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INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

INTERNATIONAL DEVELOPMENT ASSOCIATION

THE ECONOMY OF ETHIOPIA

Volume I

September 30, 1963

Department of OperationsAfrica

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CURRETICY E4UT ALENTS

Unit Ethiopian dollar (Et, or Eth.$)

U.S. $1.00 - E.$2.484E.N'l.00 - U.S.o0.4o25E.4l million a U.S.$402,5O0

WEIGHTS

All weights are expressed in metric tonsunless otherwise stated.

AREA

1 hectare - 2.471 acres1. square kilometer 247.1 acres1 square kilometer 0.386 square miles

TIi_

The Ethiopian calendar year (here marked E.C.)begins on September 11. (The Gregorian cal-endar is marked here G.C.) The current yearup to September 11, 1963 G.C. is called 1955E.C.

The Ethiopian budget year runs from July 8to July 7, budget years are referred to bythe year in which they end, e.g. the yearending July 7, 1963 is referred to as bud-get year 1963.

In order to simplify the report the Gregoriancalendar has been used unless otherwisestated.

TIE ECONOMY OF ETHIOPIA

Table of Contents

Page

BASIC DATA

MAP OF ETHIOPIA

SU1lEARY AND CONCLUSIONS . . . . . . . . . . . . . . . . . . .

I. BACKGROUND FOR DEVELOPMENT . . . . . . . . . . . . . . .

II. GROWTH AND STRLCTURE OF THE ECONOMY . . . . . . . . . .

A. National Accounts Data . . . . .. . .. 8B. Production and Employment by Sectors . . . . . . . . 10

Agriculture . .............. 10Forestry . ... ... ... ... 15Fisheries ...... ... . . . . . . . . . 16Mining . . . . . . . , . . . . . . . . . . . . 16Industry and Handicraft . . . . . . . . . . . 17Building and Construction . . . . . . . . . . . 19

C. Investment Policy . . . . . . . . . . . . . . . . . 19D. Transport and Utilities . . . . . . . . . . . . . . 21E. Education ..... .... .... ... 23F. Public Finances . . . . . . . . . . . . . . . . . . 25G. Money, Credit and the Capital Market . . . . . . . . 31H. Prices and WIages . . . . . . . . . . . . . . . . . 36I. External Finance and Trade . . . . . . . . . . . . . 37

Balance of Payments . . . . . . . . . . . . . . 37Foreign Aid . . . . . . . . . . . . . . . . . 38Foreign Exchange Reserves . . . . . . . . . . . 38External Debt ..... ...... 39Foreign Trade . . . . . . . . . . . . . . . . . 40

J. PLanning . . . . . . . . . . . . . . . . . . . . . 112

III. LONG-TERM PROSPECTS AND CREDITWORTHINESS . . . . . . . . 3

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AD)PENDITOES

1. TRANSPORTATION AND CO,UTNIICATIONS FACILITIES

2. EDUCATIONAL SYSTEM

3 . GOVSRNiNT INVEST?EITS AT ENM OF INDIVIDUALFINANCIAL YEARS

4. iJIAJOR liONETARY INSTITUTIONS AND THEIR FUNCTIONS

5. DEVSELC'Th T`1-,T L3ANK OF ETHIOPIA

6. STATIS,TICAL A?P?ENDIX

BASIC DATA

Area 45jO000 sq. miles

Population estimate 15-21 million (21 million is theofficial estimate)

GNP estimate (1962) U.S. 8 560 million

Per Capita GNP estimate U.S. ki 40

Central Government Budget 1962 (actual) U.S. 4 million Equivalent

Ordinary Revenue 80Expenditure 77

Extra-ordinary or capital expenditure 25of which financed from external sources 17

Balance of Payments 1962

Exports f.o.b. 83

of which coffee 52%hides and skins 12%oilseeds and oilseed

cakes 12%cereals and pulses 3%

Imports c.i.f. 10o

Other current payments, net 9

Capital inflow, net 40

Increase in foreign assets 10

Foreign Exchange Reserves

iy 31, 1963 75

Public External Debt

Outstanding December 31, 1962

Net of undisbursed 43.4

Including undisbursed 67.8

Major additions Jan. 1-April 30, 1963 13.5

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MAY 1963

THE ECONOIT OF ETIHIOPIA

Summary and Conclusions

1. The geography and topography of Ethiopia, the unique culturalheritage, her historical development and her long independence maintainedover centuries, go a long way towards explaining Ethiopia today, her semi-isolation until recently from the outside world, and her recent appearanceon the world scene as a country seeking development and inviting the helpof external assistance in this task. The basic framework of the governmentderives from the Constitutions of 1931 and 1955. In fact most power reposesin the Emperor. The Council of Ministers, headed by a Prime Minister, isresponsible to the Emperor and not to the Parliament. The administrativestructure of government generally leaves much to be desired with respectto the crucial role it must inevitably play in the country's development.The absence of coordinated collective ministerial activity as well as lackof coordination in and between levels of government has imposed a limita-tion on economic development, and continues to do so. Some of recentdevelopments in public administration hold, however, some promise forimprovemnen-ts, but administrative reorganization remains a pressing problemif growth is to be achieved.

2. The Government has played a large role in the economy in the pastand this tendency remains. It published the c3econd Five-Year Plan during1962. The Planning Office, however, does not occupy a position to enableit to carry enough weight to delineate and follow through on governmentdeveloprment policy as outlined in the Plan. The Second Five-Year Planenvisages a change toward a higher proportion of investments in directlyproductive sectors than in the past as well as a significant increase inthe overall level of investment; it seems quite likely that both of thesetrends will develop, but not to the full extent planned. A major lirnita-tion, on the degree of fulfillment of the Plants objectives will probablyarise from entrepreneurial and private financing stringencies, two elementsassumed to be supplied to a large extent from abroad. An increase in theprivate capital inflow in the near future to the extent required by the Planseems doubtful.

3. The public development effort is not particularly striking as faras public savings and public consumption of a recurrent exoenditure natureare concerned; but seems satisfactory as far as capital expenditure is con-cerned, provided of course that the projected large increase in foreign aidbecomes available. This very availability, however, is likely to be adverselyaffected by the limited domestic resource mobilization effort, which willdiminish the country's capacity to match foreign capital with local resources.

4. The economic potential of Ethiopia has not been fully explored andin any event has not been fully exploited. The fertile soil, the range ofclimate, and the level of rainfall hold out considerable potential forgrowth of agricultural production, including cattle-breeding and animalhusbandry generally, given the right stimulus and support, e.g. land reform,extension services, credit and marketing systems and research. IvMineral

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exploration recently started, has not yet yielded significant resultsbeyond the promising discovery of potash resourcesj but holds some hope forlong-term growth. Ethiopian economic growth will to a large extent beinfluenced by a number of key external factors. The average annual levelof coffee sales proceeds over the 1963-67 period are likely to exceed by5-10QZ the 1961/62 level. Export prospects of other commodities are mixed,iwith mineral and meat products among the most promising. Import replacementwill also continue to play a growing role. The need for and dependenceupon foreign public and private capital is, expected to increase substantially,and may find a favorable response overseas, even if not at the hoped forlevel.

5. The Ethiopian external debt is not uncomfortably high although ithas recently increased quite rapidly. The foreign debt service amounts toU.S. $7.2 million, or 8% of export earnings (or about 10% of foreign exchangereserves). The debt service is expected to increase to U.S. $8.2 millionby 1965). Ethiopia has an excellent debt service record0 Foreign exchangereserves are at a fairly high level, equal to 8-9 months imports at thepresent level. Present export prospects do not seem sufficiently promisingto finance a rate of growth of imports necessary to sustain the expectedrate of growth of the economy without a reduction of reserves and/or rapidlyrising inflow of' foreign capital. The likelihood of Ethiopia's obtainingsubstantial foreign private investment seems comparatively limited, and itcan be expected that public capital will play the leading role in capitalinflow in the near future as in the past when about half of this inflow wasin the form of grants and soft loans, and half in the form of loans on con-ventional terms. Thus, on balance, in the light of its present externaldebt and foreign exchange positions as well as its past debt servicingrecord, Ethiopia appears creditworthy to service limited additional debt onconventional terms. Hotever, since the outlook is for an increase incapital requirerments exceeding the probable limit of this capacity to ser-vice debt on conventional terms, and since it is desirable to keep theforeign debt service within reasonable limits to allow some margin to servicesuch additional foreign private investment as the country may attract andsome margin to offset some of the wIcertainties indicated in the report withrespect to export prospects, it would also seem necessary for Ethiopia toreceive credits on non-conventional terms. It also appears necessary tostrike a balance between loans on ocnventionl and ncn-conventicoial termsso that the composition of the new debt does not impose too heavy a burden onthe country's foreign debt service capacity. The very low per capita incomein the country and the relatively slow grc*th rate, on the one hand, andthe recent attempts of the Government to improve its general performance andto develop the economy, on the other, suggest that Ethiopia is eligible forassistance on non-conventional terms. In short, Ethiopia can for the timebeing be considered as a "blend" country, subject to periodical review ofthe strength of the economy, the performance of the government, and theevolution and composition of the external debt.

I. BACKGROUID FOR DEVELOPMfIT

1L. The Empire of Ethiopia occupies the easte;n horn of Africa withS'oialia, and looks across the Red Sea to Saudi Arabia and hden and has forits near neighbors the Sudan and the Northern Frontier District of Kenya.Eor the most part, the principal influences emanating frcm Ethiopia's neigh-bors are Arabic and Moslem. The origin of several of the principal strandsin the Ethiopian population dating back perhaps 2,000 years or more is thoughtto have been in the Arabian peninsula; the official language of the countryAinharic has links with Semitic and Hamitic languages. The principal religionsof the country are also ILddle Eastern in origin. The official religion of-the Established Church of the Empire is a special type of Christianity,based on the doct;rines of Saint Mark, and shares many concepts and practiceswith the small Coptic Church of Egypt. Until recent years there were anunber of organizational and doctrinal links between the two Churches. TheEthiopian Orthodox Church traces its origin back to the fourth century. TheOther major religion in the country is Islam. There are also a number ofanimistic religions of the type found elsewfhere in Africa, practiced bydifferent tribes in various parts of the country. The ruling Solomonicdynasty also traces its origins back to ancient times; in fact it traces itsdescent directly from a union of King Solomon of Jerusalem and the Queen ofSheba of ancient Ethiopia, sometimes referred to as Abyssinia. In light ofthis heritage it has been said "Ethiopia is in Africa, but not of Africa!'.Nevertheless, in recent years Ethiopia has been increasingly active inAfrican affairs and has been taking an increasingly active role in Pan-Africanpolitical affairs (see paragraph 21). Thus in sum Ethiopia today presents aunique synthesis of cultural forces which sharply distinguishes it from anyof its neighbors.

