern parts of the highlands are almost devoid of trees. However, about 4.5 million hectares of dense forest exist in the southern and southwestern sections of the highlands. Some of these include coniferous forests, found at elevations above l,600 meters, but a majority of the forestland consists primarily of woodlands found in drier areas of the highlands and in the drier areas bordering the highlands.

Lumber from the coniferous forests is important to the construction industry. The broadleaf evergreen forests furnish timber that is used in construction and in the production of plywood. The woodlands are a major source of firewood and charcoal. Certain trees--boswellia and species of commiphora--are of special economic significance. Both grow in the arid lowlands and produce gums that are the bases for frankincense and myrrh. A species of acacia found in several parts of the country is a source of gum arabic used in the manufacture of adhesives, pharmaceutical products, and confectionery. The eucalyptus, an exotic tree introduced in the late nineteenth century and grown mainly near urban areas, is a valuable source of telephone and telegraph poles, tool handles, furniture, and firewood. It is also a major source of the material from which fiberboard and particleboard are made.

Data on forestry's contribution to the economy are not readily available, largely because most GDP tables aggregate data on forestry, fishing, and hunting. In l980/81 forestry accounted for 2.5 percent of GDP at constant l960/61 factor cost and 5.4 percent of the share attributable to the agricultural sector.

Before 1974 about half of the forestland was privately owned or claimed, and roughly half was held by the government. There was little government control of forestry operations prior to the revolution. The l975 land reform nationalized forestland and sawmills, which existed mostly in the south. The government controlled harvesting of forestland, and in some cases individuals had to secure permits from local peasant associations to cut trees. But this measure encouraged illegal logging and accelerated the destruction of Ethiopia's remaining forests. To ensure that conservation activity conformed with government policy and directives on land use, reforestation programs were organized through the Ministry of Agriculture or district offices that planed, coordinated, and monitored all work. The local peasant associations lacked decision-making authority.

Reforestation programs resulted in the planting of millions of seedlings in community forests throughout Ethiopia. A variety of Non-Governmental Organizations (NGOs), which had to organize their activities through the local peasant association, supplemented government efforts to rehabilitate Ethiopia's forests. However, critics maintain that both systems caused communal resources to be developed at the expense of private needs. As a result, reforestation programs did not perform well. Seedling survival rates varied from as low as 5 to 20 percent in some areas to 40 percent in others, largely because of inadequate care and premature cutting by peasants. In late 1990, Addis Ababa was in the process of launching the Ethiopian Forestry Action Plan (EFAP) to improve forestry conservation, increase public participation in reforestation projects, and prevent further depletion of existing forest resources. It remained to be seen whether this plan would improve the state of Ethiopia's forests.

Ethiopia - Government Marketing Operations

Private traders and the Agricultural Marketing Corporation (AMC), established in l976, marketed Ethiopia's agricultural output. The AMC was a government agency whose objective was to influence the supply and price of crops. It purchased grain from peasant associations at fixed prices. The AMC set quotas of grain purchases to be delivered by peasant associations and cooperatives and also bought from private wholesalers, who were required to sell half of their purchases at predetermined prices. State farms sold their output to the AMC. Although the AMC had agents in all regions, it was particularly active in the major cerealproducing regions, namely, Gojam, Shewa, Arsi, and Gonder. In 1981/82, out of the AMC's purchases of 257,000 tons of grain, Gojam accounted for 32 percent of the purchases, and Arsi, Shewa, and Gonder accounted for 23, 22, and l0 percent, respectively. The government's price controls and the AMC's operations had led to the development of different price systems at various levels. For instance, the l984/85 official procurement price for 100 kilograms of teff was 42 birr at the farm level and 60 birr when the AMC purchased it from wholesalers. But the same quantity of teff retailed at 81 birr at food stores belonging to the urban dwellers' associations ( kebeles) in Addis Ababa and sold for as much as l8l birr in the open market. Such wide price variations created food shortages because farmers as well as private merchants withheld crops to sell on the black market at higher prices.