2. In addition to the special cultural synthesis, geographically and

topographically the core of the country is the high plateau which rangesfrom 7,500 feet to 15,000 feet (with the capital Addis Ababa at about 8,500feet) and the low plateau which ranges from 5,000 feet to 7,500 feet. Beyondthese highlands the Ethiopian low lands taper down into the flat desert areasand hot regions of the countries wfhich surround it. The "mountain fortress"which is the heart of Ethiopia has a cool climate, and fertile and reasonablywell-watered lands. The contrast once again between Ethiopia and its neighborsis a sharp one.

3. Historically too Ethiopia stands in contrast with its neighbors.It can trace its origin back 2,000 years or more, during which time, withthe exception of the Italian occupation of 1936-41, it has successfullymaintained its independence. By and large Ethiopia does not have a colonialpast in the sense of most of the African continent. The size, shape andcomposition of the Empire has varied considerably over time; at various timesdifferent local kingdoms coalesced to form the country and only in recenttimes, dating from the reign of i"Jenelik II in the late 19th century (1889-1923),

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was the country unified substantially within its present geographical con-figuration (except for Eritrea). In 1952 the formaer Italian colony of

Aitrea was federated by the United 14ations vrth Ethiopia; Ethiopia claimedhistorically that the area, 7with its access to the Red Sea, was part of theEr;pira. Only ten years later, in November 1962, the local legislature ofigcitrea voted to forego its federal status and become constitutionally anintegral part of the unitar3y Ethiopian Empire.

4. Thus, the geography a-nd topography of the country, the uniquecultural heritage, its historical development and its long independence,maintained over the centuries, particularly during the middle and late 19thcentury at a time when the Sudan, Eritrea, Somalia and Kenya all 'becamecolonies, go a ong way towards explaining Ethiopia today, its semi-isolationuntil recently from the outside world, and its recent appearance on the worldscene as a countJry seeking development and inviting the help of exuernalassistance in this task.

5. The constitut.ional development of the country has been slow andalso reflects the special history of the country. The first written consti-tution of the country was prcmulgated in Ju'y 1931 by the Emperor HaileSelassie I on the advent of hi.s accession to the throne. In fact, the briefconstitution of 55 articles for the Jm,Iost part formalized the situation thenextant in the country. Power was totally concentrated in the monarch. Twenty-'ive years later-, in November 1955, the th;peror promulgated the Revised Con-stitution of Ethiopia, lwhich runs to 131 ar-ticles and spells out with moreexactitude tLe distribution of f-unctions and to some extent power, the rightsof the individual and the structure of governnent. Once again, for tae mostpart power is concentrated in the monarch. An attempt is made to spell outwfith more precision the legal succession to the Crown and for the first tiLmeprovision is made for a popularly elected Chamber of Deputies, which shareslimited legislative power with the -Senate, which is appointed by the mperor.

6. The Council of :inisters, headed by a Prime Ministe-, is responsibletlo the Eimperor and not to Parliament. The role of the Council is essentiallyadvisory. Although the concept of joint ministerial responsibility forI"ouncil decisions exists, Practice r4 ouil suggest that irinisters -ake theirlirection from the Emperor and report to him and that the coordinating and:Lttegrating role of the Council is limited. in the last two years there hasbeen an attemLpt to modernize somewhat the government structure through theadoption of a basic civil service statute and the establishment of a centralpersonnel agency. Also under consideration at the present tize is a "projetde loi"l for the organization of a local governmental structure, which, forthe most part, outside of traditional tribal and village institations, onlyexists in rudimentary forrm.

7, There are at t.ie present time 17 mainistries irn addition to the officeof the Prime .intister, 9 or 10 major g,overnment corporations, and, in addition,a variety of boards, bureaux and other special organizations. There is a

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considerable duplication of staff in this complex of agencies - e.g., it isnot unusual for a minister or assistant minister to be a member of as manyas 10 or 15 boards of directors of government corporations, boards, bureaux,and other agencies. The tendency towards fragmentation of functions, multiplejobs in the hands of a limited number of individuals, and the nemness andlimited scope of the Civil Service structure all tend to accentuate the lackof cohesion and coordination in the formulation, administration, and executionof government policy, ultimately reflected in the already observed relativelylimited application of tihe principle of collective ministerial responsibility.

3. This absence of coordinated collective ministerial responsibility isreflected not only in the general formulation and administration of governmentpolicy, but also more specifically in the operation of the government'sfinancial system. All too often the national budget is a conglomeration ofindividual ministerial budgets reflecting the exigencies of the moment inone or another field with little if any reference to established general policyor governmental ohjectives. The Second Development Planillustrates this problem in connection with budgeting for the various projectsand programs contemplated in the Plan.

5. In the same way that the central government, where all power in thecountry is concentrated, lacks focus and is weak on coordination so too govern-ment outside of the capital lacks direction and focus. There are now 13provinces plus Eritrea headed by Governor Generals, who are for the most partr-epresentatives of the Emperor, with limited staffs and resources, and wFithlimited capacity for channeling central policy and applying it to the localareas and vice versa for channeling local problems to the attention of thecentral authorities. Beyond the provincial level, the governmental structurebecomes even more tenuous and less certain. There are 6 municipalities in thecountry, headed by mayors appointed by the Zmperor, as well as innumerablehamlets, villages and towms. The latter units have limited contact, directlyor indirectly, writh the central authorities and are essentially governed by-radiiional authorities.

lO Thnus, one of the most serious limitations on the capacity of thegovernment for effective action in all spheres of activity, and particularlyin the sphere of economic development, is the nature of the existing adminis-trative structure and the institutional gaps at the center and between thecenter and the provinces and between the provinces and intermediate and locallevels of government.

11. In addition to the institutional gaps already discussed, there arernany o-ther important ones discussed in various places in the report and onlybriefly mentioned here. In the most important economic sector - agriculture -

there is only a rudimentary extension service, almost a total absence of aneffective agricultural credit system, and no concept of supervised agriculturalcredit, particularly for small and medium-size farmers, a limited agriculturalresearch and experimental system, and the system such as it is is in disputebetween various government authorities, a limited agricultural marketing,ystem, end an almost total lack of an agricultural cooperative system for

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marketing or credit or purchasing or buying purposes. In the limitedindustrial sector, on which the new Five-Year Development Plan places somestress, the existing Development Bank of Ethiopia plays a very limited roleindeed. As far as can be ascertained the existing Development Bank apparentlydoes not conceive of itself as a serious source of credit for small or medium-size agricultural enterprises). As a consequence the Five-Year Plan contem-plates the establishment of a new Investment Bank to fulfill these functions.

12. In the economy as a whole, there is a serious lack of savingsinstitutions, and for all practical purposes there is no internal moneymarket. The Government is, however, now experimenting with new issues ofsavings bonds. There is no stock market and the offerings of share com-panies are limrited to a small circle of investors in the capital, many ofthem in one form or another government institutions or government-financedinstitutions.

13. The private sector is limited in scope and in the nurmber of parti-cipants. There are signs, however, of increasing cash-cropping on the partof farmers and some indications that farmers apparently will slift productionof crops in response to prices offered.

14. In addition to the institutional problems already mentioned,there is the major question of land reform, which has been the subject ofconsiderable discussion in the country for some time. There have been twogovernment commissions sitting in the last two years to consider the prob-lem and two FAQ experts have been making a study of the problem at theffovernmentts request. The su-ject is obviously a delicate and complicatedone; it is also extremely difficult to obtain detailed information. Never-theless, it seeas clear that the land-ownership pattern in Ethiopia isprobably -mique for all of Africa. The riajor landowners in the country arethe State itself, the Emperor and the royal family, the Established StateChurch, the clergy, the landed-nobility and in several provinces the moretraditional collective ownership of tribal and sub-tribal organizationsobtains. On much of the land that is not tribally owmed a syJstem of land-lord and tenant relationships exists, involving a type of share-croppingunder which it is reputed that between 25% and 50% of the output goes tothe landlord, varying with the traditional pattern in an area and wJith theservices and supplies pro-vided by the la-ndlord, e.g. seeds and bullocks.In addition certain personal services, on a diminishing scale, apparentlyin some instances are still required to be accorded by tenants to landlords.Tenants are legally free to move, although custom and past prac-tice oftenmilitate against such mobility.

15. :n addition to the landholding system there is the problem of thecollection of land taxes. In addition to the government, the State Churchfrequently has been granted the right to collect land taxes from landlords.For this purpose the Church stands in the role of the government as tax

collector (distinct from its other role as a landlord). In the past too avariety of individuals, frequently soldiers and noblemen who have served theEmpire well, were also granted the right to collect land taxes. This rightof individuals to collect land taxes has been disappearing in recent years.

16. Ever since 1929 there have been a series of decrees and orderspromulgated b; the Emperor in an attempt to clarify, modernize, and to anextent reform the land tenure system and landholding practices. In additionto th1e current studies of the land tenure system itself there are under con-sideration "projets de loi" dealing with landlord-tenant relationships andland tax reform. There is obvious need for a standard land-measurement system.Iarge areas of the country have aoparently never been measured; other areashave been measured with a unit of measurement - a gasha - which is variouslydefined as containing anyrwhere from 40-70 hectares. in addition, many of themeasurements are old and there is little reason to have much confidence intheir accuracy. A new standard measurement used in systematic land surveysand in a program of land registration would not only have the effect of en-larging tax collections and clarifying land-ownership, it would also probablyresult in some redistribution of the land resulting from forfeitures of land-Thich is not now effectively worked or not worked at all. In addition, theabsence of agricultural income from the country's income tax has also becomecl subject of discussion and study.

17. As against the foregoing structural and institutional gaps, Ethiopiastarts with a basically favorable resource endoTAnment. Large parts of thecountry enjoy a temperate climate wJith reasonably good rainfall and reasonablygood soil conditions. There a4so appear to be limited possibilities forirrigation. The range of agriculture possibilities appears extremely broad.The range of agricultural products now successfully cultivated in the countryincludes teff (a local grain much favored by the Ethiopians for producing in-gira, the local equivalent of bread), wheat, barley and other grains, pulses,oil seeds, gardern vegetables, fruit, and the important cash crops, coffee andcattle and other farm animals, with the important by-product of skins and hides.She country is basically self-sufficient in food, and with the operation oftwo sugar-cane plantations by a private Dutch company is now almost self-sufficient in sugar and sugar products. The land/man ratio is oy and largesatisfactory and pressure on the land is still manageable, su(gesting thatorderly landholding and landworking re-organization is still possible.