Ethiopia - Manufacturing

Prior to 1957, when Ethiopia initiated a series of fiveyear development plans, cottage and handicraft industries met most of the population's needs for manufactured goods such as clothes, ceramics, machine tools, and leather goods. Various factors--including the lack of basic infrastructure, the dearth of private and public investment, and the lack of any consistent public policy aimed at promoting industrial development--contributed to the insignificance of manufacturing. Throughout much of the 1960s and early 1970s, manufacturing activity increased as the government's fiveyear plans diversified the economy by encouraging agroindustrial activity and by substituting domestically produced goods for imported items. Thus, according to the World Bank, manufacturing production increased at an annual rate of 6.l percent between l965 and l973. During the same period, agriculture grew at an annual 2.1 percent rate, and services grew at an annual 6.7 percent rate. Despite this favorable growth rate, manufacturing in l975 accounted for less than 5 percent of GDP and employed only about 60,000 people. Handicrafts, such as weaving, pottery, blacksmithing, leather working, and jewelry making, along with other small-scale industries, accounted for another 5 percent of GDP. In 1984/85 manufacturing and handicrafts together accounted for 11.4 percent of GDP.

In l975 the PMAC nationalized more than l00 industries and took partial control of some of them. The main characteristics of the manufacturing sector inherited by the revolution included a predominance of foreign ownership and foreign managerial, professional, and technical staffing; heavy emphasis on light industries; inward orientation and relatively high tariffs; capital-intensiveness; underutilized capacity; minimal linkage among the different sectors; and excessive geographical concentration of industries in Addis Ababa.

After nationalization, there was an exodus of foreigners who had owned and operated the industrial enterprises. The war in Eritrea and labor strikes and demonstrations also closed the approximately 30 percent of the country's plants that had been located in that region.

The economic dislocation that followed the revolution had a significant impact on the manufacturing sector. Privatesector capital investment ceased, and labor's marginal productivity began to decline. In performance terms, the manufacturing sector's output after l975 grew haltingly. Manufacturing had grown at an average annual rate of 6.l percent between l965 and 1973. A period of decline from l974/75 to l977/78 and an average annual growth rate of l8.9 percent for l978/79 and l979/80 were followed by a reduction of the growth rate to about 3.1 percent per annum between l980/81 and l984/85 and 3.8 percent per annum from 1985/86 to 1988/89.

The manufacturing sector's performance paralleled developments in other parts of the country. In the revolution's early days, the dislocation caused by nationalization, the flight of managers, the wars in Eritrea and the Ogaden, and local strife in many areas disrupted production and hurt productivity. Zemecha production campaigns, which focused on increasing capacity utilization, characterized the late 1970s. As a result of these campaigns, Ethiopia achieved growth rates of 27.3 and 10.5 percent, respectively, in 1978/79 and 1979/80. By l985 capacity utilization estimates of many industries ranged between 70 and l00 percent, and many plants operated in three shifts. These figures were high by African standards.

Manufacturing productivity began to decline by l980 because of a downturn in agricultural production and a shortage of foreign exchange to import raw materials. Analysts expected the manufacturing sector's productivity to decline further in the 1990s as equipment aged and spare-parts shortages grew. In response to the downward trend, in l987/88 the government planned to invest 342 million birr in industrial enterprises to increase production capacity. In l989 the government issued Proclamation No. ll, which enunciated policies intended to attract foreign investment. Finally, in March l990 Mengistu announced the replacement of Ethiopia's socialist economic system with a mixed economy. Among the proposed changes were that private investors would by permitted to participate in all parts of the economy with no limit on the amount of capital invested.