:18. There has never been a population census in Ethiopia, and estimatesvary from- 15 million to 22 million. The Grovernment for planning purposes hasadopted the number of 21 million. The average annual population increase isthought to be in the neighborhood of 1.5%. A census at an early date plus theestablishment of an appropriate statistical service to record vital statisticsare recognized as important needs for improved planning.

19. In the fields of transportation and communications, discussed indetail in Chapter II and Appendix I , Ethiopia has a long way to go. Bothits economic development and its political, cohesion require opening up andconnecting very large areas of the country with one another and with the

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ca-ital, as well as .,ith Ethiopia s outlets to the sea. CorrLrmunications wqithin

2tlbiopia have been developing, particularl-y wi.th the aid of two IJ3D loans.liere too, there is room for further development if the country i-s to be moreclosely Imit together economically and politically.

20. Education, discussed in detail in Chapter II and Apnendci 2, is

another field of major pre-occupation for the Ethiopian Government. Nuch

attention is given to the subject in the Second Development Plan. The hour-glass configuration already emerging in Ethiopia's education, however-, is amnatter of concern. From the point of view of national emphasis there is abulge at the prinmay school level, particularly in the lowest grades, and then

again on a smtaller scale at the university level withn a pinch in the middle,starting at the upper-primary school level, and going through the secondaryschool level, the technical and vocational school level, and the post-,seccndary nor-university technical and vocational level, The prospect of

lthiopia repeating the experience of imany other African countries of producing

large nurbersof partially and fragmentarily educated primary school leavers-aith insufficient education and lack of skills to make an adequate social oreconomic contribution to the society is already apparent. The prospect of

swelling the ranks of displaced young people frcm the rural areas without

sufficient education to make a contribution in the urban centers, and with

just enough education so that their taste for the rural areas as they now

are has been blKunted, is also already discernible. ITuch consideration appears

required wit'h respect to rural educatior. and the role of agricultural and

manual skills training in the curriculunr

21. Turning from the considerations and problems of internal developnnnt

briefly to Ethiopiats emergence on the w,orld scene, the increased activityof Ethiopia in African affairs must be noted. Ethiopia is the site of the

Eacnomic Comm.issicn for Africa and as such has been increasingly draw,xn into

the vortex of Africa-wide economic and political affairs. Ethiopia has been

an active member of tlhe Monrovia Bloc of Aifrican nations. In addition,Ethliopia has been concerned w.ith attempting to reconcile the mo principal

blocs cf African nations - the IM,onrovia and Casablanca Blocs - and as suchhas been active in sponsoring the "'Sumnit Conference", held in Addis Ababalate in May, to which all independent African states wrere invited, other than

the Republic of South Africa and Togo. Ethiopia's relationship with hler near

neighbor, the Somali Republic, has been a strained one involving disputes over

border and grazing rights, primarily in the Haud and Ogaden Region. The claim

of thae Somali Republic to a large part of the Northern Frontier District ofKenya, which has a large population of nomadic Somali cattle raisers, has also

been a subject of contention, with Ethiopia supporting Kenya. Another potential

source of difficulty between the two countries is the Somali Republicts campaignto incorporate Frenchl Somaliland with its important port of Djibouti,, which is

the terminus of the Addis Ababa-Djibouti railway, into a Greater Somali Republic.Ethiopia's relationship with the Sudan appears cordial, w,hereas her relation-

ships w.f;ith Egypt and Saudi Arabia have fluctuated, in some degree as the

relationships of these two countries have with the Somali REepublic. Ethiopia

has also been an active participant in the U.N. operation in the Congo Republic,w-here it 'has provided the largest contingent of African troops in the U.N. force,

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approximately 3,000 trcops, as well as at different times a small airforcedetachment of jet planes. Beyond hfrica, Ethiopia h1as boy and large steeredc:lear of all groupings or blocs; however, the Emperor did attend the BelgradeConference of' "non-aligned" states in 1961, at which the African representationc:ame predominantly from the Casablanca Bloc. Ethiopia has centered itsparticipation in extra-African affairs in the U.Ne and its agencies and parti-cipated actively with combat troops in the U.N. force in Korea. She alsojoined with Liberia in raising the question of the status of the League ofNations Mandate over South-West Africa to the then Union of South Africa.idost recently Ethiopia has been engaged in the negotiations of a trade andpay,ments agreement and an econoric assistance agreement with Italy, in whatrnay be an important step towards a rapprochement betwJeen the two countries.Finally, it should be noted that Ethiopia has sought and received foreign aid,economic and military, from a variety of sources, but primarily from theUnited States, and more recently from the Soviet Union, Technical assistanceand 'oreign personnel have been sought and obtained from many European,ountries, partic:ularly from Scandinavian countries, and more recently teachersfrom India and the United States. In fact, as part of its historical develop-ment, Ethiopia has sought to balance the influence of foreign advisers and-technicians by diversifying its sources. On the one hand this prevented any

one foreign country from becoming dominant in any crefield; on the other itcontributed to the lack of focus or coherence already alluded to in overallgovernment policy and action. Over the years down to the present Ethiopiahas hired and pa:id fror from its o-in resources a nuumber of foreign advisersand technicians; others are provided now as grant aid.

22. All' of the foregoing considerations and problems, many of w^.Thichhave been throwJn up by the process of transition from a traditional, non-market, isolated society to a mnore mcdern, market, world-connected society,wshich Ethiopia has emnbarked upon, are the background for and the context in

which the Ethiopian economy will evolve.

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II. GROWTH ALT' STRUCTURE OF TEE ECON0ILi

A. National Accounts Data

23. The Ethiopian economy is based upon agriculture primarily of asubsistence type. lianufacturing is still of less iaportance than the handi-craft and cottage industry. Most of the services are underdeveloped. Thenon-agricultural activity is directly or indirectly dominated by governmentinterests. The folloiring table sets out the composition of production andthe purposes to which this production is allocated. (It should be notedhere and in subsequent usage in Section A that the figures used are officialPlan figur-es. They are be½nz used as the best available, witLoutr any intent-3 icn o' LnfJino that they are an accurate iTrasure, ant in order to facilitate

e consideration of the Plar-t

Balance of Resources 1962

E$ Million

Su>l3ly 'JUse

Production in:

Agriculture, forestry, Private consumption 1,824fisheries 1,478 Government consumption 162

Manufacturing, landicraft, Gross fixed capital formation:building ar;.a construction 157 private 95

TranEport arid corrunication 1C9 government and public enter-Trarle and co:mterce 136 prises 78otLer, including public Cianges in stocks (net) 6adm.inistration 250 Exports of goods and services

(net) 199.ross Domestic ProDduct 2,2 30saports of Goods 234

Total supply 2,364 Total use 2,364

Note: Figures are in 1961 prices.

Source: Imperial Ethiopian Government. Second Five-Year Plan, draft andrevised estimat s , April 1963.

24. The Gross Yatioral Product amounted to Z?2,143 million in 1962 (in1961 prices) or the equivalent of U.S.$80O million. Based on a populationestimate of 21 million inhabitants per capita production averaged U.S.MO.(TI-ds is the per capit-a estimate that is accepted by the Ethiopian authori-ties.) Th.is average includes, of course, a range stretching from the highincomes of a relatively few landlords to the subsistence incomes of the largebulk of farmers and the nomads out in the provinces. There are, however, fewvery rich people in Ethiopia. The urban population which amounts to, say,

only 5% of the total population has on the average higher but not considerablyhigher incomes th<an the farmuers. Thie standard of living is low in Ethiopia,even compared with that of many other African countries. The average value ofper capita private consumption should, according to the official estimates, beabout U.S. t33. In spote of this nutritional stu-dies seem tc agree that ,he

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population, generally speaking, obtains a reasonable calorin intake per headper day and that food stringencies occur only in connection with temporary orregional crop failures. Deficiencies in diet due to lack of other vital in-gredients in food than calories is, however, still a problem, and improvementof the diet balance remains an urgent development need. Housing standardsremain low, despite considerable emphasis on housing in the first Five-YearPlan. Clothing standards have recently improved, as can be seen from the in-crease in purchase of cotton goods, but are still relatively low. Availablepublic health and education services are also very limited.

25. Public consumption is estimated to be E$162 million or 8% of GNP.The definition of public consumPtion is, however, not clear. It is not cer-tain that non-central government activities are included, i.e., those oflocal and regional public authorities. Public investment is computed to havebeen E$78 million in 1962, which included an unspecified but probably smallamount in public enterprises. Total public investment and consumption thusamounted to E$240 million or 11% of GNP.

26. Gross fixed capital formation amounted to E$180 million or about8% of GNP, in 1962, of which half resulted from private investment and halffrom investment by public enterprise and Government. A breakdown of invest-ment in production sectors shows that during the period 1957-1962, 34% oftotal gross fixed investment went into transport and communication, 25% intohousing, 9' into services, etc., and 32% into the productive sectors ofagriculture, mining, power, and manufacturing. The emphasis was thus oninfrastructure during the first Five-Year Plan. This pattern of investmenthas primarily laid the basis for more directly productive investments in thefuture (cf. Section J). 80,b of the investment is said to have been financedby domestic saving and by investment in kind by the rural population, while20% of the financing has been attributed to foreign resources.

27. The growth of the economy in the past is not very well known but of-ficial estimates put the growth rate for the period 1957-62 at 3.4%, and alsooffer as a guess a growth rate of 2 - 2-1/2% for earlier periods. Growth inindividual sectors has been rather uneven. Agricultural production has beenincreasing at a rate below 2% a year, which explains the overall low rate oftotal growth. All other sectors taken together (accounting for only 1/3 oftotal output) have grown well above 7% per year; manufacturing, buildingand construction, public services, and administration have been most expansive,while trade, commerce, and other private services have been growing at lessthan 7% per year. Gross investment for the period 1957-62 shows an increaseof 13% a year, or from E$96 million in 1957 to E$180 million in 1962. This rapidgrowth which was fairly well shared by all major sectors of the economybrought the investment ratio (gross investment as a ratio of GNP) up from5.4, in 1957 to 8.3% in 1962.