Ethiopia - Industry

Between l950 and l960, the imperial government enacted legislation and implemented a new policy to encourage foreign investment. This new policy provided investor benefits in the form of tax exemptions, remittances of foreign exchange, import and export duty relief, tax exemptions on dividends, and the provision of financing through the Ethiopian Investment Corporation and the Development Bank of Ethiopia. In addition, the government guaranteed protection to industrial enterprises by instituting high tariffs and by banning the importation of commodities that might adversely affect production of domestic goods. Protected items included sugar, textiles, furniture, and metal. The government also participated through direct investment in enterprises that had high capital costs, such as oil refineries and the paper and pulp, glass and bottle, tire, and cement industries. In l963, with the Second Five-Year Plan under way, the government enacted Proclamation No. 5l. The proclamation's objective was to consolidate other investment policies enacted up to that period, to extend benefits to Ethiopian investors (previous legislation had limited the benefits to foreigners only), and to create an Investment Committee that would oversee investment programs. In l966 Addis Ababa enacted Proclamation No. 242, which elevated the Investment Committee's status as an advisory council to that of an authorized body empowered to make independent investment decisions. Thus, by the early l970s, Ethiopia's industrialization policy included a range of fiscal incentives, direct government investment, and equity participation in private enterprises.

The government's policy attracted considerable foreign investment to the industrial sector. For instance, in 1971/72 the share of foreign capital in manufacturing industries amounted to 4l percent of the total paid-up capital. Many foreign enterprises operated as private limited companies, usually as a branch or subsidiary of multinational corporations. The Dutch had a major investment (close to 80 percent) in the sugar industry. Italian and Japanese investors participated in textiles; and Greeks maintained an interest in shoes and beverages. Italian investors also worked in building, construction, and agricultural industries.

In l975 the PMAC nationalized most industries and subsequently reorganized them into state-owned corporations. On February 7, l975, the government released a document outlining socialist Ethiopia's economic policy. The policy identified three manufacturing areas slated for state involvement: basic industries that produced goods serving other industries and that had the capacity to create linkages in the economy; industries that produced essential goods for the general population; and industries that made drugs, medicine, tobacco, and beverages. The policy also grouped areas of the public and private sectors into activities reserved for the state, activities where state and private capital could operate jointly, and activities left to the private sector.

The l975 nationalization of major industries scared off foreign private investment. Private direct investment, according to the National Bank of Ethiopia, declined from 65 million birr in l974 to l2 million birr in l977. As compensation negotiations between the Ethiopian government and foreign nationals dragged on, foreign investment virtually ceased. The United States Congress invoked the Hickenlooper Amendment, which had the effect of prohibiting the use of United States funds for development purposes until Ethiopia had settled compensation issues with United States nationals. During l982 and l983, the Mengistu regime settled claims made by Italian, Dutch, Japanese, and British nationals. Negotiation to settle compensation claims by United States nationals continued until l985, when Ethiopia agreed to pay about US$7 million in installments to compensate United States companies.

Issued in l983, the PMAC's Proclamation No. 235 (the Joint Venture Proclamation) signaled Ethiopia's renewed interest in attracting foreign capital. The proclamation offered incentives such as a five-year period of income tax relief for new projects, import and export duty relief, tariff protection, and repatriation of profits and capital. It limited foreign holdings to a maximum of 49 percent and the duration of any joint venture to twenty-five years. Although the proclamation protected investors' interests from expropriation, the government reserved the right to purchase all shares in a joint venture "for reasons of national interest." The proclamation failed to attract foreign investment, largely because foreign businesses were hesitant to invest in a country whose government recently had nationalized foreign industries without a level of compensation these businesses considered satisfactory.

In l989 the government issued Special Decree No. ll, a revision of the l983 proclamation. The decree allowed majority foreign ownership in many sectors, except in those related to public utilities, banking and finance, trade, transportation, and communications, where joint ventures were not allowed. The decree also removed all restrictions on profit repatriation and attempted to provide more extensive legal protection of investors than had the l983 proclamation.

President Mengistu's March 1990 speech to the Central Committee of the WPE was a turning point in Ethiopia's recent economic history. Acknowledging that socialism had failed, Mengistu proposed implementing a mixed economy. Under the new system, the private sector would be able to participate in all parts of the economy with no limit on capital investment (Ethiopia had a US$250,000 ceiling on private investment); developers would be allowed to build houses, apartments, and office buildings for rent or sale; and commercial enterprises would be permitted to develop industries, hotels, and a range of other enterprises on government-owned land to be leased on a concessionary basis. Additionally, state-owned industries and businesses would be required to operate on a profit basis, with those continuing to lose money to be sold or closed. Farmers would receive legal ownership of land they tilled and the right to sell their produce in a free market. Whereas there were many areas yet to be addressed, such as privatization of state enterprises and compensation for citizens whose land and property had been confiscated, these proposals generated optimism among some economists about Ethiopia's economic future. However, some observers pointed out that Mengistu's proposals only amounted to recognition of existing practices in the underground economy.