28. Development during the past years has been sufficient to raiseper capita income by 1%X to 2% rer year, on the assumption that the populationgrowth rate has been less than 2% ner annum reflects the true situation in thecountry. This per capita increase is not unreasonably low, however, takinginto account that Ethiopia still is in an early stage of development and that

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relatively large amounts of investments have been and are being directed toinfrastructure, without a high immediate return. The rate of growth of in-vestment has been satisfactory, due in large part to foreign aid. However,the agricultural sector, which is the principal sector of the economy, hasnot received enough attention in the past, and the growth rate in that sectorhas been disturbingly low. As the problem of raising the grow-ith rate inagriculture is a long-term one, it seems likely that the lack of developmentin the agricultural sector in the past will impose a serious limitation onthe possibilities of raising the growth rate of the economy markedly overthe next five years.

B. Production and Employment by Sectors

Ahriculture

29. Ethiopia has a great range of climates and soils, ranging from thehot and unfertile plains alongside the Red Sea and in the Danakil Depressionto the plains in eastern Ethiopia used primarily for grazing, to the fertileand cultivated savannah in the northern highlands and the intensively culti-vated former woodlands in the high central plateau. The level of rainfallis as varied as the topography of the country. The most cultivated areasseem to enjoy some rainfall all year round, although the country by and largeis dependent for most of its rainfall on the "long-rains" during the monthsof April to September. There are a number of rivers, but only a few carrywater all year round. Special areas such as the Rift Valley are well endowedwith a series of natural lakes. Some irrigation work has been done inEritrea and in the Awash Valley, and further irrigation possibilities in theAhwash Valley are now being studied by a Special Fund team.

30. Agriculture is the largest sector of the economy. It is estimatedthat it contributes 70%0 of the Gross National Product, and that more than90% of the population is directly dependent upon it. Agricultural productsaccount for almost 100% of exports. A large proportion of the agriculturalsector is devoted to subsistence-type production. iM1ost of the land is farmedby peasants in units rarely exceeding 3 hectares. Some of the land is ownedby the individual farmers but the bulk of the cultivated land is operated ona share-cropping basis. A very small fraction'of the cultivated land isfarmed commercially in large units, sometimes by private companies or indi-viduals given concession by the Government, sometimes by experimental statefarms.

31. Land use in Ethiopia:

TvDe of Land Millions of hectares Percentage of total area

Agricultural land cropped 9.5 8.1Coffee forests 0.5 0.4Grazing grounds 33.0 28.0Closed forests 4.0 3.4Open woodland 3.4 2.9Open brush and scrub 22.5 25.0Deserts 37.0 31.0Lakes and rivers 1.1 1.0

Total 118.0 100.0

Source: FAO, Agriculture in Ethiopia, Rome 1961, p.136.

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The total area of Ethiopia, including Eritrea, is thus estimated to be about118 million hectares. The area actually under cultivation is between 10 and15 million hectares. Some 50-60 million hectares can be classified as pasture,while only 4 million hectares are forests. The land/man ratio in Ethiopia hasbeen satisfactory and excent for some small pockets of over-population, thedensity in fertile areas is seldom much higher than 25 per square kilometer.This partly explains why such a large area is used for grazing, and whyEthiopian farmers have been able to maintain one of the largest livestockpopulations in Africa.

32. The development of agriculture has been hampered by institutionalfactors as well as by traditional habits and attitudes of the peasantcultivators. As noted in Chapter I (paragraphs l-16 ), the land tenuresystem is among the most important institutional factors inhibiting develop-ment as the system provides little, if any, incentive to the tenant farmer toincrease his production. Any investment made by the tenant farmer belongs tohis landlord, and out of any increment in gross production due to his efforts25-50Cflo must go to the landlord, notwithstanding the fact that the farmer mayhave spent his own funds to induce this increment, for instance, the purchaseof fertilizers. The relationships betweeni the landlord and the tenant arequite often undefined without legal basis, which adds to the insecurity ofthe tenant.

33. The Government has recognized the importance of the land tenureproblem in the second Five-Year Development Plan and has also noted some ofthe more important institutional gaps in the new development plan. However,only in the marketing system have definite organizational steps been taken.The recently established Grain CorDoration is to provide storage facilitieson a substantial scale. The Corporation is expected to be able to offerbetter and more stable prices to producers for their products than they nowreceive from merchants and middlemen, to induce an improvement in the qualityof the produce, and to be able to sell the produce to the consumer cheaperthan the merchants do at present. The Government believes that the Corpora-tion could have a decisive influence on the market without handling more thana part of all grain offered for sale. In order to facilitate marketingcooperatives are now being officially encouraged. The cooperative movement,however, is limited both in number of products handled and areas served, butwith proper guidance and support, may become a useful instrument to facilitatethe modernization of the agricultural sector. A planned National LivestockBoard is to deal with the problems of meat, hides and skin production.Government support of production includes direct assistance to producersthrough agricultural extension workers, veterinary services, etc. Theseservices are now being strengthened somewhat by the improvement and enlarge-ment of existing agricultural schools and veterinary laboratories, partlywith foreign assistance.

34. The development of the agricultural sector has on the whole beenneglected in the past. Expenditures in the budget on agricultural developmenthave never exceeded 5% of total expenditures and more often varied between 1%and 2%. Even more important has been the traditional resistance towardsreforms of an institutional character. There are recent signs, however, of

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a modest change in attitude both on the side of the Government, which hasrecognized some of the more glaring problems and has given some preliminaryconsideration to them, and on the side of the local farmers who have shownsome willingness to improve their conditions through community cooperation,taking the form of campaigns for money to build bridges, feeder roads, andschools. W4hether this change in spirit will carry far enough to remove themajor obstacles to agricultural development in an orderly way depends mainlyon whether Government translates its preliminary consideration into concreteactions and the response Government gives to the local initiatives of farmersthrough community development and agricultural extension programs.

35. In terms of volume it is estimated that grains are the most impor-tant crop in Ethiopia. They cover over 80% of the area sowm and are the mainfoodstuff. The actual production figures are not known and estimates varywidely, which is partly explained by the fact that only a part of the crop isactually traded on a market. Total cereal production is thus estimated byFAO and other external sources to be 2.5 - 3.0 million tons while theMinistry of Agriculture in its sectorial plan gives an estimate of 4.9 mil-lion. The estimates for individual crops vary still more. The productionseems by and large to meet the needs of the population. The need for foodimports occurs only intermittently as a result of a temporary or regionalcrop failure. In the past, some grains were exported, but there are nolonger any exportable surpluses. The type and quality of the produce appar-ently does not make the cereals suitable for exports. Teff, an indigenousgrain, accounts for about half of all cereal production and is the basic food

of the farmers. The Government's policy now seems to be, however, to dis-courage the cultivation of teff as a low yielding and high labor-consumingcrop under existing technical conditions, and to substitute the productionof other higher-yielding crops suitable for growing in the different regions.Other major cereal crops are sorghum, barley, corn and wheat. Wheat which is

now the smallest of the crops, with some 150-260 thousand tons produced, is

thought to be the most promising of the grains for expansion of production.

36. Pulses are the second most important food crop, consisting of chick-peas, peas, broad beans, haricot beans and lentils. All of these are grownfor local consumption as well as for exports - export value hovering aroundE$20 million during the past three years, or 10% of total exports. The ex-port value doubled between 1954/5 and 1961/2 although the volume remainedabout the same. Most of present exports are going to Ceylon with smalleramounts going to European countries. Exports are expected to grow. Anotherimportant crop is oilseeds; some 250-350 thousand tons are produced annually.About 20% of the crop is exported, the value varying between E$15 and 20 mil-lion, or about 10% of total exports. This crop is also thought to have apotential for growth in exports. The world market, however, does not looktoo promising for increased exports.

37. A number of other crops are grown commercially. Among the mostimportant is sugar cane, which since 1951 has been produced by a Dutch firmat the Wonji Sugar estates. Production has increased rapidly and shouldcover domestic requirements by the end of 1963. (Import value amounted toabout E$6-7 million before production started.) Cotton is produced on a

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small scale almost everywhere in Ethiopia. A few plantations dependent uponirrigation produce cotton for the domestic market, but do not cover more than

part of the domestic demand. Imports now amount to about E$8-9 million a

year or about 5,000 tons. Plans to extend cotton plantations are quite ad-

vanced, and it is expected that Ethiopian domestic production will in a

relatively short time catch up with the increasing demand. Another fibre

producing crop is sisal. which although long produced, has only recently been

adopted as a plantation crop. Contemplated investment and production plans

exceed the expected domestic needs, with a view to entering the presently

favorable world market for sisal. Tobacco production is small but almost

covers the demand of the Ethiopian Tobacco Monopoly; only a small amount

is imported for blending. Recently there was a small export of tobacco to

Eastern Europe. There is a large export of Chat, valued at E$11 million,

to Aden. (Chat is a leaf with certain "narcotic-type" qualities.)

38. Coffee is the most important export commodity of the country.Coffee is a plantation crop, and also grows wild. The actual production isestimated to be between 70 and 140 thousand tons. The higher estimate assu-mes that about 50% of the production is consumed domestically. It seemslikely that the actual production figure lies somewhere between these two

estimates. Coffee exports show the following development:

GC 1954 1955 1956 1957 1958 1959 1960 1961 1962

Exports in thousandsof tons 31.6 42.1 31.5 50.7 39.9 45.2 51.3 56.o 62.5

Exports in E$ million 99.5 90.2 80.1 123.0 84.1 74.6 94.4 93.9 107.2Wholesale price index

for export of coffee 156 104 131 115 100 78 83 84 76

During the last year exports have continued to increase in volume while prices

have continued to decline. The rapid increase in coffee exports starting in

1959/60 is the result of several factors. During the boom years of the mid-1950s when prices for coffee were high large areas were planted which haveonly come into production during the last few years. Further, larger areas

of wild coffee appear to have been harvested in recent years, due to improvedmarketing possibilities and communications, e.g., newly built roads that have

opened up new areas. Finally, some credit for part of the rise in exports

may be due to the National Coffee Board, created in 1957. Its mtain duty is

to give full effect to existing laws and regulations on the cleaning and

grading of coffee for export. It is also charged with suggesting new ways

and means to improve the standard of Ethiopian coffee. Its creation appears

to have led to some improvement in standards and reduction in overseas refu-

sals of coffee shipments. It also may have made Ethiopian coffee prices

somewhat firmer on the international market. However, the Ethiopian Jimna

coffee wias quoted at 31.754 per lb. in July 1963, about 2/ below the compar-

able Brazilian coffee type.