Ethiopia - Energy

Ethiopia is one of the few African countries with the potential to produce hydroelectric and geothermal power. As of mid-1991, however, no comprehensive assessment of this potential was available, although some estimates indicated that the total potential could be as much as l43 billion kilowatts. The main sources of this potential were thought to be the Abay (Blue Nile; 79.9 billion kilowatts), the Shebele (2l.6 billion kilowatts), and the Omo (l6.l billion kilowatts). The remaining 25.9 billion kilowatts would come from rivers such as the Tekezé, Awash, Baro, Genale, and Mereb.

Ethiopia's first large hydroelectric generating facilities were constructed in the Awash River basin. The three plants- -Awash I (Koka) with 54,000 kilowatts capacity, Awash II with 32,000 kilowatts capacity, and Awash III with 32,000 kilowatts capacity--were finished between l960 and l972. In l974 the Fincha River facility in central Welega opened with a generating capacity of 84,000 kilowatts. Other major power-generating facilities included those at Bahir Dar (7,680 kilowatts) and Aba Samuel (6,560 kilowatts). The total installed capacity of thermal generating units amounted to 210,084 kilowatts in l985/86.

Electric power production in l985/86 totaled 998.7 million kilowatt-hours, 83 percent of which was produced by hydroelectric power installations. Thermal generating units produced the remaining 17 percent. The thermal generating units in the public utility system, many of which were comparatively small, had a generating capacity of 95,635 kilowatts in l985. Major units were located close to Asmera (3l,900 kilowatts), Dire Dawa (4,500 kilowatts), Addis Ababa (3,l00 kilowatts), and Aseb (3,l00 kilowatts). In l985/86 various business enterprises and local communities owned electrical generators of unspecified capacity.

The regional electrical distribution system included an interconnected system and a self-contained system. By 1988 most power generating sources, including all major hydroelectric power plants, were interconnected in a power grid. The interconnected system served more than l00 towns. Power from the Awash, Fincha, and Aba Samuel stations ran the central system, the largest component of the interconnected system. The Bahir Dar interconnected system, which served parts of Gojam and Gonder, and the Eritrean Region Electricity Supply Agency (ERESA) were two of the other major systems. A majority of the self-contained systems got their power from thermal power plants, with the power often being used for domestic purposes and to run small mills.

The Ethiopian Electric Light and Power Authority (ELPA), a government corporation, operated most of the country's power systems. Prior to the revolution, ELPA incorporated more than forty electric power stations and generated about 80 percent of the nation's total electrical output. Two Italian firms, Societŕ Elettrica dell'Africa Orientale and Compagnia Nazionale Impresse Elettriche, chiefly serving Eritrea, produced another l6.5 percent of the country's electrical energy. Independent stations generated the remaining 3 to 4 percent. In 1975 the government nationalized all private utility companies and placed them under ELPA. Since then, utility services have been reserved exclusively to the state. In l987 ELPA served about l70 towns and produced about 92 percent of the national electrical output. Mass organizations, sugar factories, and the Aseb refinery administered the remaining 8 percent.

In 1985/86, of the total 847.7 million kilowatt-hours of power sold by ELPA, 59 percent was for industrial use, 29 percent for domestic use, l0 percent for commercial use, and the remaining 2 percent for other uses such as street lighting and agriculture. By 1987 about 9 percent of the total population (4.3 million people) were using electricity.

Ethiopia's second commercial energy resource is oil. Despite reports of natural gas reserves and traces of petroleum, Ethiopia still depends on imported crude oil, which accounted for an average of about l2 percent of the value of imports during the period l982/83 to l987/88. Exploration for petroleum and natural gas in the Ogaden and the Red Sea basin has been going on for many years. In May l988, International Petroleum, a subsidiary of Canada's International Petroleum Corporation (IPC), signed a production sharing and exploration license for the Denakil block, which covers 34,000 square kilometers on and off shore along the Red Sea coast. The IPC also has conducted geothermal studies and undertaken mapping projects. In late 1990, the government announced that geologists had discovered oil in western Ilubabor, with an expected deposit ranging from 100 million to 120 million tons.

Since the early 1970s, there has been exploration and development of geothermal resources in the Great Rift Valley. In early 1972, the United Nations Development Programme (UNDP) conducted preliminary explorations in the area and detected what appeared to be one of the world's largest potential sources of geothermal power. In mid-1979 the EEC, assisted by the UNDP, provided a grant to aid exploration in the valley's lake region. In l984 Ethiopia reported the discovery of a promising geothermal source in the Lake Langano area. However, no indication has been provided as to when production will start. The primary energy sources for most Ethiopians are charcoal, animal manure, and firewood. Some estimates indicate that as much as 96 percent of the country's total energy consumption is based on these traditional sources.

Ethiopia - Mining

Ethiopia's minerals industry has been only of minor importance, contributing an average of less than 0.2 percent of GDP at constant factor cost between l984/85 and l988/89. Although it had reported the existence of a wide range of minerals throughout the country, the government had authorized little exploration. Thus, there are no reliable estimates of the extent of mineral resources. However, there has been some small-scale mining for minerals such as gold, platinum, salt, limestone, and clay. Gold has been mined at Adola (in Sidamo) for many years. In l981/82 output at this site in southern Ethiopia averaged around 500 kilograms per annum. However, by 1985/86 production had dropped to 293 kilograms. In l987 the government reported the discovery of large gold deposits in Lege Dimbi, also in Sidamo. Observers believed that prospectors mined an annual average of 7.5 to 8 kilograms of platinum in the Yubdo area in Welega.

Stretching inland from the Red Sea coast, the Denakil Depression has large salt deposits. Production averaged some 20,000 tons annually. Other major salt sources are found at Aseb and around Mitsiwa, also on the Red Sea. According to some estimates, Ethiopia produces about 300,000 tons of marine and mined salt annually. However, this supply fails to satisfy domestic needs because the government exports salt to improve its hard-currency reserves.

A large potash deposit, estimated at l40 to l50 million tons, is located in Tigray's Dallol area. Production has averaged less than l million tons per year.

Large iron ore deposits are scattered throughout the country. During the Italian colonial period, a few companies started iron-mining operations in Eritrea but abandoned them after the Italian occupation ended in 1941. In the late 1980s, prospectors identified iron ore deposits estimated at 20 million tons in the Agametta region (near Mitsiwa) and another l60,00 tons of iron ore in Welega and Bale.

Copper, lead, and zinc deposits are found near Debarwa, thirty-five kilometers southwest of Asmera. In l973 the Ethio-Nippon Mining Share Company started mining copper in Debarwa. However, the Eritrean war forced an end to operations two years later.

Limestone is excavated near Mitsiwa, Dire Dawa, and Addis Ababa. The limestone is used chiefly at the cement works operating in those cities.

Ethiopia - Transportation

A lack of resources, coupled with military and political instability, has retarded the growth of a transportation infrastructure in Ethiopia, even though development of such a system traditionally has been a government objective. The Haile Selassie regime allocated an average of 700 million birr of the planned budget for the development of transportation during the three five-year development plans (l957-74). In l975, when the PMAC articulated its socialist economic policy, the government assumed control of all transportation and communication facilities. The military government continued to expand and improve the transportation infrastructure by using its own funds and by securing loans from international organizations such as the World Bank. In l991 the transportation system included l3,000 kilometers of all-weather roads, a 78l-kilometer railroad connecting Addis Ababa and Djibouti, twenty-five airports, and another twenty airfields.