39. The potential for growing coffee in Ethiopia at a low cost is said

to be high and production could increase at a high rate given the right kind

of support and stimulus, in the form of transport and marketing facilities,

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agricultural credits, etc. Under the International Coffee Agreement whichcame into force in 1963, Ethiopia has been allocated a basic export quotaof 61,000 tons. The basic quota is approximately the export quota for the1963/64 production year. Thereafter the basic quotas for all countriesare to be adjusted in line with world consumption trends. Ethiopian exportsexceeded 60,000 tons in 1961/62 and the amount available for export isrising. Ethiopia has signed the Agreement and is likely to ratify it beforethe end of 1963. 1/ It would be difficult to envisage Ethiopia remainingout of the Agreement over a long period of time once it becomes fullyoperative, given the present world outlook for coffee sales and prices. Onbalance the average annual level of Ethiopian coffee sales proceeds duringthe 1963-67 period are likely to be 5-10% higher than the 1961/62 level,taking into accoumt a possible small growth in world consumption, the pos-sibility of upgrading of quality, and the general outlook for coffee prices.

40. Ethiopia has an abundance of livestock. The economic benefits ofthis potential wealth have so far been small; up until now domestic andforeign markets for cattle and cattle proclucts have been limited. The totallivestock population was estimated by FAO in 1958 to have the followingcomposition (in millions):

Cattle 24Horses 1Donkeys 4Mules 1Sheep 23Goats 8Camels 1

Total 62

Recent estimates by the Ministry of Agriculture are even slightly higher.The number of goats may actually be considerably underestimated in the tableabove. The total production from these resources has by various sources beene stimated to be E$250-600 million in 1962 or between 10% and 25% of GNP. Themajor part of this value has been accounted for by meat and milk production

for local consumption. The major export products are hides and skins, the

export value of which has varied between E$15 and 30 million.

1/ Ethiopia was initially given a quota of 51,000 tons. Ethiopia claimedthat the production figures used in the computation underlying her quotawere not accurate and it was decided at the August 1963 meeting of theInternational Coffee Organization that a revision was to be made, subjectto a study in the fall 1963. Ethiopia has notified the U.N. of her in-tention to ratify the Agreement given a revised quota of 1,020,000 bags(61,000 tons) in the 1963/6h production year. Under the terms of theAgreement such a notification is sufficient for participation in theAgreement through December 31, 1963.

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E$ million Volume index 1962ExDort value 1951 1955 1958 1961 1962 1951 = 100

Hides 20.1 4.0 3-3 7.9 7.3 68Sheep skins 4.3 4.8 3.8 9.2 13.2 151Goat skins 6.1 6.7 7. 4. 5. 138

Total 30.5 15.5 14.5 21.5 25.9 n.a.

41. Hide and skin exports have accounted for between 8% and 16% of totalexports during the past 10 years. Exports have not yet regained the peak of

the boom years during the Korea crisis, although there has been a marked im-proverrient from the depressed levels of the mid-1950s. As for future exports,the Government believes that meat, hides and skins, in combination may well

become the most important agricultural export in the not too distant future.The goals of the Government in the animal husbandry sector are to improvethe quality and increase the volume and value of meat production for exports,to increase dairy production for local consumption, to improve the quality ofhides and skins for exports and local industry, and of wool and mutton. Thisis to be done by establishing marketing facilities and by creating incentivesfor the development of an efficient livestock industry. There are now threeprocessing plants established with foreign investment for meat and hides inthe country, and it is expected that more will be established. It is expectedthat the creation of these plants will raise the quality of hides and skins,and thus increase the competitiveness of the Ethiopian products on the worldmarkets. I',eat exports, which now are rather limited, are also expected to

become a major export item. There appears to be a market for meat in theNear East, and more generally in the world for canned meat. The establishment

of nationwide veterinary services and the vaccination of all livestock, bothof which are now started, are expected to help improve the quality of theproduce and contribute to wider acceptance of Ethiopian meat products abroad.

Forestry

42. Ethiopia was once half covered with forests. Most of them have dis-

appeared due to extensive agriculture and cattle raising by a growing popula-tion. The present area of potentially productive forest lands amounts toabout 5 million hectares or 4.4% of the total land surface of the country.80% of these forests are, however, located in still largely inaccessibleregions.

43. The present growing stock of merchantable stumpage from the totalforest area that could be made accessible amounts to 550 million cubic meters.

The present forest utilization is limited to a few organized, but compara-tively small, cutting operations on one of the State forests and a series ofprivate forests and to local cuttings of the population. The annual removalof wood from the forests is estimated at slightly more than 5 million cubicmeters (of which 99% is for local fuel consumption), another 25 million of

fuel wood is obtained from so-called non-forest land (savannahs, etc.).About 50,000 cubic meters of sawn logs and another 40,000 cubic meters of

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building poles and industrial wood are produced annually. The eucalyptusplantations, which are of a rather recent origin, supply material for build-ings, fences, and fuel; bamboo is also an important building material incertain districts. There are some imports of timber and wood products, andsome exports of lumber and scented wood.

44. The improved utilization of the forests is expected to be a long-term undertaking. It is believed that the forests have to be transformed toinclude more homogeneous and productive species, a process which at its bestwould change 20% of the area over the next 50 years. Production from virginforests might, however, be stepped up more quickly, and provide a small ex-port supply. Official reforestation policy has recently become explicit,requiring permits for cuttings, providing seedlings from Government forestnurseries for reforestations, and coordinating forest policy with water andsoil conservation policy. As most of the policy measures have only beenadopted recently, the most that can be expected in the near future is thata brakc will be put on the rapid destruction of the Ethiopian forests; andthat over the long run improved forests utilization will be possible.

Fisheries

45. Ethiopia has a coast line of about 760 kilometers at the Red Sea.The sea fishing industry, with a total catch of 209000 - 30,000 tons a year,is based on traditional methods. Most of the fish is caught from shore orclose in to shore; relatively little is known about the prospects formodern fishing units further offshore. It is estimated that 3,000 - 4,000fishermen are employed in fishing during the season. Some development inthis industry appears to be taking place, and some offshore fishing is nowbeing organized. Only a small proportion of the fish is consumed fresh;the major part is dried and ground into fishmeal and is exported. Otherprojects in this general area are contemplated. The shell-fishing industry,which has provided the raw material for buttons etc. has a limited and de-creasing importance, due partly to increased competition from other materials,such as plastics.

Mining

46. In the non-agricultural field there has been very limited develop-ment in Ethiopia, either for the domestic market or for export. The mostpromising potential mineral export now appears to be verified major depositsof potash in the Danakil Depression in northeastern Ethiopia, where anAmerican company expects to come into production in 1964 with an annualproduction starting at 300,000 tons and increasing rapidly to 500,000 tons.The Mobil Oil Company of the U.S. has recently signed an oil exploration andproduction contract for coastal and offshore areas along the northern halfof the Eritrean coast on the Red Sea. A German company has been prospectingfor oil for some time in the Ogaden region of southeastern Ethiopia borderingon Somalia. There are also known to be small deposits of gold and platinumwhich are being worked on a limited scale. For the rest spotty and sporadicexploration activity is going on in the country, some by the government Min-istry of Mines, some under government contract with private companies, and

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some under concession to private enterprises. Prospecting is at present beingconcentrated on gold, alluvial platinum, and iron ore.

47. The Government is also at the present time investing in new goldmining equipment in order to raise production. The Government has since 1958been training its own prospectors and has now a staff of 50-60 prospectors.The prospects for finding iron ore of high quality are thought by the Govern-ment to be good. The iron and steel industry, which is included in theSecond Five-Year Development Plan on the basis of an anticipated supply ofdomestic iron ore is, however, premature.

Industry and Handicraft

48. The manufacturing industry in Ethiopia is still of very limited im-portance. The gross value of its production amounted to E$116 million in196 2 and the net value added E$35 million or 1.6% of GNP. Total employ-ment in manufacturing industry was estimated at about 28,000. Ownership andmanagement seem to a large extent to be in the hands of foreigners orEthiopian nationals of foreign descent. The Government has, however, sub-stantial interests in some manufacturing industries, as cement, textile, etc.

49. The handicraft and cottage industry is of more importance than themanufacturing industry. The dividing line is, however, at time somewhatobscure. The net value added was twice as large as that of the manufacturingindustry or E$77 million (gross output E$88 million), and employment wasclose to 200,000. Handicrafts and cottage industry have supplied many needsof the domestic market, in particular certain textile products, footwear,agricultural tools, utensils and other such articles. Building handicraftsand service handicraft have also recently gained some importance.

50. The largest manufacturing industry is the food industry (excludingcoffee and grain cleaning). It accounts for about Lo of total output andemployment. Sugar production (including sugar cane plantations) accounts forabout two-thirds of the food industry. Sugar production capacity was raisedmarkedly by the completion of a second sugar mill in 1962. The small meatpacking and processing industry appears, as already noted, to have the great-est potential for growth. Exports to Israel have recently started, andarrangements for exports to Europe are being negotiated. The potential ofthis industry lies in the availability of livestock, the quality of whichneeds improvement, particularly with regard to health standards, in order tosatisfy export requirements. It has been estimated that given a market, theexport value could be increased over the long run from the present E$2-4 mil-lion to as much as E$80-100 million per year. The Development Plan calls fora sevenfold increase in production. A number of other food industries produ-cing for the domestic market as well as for the export market have been crea-ted recently, as dairies, "tej" factories (tej is a type of beer made fromhoney), tomato canning plants, etc. The official policy is to increase theproportion of processed food products in exports and the Government is nowpromoting the production of coffee powder, edible oils, etc. The importanceallocated to food industry exports in the Development Plan is illustrated bythe fact that 40% of the increase in total exports and 80% of the increase in

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manufactured exports during 1962-67 is expected to come from this industry.This requires a sixfold increase in food industry exports from E$10 to E$60million. The actual increase will probably be limited by the marketingprospects for the individual products, and might result in some of the con-templated projects being delayed or shelved.

51. Host other industries produce mainly for the local market. Thetextile industry accounts for roughly one third of outpuit and employment inthe manufacturing industries. The emphasis has been on the extension ofcotton mills during the past five years and the capacity has been and isbeing considerably increased. Investment in textile mills accounts for 50gof all investments made in manufacturing industry during the first Five-YearPlan. As a result, production rose 170%9 between 1957 and 1962. Imports of

finished textiles continue, however, to be the largest import item, and therehave been tendencies of oversupply of certain items. Domestic production hasbeen limited to the cheaper qualities, previously imported from India. Localdemand seems, however, to be rising for better Japanese qualities not yet pro-duced in Ethiopia. Present large domestic consumption of finished textilesmay, given the Government's policy of selective limited protection and asuitable production pattern, allow the industry to expand further. Invest-ments are, however, expected to diminish slightly, and production to growmore slowly than in the past five years. The cotton industry is to a growingextent expected to obtain raw cotton from local plantations now being devel-oped. Raw cotton imports presently amount to E$9 million. The import sub-stitution of textiles and raw fibres (cotton, sisal, wool) may in the longrun have a considerable impact on the balance of payments position.