Ethiopia - Foreign Trade

Both the imperial and the Marxist governments tried to improve Ethiopia's balance of trade, the former by encouraging exports and the latter by curtailing imports. However, Ethiopia's foreign trade balance has basically been in deficit since l953, with the exception of l975, when a combination of unusually large receipts from sales of oilseeds and pulses resulted in a surplus. In general, foreign trade has grown faster than the national economy, particularly in the early l970s, but it has accounted for only a small percentage of the national economy. In EFY 1972/73, exports and imports accounted for l3 and l2 percent of GDP, respectively. By EFY 1988/89, exports had declined to 8 percent of GDP, and imports had jumped to 2l percent. Virtually all machinery and equipment had to be imported, as well as intermediate goods for agriculture and industry, including fertilizer and fuel. Increased cereal shipments accounted for the growth in imports. In the 1980s, Ethiopia faced several famines and droughts. Consequently, the country, which had been virtually self-sufficient in food supplies in the 1970s, became a net importer of food worth as much as 243 million birr annually during the period EFY l983/84 to EFY l987/88. The military government failed to correct the country's historical trade deficit, despite efforts to regulate exports and imports. Consequently, during the 1980s the trade picture worsened as imports grew rapidly and foreign aid slowed.

Exports

Ethiopia's exports in EFY l988/89 were primarily agricultural products. The only significant nonagricultural exports were petroleum products such as heating oil, which had no use in Ethiopia, from the Aseb refinery.

The value of exports increased during the l980s, and by EFY l988/89 exports had almost twice the value they had in l973. However, the composition of exports had remained essentially the same, although the relative share of the various agricultural exports had changed. Coffee, the major export, still averaged about 63 percent of the value of exports during the five years ending in EFY l988/89. The relative share of oilseeds and pulses, however, had changed dramatically. Pulses and oilseeds, which accounted for about l5 percent and l9 percent, respectively, of the total value of exports in EFY 1974/75, dropped to l.9 and l.4 percent, respectively, of the total value of exports in EFY l988/89. Droughts, famines, the peasants' preference for cereals and other staples, and the rising cost of producing pulses and oilseeds accounted for the decline in the export of these two products. Exports of livestock and livestock products averaged l8 percent of the value of exports for the five years ending in EFY l988/89, which was slightly higher than the prerevolution share of 16 percent.

After the l974 revolution, exports' relative share of GDP declined, largely because domestic production grew more slowly than total demand. This could be attributed to the agricultural crisis associated with the country's recurring droughts and famines and the dislocation of the farm economy resulting from the revolution. Total domestic production, measured by GDP, grew at an average annual rate of 0.9 percent per year during the 1980-87 period while exports declined at an average annual rate of 0.6 percent. During the same period, the population grew at an average 2.4 percent annual rate. Consequently, Ethiopia's export share of 8 percent of GDP in EFY l988/89 was one of the world's lowest.

The direction of Ethiopia's post-1974 exports remained essentially the same as in the prerevolution period, despite the government's change of policy and realignment with the Soviet Union and Eastern Europe. About 79 percent of Ethiopia's exports went to Western countries, primarily the United States, the Federal Republic of Germany (West Germany), and Japan. Ethiopia's export trade with the Soviet Union, one of its major allies, was less than 4 percent in the five years ending in l987; prior to l974, the Soviet Union had accounted for less than 1 percent of Ethiopia's imports. Beginning in 1979, Addis Ababa sought to encourage exports to the Soviet Union and other socialist countries by encouraging barter and countertrade. Ethiopia used this technique to market products such as spices, natural gums, some pulses, frozen meats, and handicraft items, which are not reliable hard-currency earners. In exchange, Ethiopia usually received consumer goods, industrial machinery, or construction machinery. Although reliable figures on the volume of barter and countertrade were unavailable, it appeared unlikely that the figure exceeded US$50 to US$55 million in any year.

Imports

Ethiopia's major category of import items was consumer goods, which accounted for about one-third of the value of imports during the period EFY l984/85 to EFY 1988/89. Capital goods, primarily machinery and transportation equipment, accounted for another 39 percent, with fuel, semifinished goods, and durable consumer goods accounting for the other third of the value of imports. A major structural change in Ethiopia's imports was the relative increase in the importation of food items. During the three years ending in EFY l986/87, cereals and other food items accounted for 22 percent of the total value of imports; in l974 cereal and food items had accounted for only 4.6 percent. As a result, the share of nondurable consumer items jumped from l6.8 percent in l974 to 34.2 percent in l985. It dropped to 24.9 percent in EFY l986/87.