52. The remaining manufacturing industries are all small (gross outputbelow E$5 million). A number of new industries, however, have been startedor are in the planning stage. The largest of these projects is a petroleumrefinery, now being constructed at the port of Assab, at a cost of E$35 mil-lion, financed mainly by a Russian credit. The refinery is to have aninitial capacity of 500,000 tons. At present, domestic consumption is around20% of that figure; the rest is expected to be sold for ship bunkering. Theprospects for this are not very clear. A small foundry and steel rollingplant with a capacity of up to 18,000 tons has recently been completed closeto Addis Ababa. Local scrap iron is used as raw material. One new cementfactory is under construction in Addis Ababa with a capacity of 70,000 tons(which can be compared with present production of 40,000 tons and imports ofaround 20,000 tons). Other cement factories are under study to be locatedat Bahr Dahr and I'Ilassawa; the latter being expected to produce mainly forexport. Amon; other developments in the manufacturing sector are the plannedconstruction of a canvas and rubbershoe factory, and present negotiations fora paper factory and the enlargement of the wood processing industries.

53. The Development Plan envisages the creation of a chemical industryincluding a paper pulp factory connected with caustic soda, carbon bisulphideand phosphoric acid plants. Pharmaceuticals, plastics, paint and fertilizerplants are also being studied. These projects are still generally in apreliminary stucly stage with the economic justification of many still beingstudied. The financing of such projects as are thought economic is still one

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step farther away. Private foreign investment is being sought, and Govern-

rment itself appears to desire significant participation. It is not clearhow many of the projects could be undertaken before 1967. Actual construc-tion activity is likely to lead to an increase in industrial productionduring the next few years. The impact on the economy, however, is likely tobe rather limited from the point of view of employment (an increase at bestof 30,000 employees) and output (at the very best, a trebling of manufactu-ring output, equal to a 3% increase in GNP). But the export production fromthe food industries and the import substitution from the other industriesshould over the long run contribute substantially to an improvement in the

balance of payments situation. However, the investments planned for 1963-

67 in the manufacturing industries will require an amount of imports of

machinery and equipment much larger than the production increase the new

industry will be able to offer for export or import substitution during the

same period.

Buildinil and Construction

54. The building and construction industry is responsible for about 30to 40% of total investments. It had a gross output of approximately E$100million in 1962, of which about 60%o was in infrastructure construction, 30%in housing, and -L0% in industrial and related construction. Another E$15

million of housing were built by farmers for their own use. The production

of the building industry doubled between 1957 and 1962.

55. The Ministry of Public borks is responsible for a large part of

the activity in this sector. Foreign contractors have long played an im-

portant role, especially in the building of more complicated civil enginee-

ring works like the new jet airports,the port of Assab, etc., and in urban

housing. Increasing investments will require a growing capacity in the

building and construction industry. The Government is inclined to try to

"Ethiopianize" the industry by encouraging the establishment of Ethiopian

construction firms. Since 1955, there has been an "Ethio-Swedish" buildingcollege. Initially it supplied building graduates supposed to be suitableto become individual entrepreneurs in the building industry. Now, training

at the institute is primarily directed at producing qualified building

foremen. A material testing and a low-cost housing research department arealso attached to the college.

C. Investment Poliev

56. The Ethiopian Government has decided to promote private investment,foreign and domestic, to carry out the second Five-Year Plan. The Governmentitself undertook major part of all investments during the first five-year

plan (1957-62), primarily in infrastructure. Directly productive investmentsin agriculture, forestry, mining, and industry have in the past been made by

the Government, governmental agencies, and a limited number of foreign com-panies: domestic private entrepreneurs have played a very small role. TheGovernment investment in the productive sector is listed in Appendix 4.There has recently been a shift in emphasis as to what investments are to

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have priority, and directly productive investments are now to get more atten-tion than heretofore. The general principle announced by the Emperor in 1961is that of partnership between foreign and domestic interests, private andpublic.

',7. The various means by which the Government wants to promote private-nvestments apply both to domestic and foreign private investors with only afew exceptions. The Ethiopian income tax which varies from 16 per cent to36 per cent allows a lower scale of increase for companies with a paid-upcapital of E$5 million or more. There is a five-year "tax holiday" withrespect to investment in newi industrial, transport, and mining enterprisesmeeting certain specified conditions. Investors can also make furtherspecial agreements with the Ministries concerned regarding certain otherpossible tax advantages.

58. Imports of industrial and agricultural machinery, implements,appliances or parts thereof are exempt from the payment of customs duty,tax or tariff, health and education tax, personal and business tax, ormunicipal tax of any description. Generally the Government policy is toencourage enterprises to use domestic raw materials and goods as far aspracticable, but if adequate justifications exist the Government is nothesitant to forego this requirement in favor of importation of raw materialsand goods required by domestic enterprises. Payments for imports require ex-change licenses which are liberally granted. Export proceeds must be surren-dered.

59. Investors are not promised protection from imports before they have

established themselves. Once in production an investor can apply to a specialinterministerial committee whose function is to protect and encourage domesticenterprises. The committee takes care to assure that there will be competi-tion among local producers even after the protection has been introduced. In

case an industry with a single dominating producer where a price monopolywould be the consequence of protection, there have been special agreements onthe price policy to be followed (as in the case of sugar during a limitedtime of protection) or taxation has been introduced designed to prevent theproducer from benefiting unduly from price increases.

60. Foreign investors usually get permission to remit abroad annuallya fixed percentage of the profit earned, according to the amount of capitalinvested, to enable them to distribute dividends to shareholders and forpayment of other agreed expenses. Foreign residents are permitted to re-patriate their capital gradually. Special agreements are often signedspecifying the percentage of capital or profits which will be allowed tobe remitted abroad.

61. Recently an Investment Guarantee Agreement has been signed withthe United States to assure U.S. private investment against non-businessrisks, such as expropriation and inconvertibility.

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62. There are also a number of requirements relating to private invest-ment, which may affect the level of such investment. Foreigners may not ownLand except with the special approval of the Emperor. Thus most of theforeign-run plantations are based on long-term leases. There are a number ofactivities which are dominated by State enterprises, such as banking, airtransport, and tobacco processing and distribution. A new banking law whichis in the offing is expected to allow some increased private banking activityin the future. As indicated, the Government favors participation of domesticcapital in any foreign investment made in Ethiopia. There is, however, nofixed rule about this. In the absence of private local investors, the Govern-inent has shown a desire to participate in industrial undertakings financed byforeigners, which may have the effect of diverting public resources from otherdevelopment projects. The Ministry of Commerce and Industry which issues"industrial licenses" has some power to regulate and supervise the establish-ment of industrial enterprises.

63. There is an official "Ethiopianization policy" which still has more`the form of a recommendation than a regulation. The Government regards theemployment of Ethiopian technicians and trained personnel as important, andacceleration of such employment as urgent. However, where Ethiopians of therequisite qualifications are not available, the employment of non-Ethiopiansof the required technical skill and experience "will be favorably considered"in order to accelerate the economic development of the country and to attractforeign capital.

5S. The attitude toward foreign private investment is somewhat ambivalentin practice. On the one hand there is a campaign to attract foreign capital,with the inducements already noted, while on the other hand there is thetendency of the Government to want to participate directly in investments inthe productive sector, sometimes in a proportion exceeding that of the privateinvestor. However, the major problem of potential foreign investors, who havefound an economically viable project, is the administrative difficulty of ob-taining decisions and receiving permissions from the various Government agen-cies responsible for different aspects of foreign investment. The SecondFive-Year Plan has recognized this problem and has stipulated that coordina-tion shall take place within the Ministry of Commerce and Industry by an"Industrial Promotion Service". The Plan also provides for a number of newinstitutions, such as a new Technical Agency to perform feasibility studies,and an Investment Bank, and for a variety of new economic legislation.

D. Transport and UtilitieslJ

655. In recent years, considerable attention has been given to the impro-vement and expansion of the transportation and communicating facilities.Several road building programs have been undertaken wTith the assistance ofIBRD, IDA, and U.S. credits. The third highway credit, recently extended byIDA, along with existing road building activity should absorb Ethiopia'senergies for the present with respect to main highway construction. Much,however, remnains to be done, particularly with respect to feeder roads ifmonetization of the economy is to continue, if new agricultural areas are tobe brought into production for the market, and if local government is to be

7 See also Appendix 1.

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effectively developed and related to central government. There are severalrailroad projects in various states of discussion, which require carefulconsideration before any of them are committed, with particular attention totheir potential role in an integrated transportation grid and with referenceto the alternatives of road and rail transportation in the context of overalleconomic development of the country. In this same connection the variousport facilities directly available to Ethiopia in H'Iassawa and Assab and in-directly available in Djibouti, should be taken into account. All indicationsat present are that there is substantial underutilized capacity at the portof Assab and ilassawa.

66. The Bank loans have also been used to rehabilitate and to expandthe telecommunications facilities during the past ten years, and according tothe present and projected demand, it seems likely that further expansion ofthe existing facilities will be required in the future. Appendix I deals withtransportation and communications facilities in detail.67. The gross production of electric power (including Eritrea), amountedto over 145 million kwh in 1962. Based on an estimated population of 15 - 21million, the per capita production of power is one of the lowest in the world.There are three main producers of power: Ethiopian Electric Light and PowerAuthority (EELPA), an autonomous public entity headquartered in Addis:Societa Electrical dell'Africa Orientale (SEDAO), also a public companyserving the province of Eritrea, and various industrial firms (mostly private).

68. The following table shows the growth of power production from 1957to 1962 and the production targets set for the second plan, from 1963 to 1967;it also indicates the relative importance of the three producers:

Production of Electric Enerzv(in million kwh)

1957 1958 1959 1960 1961 1962 1963 196L 1965 1966 1967(- - - - - - - actual - - - - - - - (- - - - - projected - - - - -)

EELPA 36.7 40 7 47.1 55.4 74.4 95.0 134.0 143.0 163.0 225.0 260.0

SEDAO 21.3 22.5 24.1 27.3 30.0 30.0 35.0 55.0 60.0 65.0 70.0Industrialfirms 15.0 15.9 17.3 19.0 19.0 20.0 21.0 22.0 22.0 25.0 25.0

Total 73.0 79.1 88.5 101.7 123.4 145.0 190.0 220.0 245.0 315.0 355.0

EELPA, which serves various sections of the country, produces over 60 per cent

of the present power generated in Ethiopia; by 1967 it is expected to be 70per cent.

69. Besides a number of self-contained systems throughout the country,operated by EELPA and other producers, the former operates the only inter-connected system which came into existence about three years ago when theKoka power plant was commissioned and talcen over by the Authority. The

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interconnected system (Koka, Abu-Samuel, Ourso, Addis Ababa and Alemaya) hasan installed capacity of about 72,000 kva and an adequate transmission anddistribution system. This system will be further extended when Awash II andAwash III are completed in 1966 and 1971, respectively.

70. The actual investment in electricity during the first plan wasE$51.8 million: Koka hydroelectric plant on Awash River (installed capacity54,000 kva) E$34.7 million; Tis Abbai hydroelectric plant on the Blue Nile(installed capacity 9,600 kva) to be completed by end 1963, E$3.2 million;and steam power plant at Addis, E$5.2 million. In addition, the transmissionnetwork was extended, reconstructed and repaired. A total of E$83.5 millionis expected to be invested for electricity during the Second Plan; of this,E$32 million will be for the interconnected system (Awash II and III, eachwith 45,000 kva); E$19.9 million for the self-contained systems (constructionof eight new thermoelectric and hydroelectric plants, including Bellesa inEritrea); E$5.9 million for the completion of the first hydro plant at TisAbbai. The remaining E$25.2 million is allocated for the extension of thetransmission sys-tem.

71. The prevalent rate structure, at least of EELPA, compares favorablywith developing countries and it is expected that 52 per cent of the totalanticipated investment during the Second Plan will be generated from theinternal revenue of the power producing entities; this is expected to accountfor all of the local currency costs.

72. It is very difficult to forecast demand for power in a country likeEthiopia. It is quite possible that the trend of the past few years mightcontinue, at least during the next four to five years. The Government anti-cipates a number of industries will grow, but to date the growth of industrieshas been slow. The Government expects overall power requirements will con-tinue to increase at a rate of about 20 - 22 per cent per year for the nextthree to four years, and may then tend to taper off to 15 - 17 per cent peryear.

E. Education

73. Given the size of its population, the educational system, in amodern sense, in Ethiopia is very small. No reliable estimate exists as faras the rate of literacy is concerned; however, the total number of studentsat all levels in 1961 was roughly 270,000, of which about 95.1 per cent werein the primary grades (1 to 8), 3.2 per cent in secondary grades (9 to 12),1.3 per cent in special grades, and 0.4 per cent in higher institutions. Theoutput of the present educational system will fall very far short of meetingthe projected long-term manpower requirements of the country, as well as themore immediate goals set in the Second Development Plan.

74. The Government is making an effort to enlarge and improve thesystem and will continue to allocate about 10 per cent of its ordinary budgetfor education during the Second Plan period. In addition about 1.6 per centof the total investment during the Plan will be for the expansion of existingeducation facilities.

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75. The greatest bottleneck in the system appears to be at the secondaryschool level where the limited enrollment and output results in a shortage of

middle-grade personnel in many fields of governmental and economic activity,causes a shortage of teachers at all levels, and limits the flow to technical,professional and higher educational institutions. The Government has become

increasingly concerned about most of the problem areas and has taken somesteps in the Development Plan to meet some of them. It also invited a UNESCO

mission to make a study of the whole field last fall and its report was recently

submitted to'th&Government. It is most likely that expansion of the education-al effort and increased allocation of resources to that end will be recommen-ded by the UNESCO report. Appendix 2 deals with the educational sector insome detail.

F. Public Finances

76. In addition to the Central Government, there are various publicauthorities, enterprises, and agencies in Ethiopia, which together make up thepublic sector. As some of these special bodies have their own ways of raisingf'inances for their investments, they have a certain importance from the pointof view of development. There are five principal categories of public insti-tutions outside the Central Government:l/

(a) Agencies that are directly controlled by particularministries and are engaged in incidental commercialactivities. Their activities may be w¢holly inte-grated with departmental finances, or may be partiallyseparated and financed by special working capitalfunds. Examples of such arrangements are the variousnewspapers under the direction of the Ministry ofInformation, the two ports under the direction of theMaritime Division of the Ministry of Defense, and theEthiopian Tourist Organization under the direction ofthe Prime Minister's Office. The amount of "extra-budgetary" activity involved is not readily ascertain-able from the data available.

(b) Agencies such as the Imperial Highway Authority, HaileSelassie I University, and the Awash Valley Authorityare registered as autonomous legal authorities, butdo not engage in commercial activities. They receivebudgetary allocations from the Central Government.The possibility of extra-budgetary activity here issmall.

(c) Some agencies are organized as corporations with theGovernment holdin- all shares, e.g., the State Bankof TEthiopia, the Development Bank of Ethiopia, theImerial Board of Telecom-munications, the ElectricLight and Power Authority, the Grain Corporation,Ethiopian Airlines, and the Imperial Tobacco Mlono-poly. Although net surpluses and deficits arebalanced in the Central Government budget, invest-ment activities may be financed from gross revenuesof the agencies. The size of these investments outsidethe budget is not clear from the data available. How-ever, some impression may be gained from the exampleof the Power Authority which has spent E$ 4 million oncapital expenditure in each of the last two years, andplans to spend E4; 7 million during the current year.

(d) The Government has a partial interest in a number ofenterprises which are engaged in commercial activi-ties and incorporated under the Commercial Code of

1/ See also Appendix 3.

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Ethiopia, e.q,, the Franco-Ethiopian Railway, theEthiopian Hotel Company, the Sabean Utility Cor-poration, and the BahrDahrCotton PLill. (Theeconomic activities of these enterprises are treatedwhere appropriate in sections of this report.)

(e) In addition to the Central Government and itsagencies and enterprises, are the public acti-vities performed by the provinces and the munici-pa]ities. The 14 provinces of Ethiopia have onlylimited local financing and are to a large ex-tent supported from the Central Government. Sixmunicipalities, principally Addis Ababa and Asmara,have their o-vm financial resources. The two citiesmentioned have a yearly revenue of some ELi 13 mil-lion resulting from a 1,% duty on imports passingthrough the respective cities, property taxes,license fees, etc. It has not been possible fromthe data available to ascertain what proportionof these revenues is spent on investment. TheState Church collects land tax in certain areasat the same rate as the Government, totallingEi 3 million a year.

77. Some basic features of the Central Government finances are indicatedin the following table: 1'

Central Government Finances-'1955 1959 1962 1963 1964

EIP Million Actual figures Budget estimates

Ordinary Revenue 116.6 147.1 199.4 203.4 2h3.5 2JOrdinary Expenditure 112.7 162.6 190.2 209.1 274.8 2Surplus or deficit (-)

on ordinary account + 3.9 -15.5 + 9.2 - 5.7 -31.3 2Extraordinary orcapital expenditure 5.0 50.3 62.9 78.0 77.0

Total budget deficit - 1.1 -65.8 -53.7 -83.7 -108.3

Financed by

,xtraordinary revenuesborrowinr, + grants 3.5 50.8 53.4 76.6 79.9

Treasury surplusreserves -2.4 15.0 0.3 7.1 28.4

oUnadjusted figures, cf. table in para. 81.

2J Including Eritrea revenues E'; 18.1 iLllion, exp. 1$ 18.5 million.Financial years ending July 7.

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Tlhe table shows that actual ordinary revenues and ordinary expenditures havebeen increasing at 8,' a year for the seven years ending 1962. During five outof eight years there has been a surplus available for use for extraordinaryexpenditure which has been growing much vnore rapidly. Total budget expendi-tures have actually been growing by 11.5"; a year, which explains the rapidlyincreasing total budget deficit and rising need for external grants and loansand domestic borrowing. The budget estimates for 1963 and 1964 show an acceler-ation in the grow..th of total expenditure to 15% per annumL, whlile ordinary reve-nues for 1963 are almost staltic but expected to rise by 11% in 1964. These twoyears are t'he first of th,e present Five-Year Ilan and reflect in part the in-tJenition of the Govermnent to step up development expenditures. lihe groirth inre,venue and ex-enditure in 1964 does however also reflect a mllore completeinclusion of various external assistance in tlLe 'budget (cf. note 2 in para. $3).

'78. 1he largest source of income is duties and taxes levied on externaltrade. Import duties accounted in 1962 for 25% of all ordinary revenue; inaddition another 10%O derives from a federal transaction tax levied on imports.'xo)ort duties ancd transaction taxes on exports account for 8% of total revenues.Thus, taxes on foreiffn trade amounted to Et 82 million or 43' of total ordinaryrevenue in 1962. Import duty revenues were largely static until 1960, and thenrose dramatically by 35% in two years. Federal transaction taxes also showed amarked improvement in 1961 and 1962. aport duties have been static over thewhole period since 1955. The relative importance of taxes levied on foreigntrade in the budget has diminished some over the past seven years. The secondmost important source of income are taxes levied on land, in the form of a landtax, a tithe, an education and a health tax, all together accounting for 1uj 25million of revenLe in 1962 or about 12% of total ordinary revenues. 1/ Exceptfor the health tax wJhich was introduced only in 1959 there has been very little:,rogress in the collection of these taxes. The third largest source of revenueis the income tax which was introduced only 7 years ago (and slightly amendedin 1962). Income tax now amounts to Eh! 20 million, or 10% of total revenues;there has been a rapid increase due to both rising taxable incomes and bettercollection of taxes. Increasing monetization of the economy suggests a con-tinuation in this trend. The residual 35% of revenue is derived from a com-'bination of rapi(ly rising tax revenues from alcohol, motor fuel and salt andfrom a general stamp tax, etc.

79. The Government seems to hold the view that only moderate tax revisionsare required in the near future. Revenues are expected to increase because ofrising incomes and better tax collection. Better collection as well as somerevmeasurement of lands should also continue to raise revenues, as increasinglyuntaxed land is taxed. This trend is reflected in an increase of 10% in thetax estimates of 1963 and 1964. The present pattern of taxation is not com-pletely satisfactory. The present income tax pattern was established on the'basis of older taxation in 1956. Income from employment is taxable at a pro-gressive rate ranging from 2V-% to 21%. Income from rents on lands and buildingsused for other than agricultural purposes range from 2p to 16;%. Income from

1/ The education and health taxes are supposed to be spent by the r-overnmentin the province where they are raised, for the purposes for which they wereraised.