Imports provided the capital and intermediate goods upon which industry depended. Imports also satisfied most of the country's demand for nonfood consumer goods, such as automobiles, radios, televisions, pharmaceuticals, and textiles. In the five years ending in EFY l986/87, the relative share of the value of transportation and transportation equipment increased, reflecting the country's increasing demand for trucks and other heavy road vehicles needed to transport food to areas affected by drought and famine.

Most of Ethiopia's imports came from Western countries. Italy, the United States, West Germany, and Japan, in order of importance, accounted for 45 percent of total imports in l987. The Soviet Union accounted for l6 percent of the value of imports in l987. By contrast, Ethiopia's exports to the Soviet Union amounted to only 5 percent of total exports in 1987. The relatively high proportion of imports from the Soviet Union was largely because of oil; in l987 Ethiopia received virtually all its crude petroleum from the Soviet Union. In l987 the United States remained Ethiopia's major trading partner despite cool relationships between the two countries; the United States ranked first in buying Ethiopia's exports and third in satisfying Ethiopia's import needs.

Balance of Payments and Foreign Assistance

Ethiopia has experienced chronic balance of payments difficulties since l953, with the exception of a few years. The major factor in the deteriorating balance of payments was the worsening situation of merchandise trade. The trade deficit that existed during the imperial years continued to grow after the revolution, despite the introduction of import controls. Since EFY l981/82, the value of merchandise imports has been roughly double the value of exports.

Since l974 there has been low growth in the overall volume and value of exports. Coffee, Ethiopia's principal export, accounted for about 60 percent of total merchandise exports, although this level fluctuated in the 1980s. Coffee exports reached an all-time high of 98,000 tons in EFY l983/84 but dropped to 73,000 tons in EFY l987/88. Similarly, coffee receipts declined as the world price of coffee plummeted. The share of noncoffee exports has not shown any significant change. Exports of oilseeds and pulses have declined since imperial times. Industrial exports consistently contributed only about 8 percent of the total value of merchandise exports. In contrast to the slow increase in the volume and value of exports, imports grew by nearly 7 percent during the decade ending in EFY l988/89. This trend reflected Ethiopia's growing dependence on imports and the decline of foreign-financed investment and domestic savings. A high growth rate in import prices accompanied the high growth rate in imports. The result of these deteriorating terms of trade was a severe trade balance problem.

To finance its trade deficit, the government has depended on foreign aid. These import finance funds were in addition to the large volume of development project aid and commodity assistance the international community has provided to Ethiopia since the end of World War II. The volume of official development assistance jumped from US$l34 million in l975 to US$212 million in 1980 and to US$635 million in l987. Most external financial assistance came from Western nations. By the late 1980s, Ethiopia was the principal African recipient of concessionary funding and the largest recipient of EEC aid. In l988 Ethiopia received US$l4l million from the EEC under the provisions of the Lomé Convention. An additional US$230 million was later allocated under the Lomé Convention. Bilateral assistance, mainly from European countries, also increased in the late l980s. World Bank lending for various projects covering agriculture, education, housing, road construction, and power development reached US$400 to US$500 million by l988. Despite this aid, however, Ethiopia still received the smallest amount of aid per capita of all developing countries. The 1987 per capita aid level was US$14, compared with a US$23 group average for all developing countries.

Reliance on foreign aid has created economic problems for Addis Ababa. In 1987 Ethiopia's total external debt amounted to US$2.6 billion, of which US$2.4 billion was long-term debt (excluding military debt). Addis Ababa owed more than one-third of the total to multinational agencies and the remainder to bilateral creditors. Economists estimated the EFY 1986/87 cost of servicing this long-term debt to be 28.4 percent of export earnings and projected the figure to rise to 40 percent of export earnings by l990.





CITATION: Federal Research Division of the
Library of Congress. The Country Studies Series. Published 1988-1999.

Please note: This text comes from the Country Studies Program, formerly the Army Area Handbook Program. The Country Studies Series presents a description and analysis of the historical setting and the social, economic, political, and national security systems and institutions of countries throughout the world.


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