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business, professional and vocational occupations, and from all other sources

not specified is taxable at rates ranging from 2.77% to 16%. However, on this

latter kind of income, two additional surtaxes are imposed: the first is on

any part of such income exceeding E:. 30,000 and the second on any part of such

income exceeding E$ 150,000 yearly. Industrial enterprises are given a five-

year "tax holiday". Rents from adricultural lands are not taxable underexisting income tax law. The land tax is the oldest existing tax. An unsuc-cessful effort was made to introduce a uniform land tax in 19h1. In 1947, an

additional tax based on land was introduced for the purpose of education, and,in 1959, a comparable tax wjas introduced for the purpose of public health. The

total annual amount of tax levied on a fertile "gasha" (ranging from 40 to 70hectares) of land varies from 72 to 80 Ethiopian dollars, the rate on semi-fertile is iD; 6h, and on poor land E'` 29. These rates cannot be regarded ashigh, and in many instances probably leave the land-oimrner liphtly taxed.

80. The comnosition of ordinary expenditures is only available in depart-

mental divisions and any functional breakdown is liable to large margins of

error.Com-oosition of Ordinary Expenditure

1962

Defense and security 38%Education 11%Public Health 5Public Works 11%Public Debt 5%

Other 30%

100%

The largest sinple item is for defense and security, including police forces,

whNich together accounted for E9 74 rmillion in 1962. The budget fimures forthlis category for the 1963 and the 1964 budget year show only a slow increase,however, and thus their proportion is expected to fall from 38% to 30% in 1964.The second largest sinsle item of expenditure is for education on wihich in 1962,Etp 21 million or 11% of ordinary expenditure were spent. lith the founding inlate 1961 of the Haile Selassie I University, a substantial amount of foreign

aid is now beinr channeled to the IIinistry of Education, raising its budget toab'ou D 50 mrillion or la% of ordinary expenditures in 1964. (Grants-in-aid andother external assistance cover EM 25 million of these expenditures.) Publichealth exienditures, althou,h small, have increased over the past few years;especially important is the orojected rise from E'; 12 million in 1963to EF,,) 21 million in 1964. (205 of this is to be paid out of external as-

sistance.) The Ministry of Public WJorks and Communications has a budget com-

prising betwJeen E; 20 and 25 million, most of which r2oes to the IHA for main-

tenance and betterment of roads. No noticeable Froi-rth has taken place in this

category of expenditure. loExpenditure on public debt has risen rapidl- from

E>j 3 million in 1958, to an estimated ES 15 million in 1964 (one third of whichis interest, two thirds repayment of principal). 11inistries directly concerned

with the economic activities in the country, i.e., the l'linistries of Agriculture,"ines and State Domain Commerce and Industry, and Ilational Comrnunity Develop-

ment have usually had only about E$: 6-7 million allocated to them. Because of

a projected large increase in the a)mrorriations to the Ministrv of Agriculture

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in 1964, this figure wyill rise to E.;; 13 million, which w-ill still be less than5% of total ordinary expenditures. Cost of administration and diverse minoritems account for the residual expenditure of 25?/ of ordinary expenditure, aproportion that has remained relatively stable in recent years.

81. The Central Government capital expenditures were until 1962 partlyincluded in the ordinary budget under each ministry, while some were put intothe extraordinary budget together with other special expenditure. This latterbudget was in 1962 renamed the capital budget, and most capital expendituresare since included in it. However, transfers to IHA for reconstruction andmaintenance of roads, an ite;m. including substantial capital expenditure, willnot be included in the capital budget until 1964. The following table givesthe official budget figures with corrections for IHA capital expenditure:

Ca4Bgtal_ DULet ExpenditureEO ,llion 1958 1959 L960J/ 1961 1962 1963 1',64

Actual figures Budget estimatesTotal expendituresin extraordinar-r orcapital budget 29.4 50.3 20.7 36.6 63.0 78.0 77.0

Capital expendituresin ordinary budget(excl. IHA) n.a. 3.5 2.2 2.5 - - -

IHA capital expendituresin ordinary budget 2/ (6.3) (4.0) (7.7) (9.2) (9.1) (10.0) -

Total capital expendi-tures 35.7 57.8 30.6 48.3 72.1 88.0 77.0

Use: Highways 2/ 10.7 13.0 15.3 16.5 14.3 17.4 20.2Port 0.5 3.8 3.6 8.0 3.6 - -

Civil Aviation 9.3 1.5 0.7 1.5 28.5 52.7 o.6Power (Koka dam) 13.0 18.1 1.2 0.3 - - -Public buildings n.a. n.a. n.a. 4.2 2.9 2.9 3.2Education n.a. 1.5 .8 .8 .4 .9 .8Public Health .5 .5 .2 .6 .1 - -

Agriculture - - - 6.4 3.7 2.4 4.9Industry .1 .2 .1 7.1 3.9 11.3 38.4Share cap. subscr. - .1 - 2.0 11.1 - 4.0Other (including un-allocated contribu-tions to soiie projectsabove in 1958-60) 1.6 19.1 8.7 .9 3.6 .4 4.9

1/ 10 months only, September 11, 1959 to July 7, 1960.g/ These figures have been estimated with the help of annual road investment

figures ,:iven in the Plan. These latter figures indicated that it wouldbe reasonable to assume that 507J of IHA expenditure on the ordinary budgetwas for reconstruction purposes.

- 3D -

82. The capital expenditures have developed in a most irregular way, thevariations usually dependent upon the commlencement or completion of one oranother big )roject. The only item of importance throug,hout the period beingconsidered is highway expenditure, whicha has been rising steadily from El 10 to20 million. The increase in total capital expenditures during- 1962 and 1963is largely explained by the expenditure for the new jet airports and jetplanes. The 1964 capital expenditure estimates are carried at about the samelevel because of the contruction of the oil refinery at Assab and the plannedconstruction of a number of new industrial projects sponsored by the Government.

83. The financin': of the caoital expenlditures in the bud-et has comeprimarily from external sources as shown in the following table compiled frombudget figures only:

F cin of Cai tal Budget ExienditureE V iM'il lion 1958 19g9f 9 A 1963 1964

Proceeds from ex-ternal loans 14.1 14.4 11.8 17.3 37.0 64.7 37.4

liar ReparationsPayments 12.8 17.9 1.0 7.0 1.6 0 0

U.S. Commodity Aid 3.5

Various externalassistance Y 31.6

Total externalassistance 26.9 32.3 12.8 24.3 42.1 64.7 69.0

Issue of coins andrealization of StateAssets .8 1.4 1.5 .9 .4 5.8 5.9

Other domesticcapital income - 17.1 2.8 - 10.9 - -

Transfers fromordinary budget .6 - 6.1 19.0 15.2 4.3 -2.9

Domestic borrowing(bonds) - - - - - 6.2 5.0

t.-iute e`>.nlc financing2/' 7.4 7.0 7.4 4.1 - 7.0 -

Total domestic f:inance 8.8 25.5 17.8 24.0 26.5 23.3 8.0

Total capital expendi-tures in budget 35.7 57.8 30.6 48.3 72.1 88.0 77.0

1/ 10 months only./ This category appears for the first time in official Ethiopian figrures for

1964. It is probably not a corm,.pletely new source of aid as much as recogni-tion of aid from a variety of sources which have existed previously but havenot heretofore been recognized in public official statistics.R Running dowm of accumulated surplus funds.

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The proportion of capital expenditure financed from external sourceshas been large during the whole period and, although slightl irregular,

increased from about 50-6C0 during 1953-62 to about 75,% in 1963, to a pro-jected 90%j in the 1964 budget year. Almost all external finance nas beenapplied to specific projects. It should be noted that the table above onlygives fivures for the Central Government budget. Public investment outsidethis budget is not completely known, but is thought to be of a magnitude ofabout E$ 10 million per annum. Foreinn aid has also been much larger than thefigures above suggest. L''oreign loans and grants, Eross, amounted to:

E$,? -Iillion GC 1957 1958 1959 1960 1961 1962

21 35 48 45 44 102Source: State Bank

These figures are between 50%I and 100% larger than those in the budget tableabove. The difference ma-y be explained partly by foreign financial and tech-nical aid a)plied to Dublic activities outside the Central Government, e.g.,independent Government agencies and corporations, and )artly, by foreign aidfor special activities, e.g., welfare and trust funds, mission establishmentsand sciools (private cajital invest:alent is not included, however). The differ-ence between :ucdget and balance of )a'Iaents est~iates of foreigna aid willprobably be greatly reduced by the r;iore complete-inclusion of foreign aid inthe 1964 budget.

84. The domestic financin- of caDital expenditure out of cu-rent income hasbeen very limri ced, about 10%o lor t1sKebwhole period 1956-64, not includin, domes-tic caDital or extraordinar-r revenues wihichi have also financed about l,, of allcapital exDenditures. Hiedu6tion of previously built-up Treasury reservesaccounts for about 8-9' of the financing of capital expenditures. Domesticborroiwing planned to berin in 1963 is not likely to be on a significant scale.

85. The public sector collected in taxes and other revenues an amount equalto about 10% of GNP in 1962 and spent an amount equal to about 13-1h5'' of GNP,the difference has been covered prilnarily by foreign aid.

G. The -Toney and Credit illarkets

86. The money, capital and credit markets are not well developed inEthiopia. The State Bank of E'thiopia which performs the functions of acentral bank is at the sa2 e time the maajor commercial and savings bank as wellas the caretaker of the bond and stock market. It has 17 branch officesthroughout Ethiopia and one office in Khartoum. h.out 10% of the commercialbanking in Lxthio)ia is carried out by two branch-es of Italian banks and anagency of a French bankl. The activities of these banks are confined to thefinancing of foreign trade. Lon -terni lending to agricultture and industry isthe function of the Development 3ank of ethiopia. Two capital institutionsof t)otential imp)ortance are an ethiopian insurance cornpan':, and a bouil-dingsociety in the course of establish-ment (see list of institutions in Appendix 4).

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87. A reform of the Ethiopian banking legislation is under consideration.A draft banking law has been worked out in cooperation with ITT? staff and hasbeen submitted to the Parliament. The draft law provides for the establishmentof a central bank (a National Bank) on modern lines, which will be responsiblefor the control of currency, credit and foreign exchange and which will act asa banker to the Government and to ouher banks operating in Ethiopia. The

comnuercial balking functions of the State Bank will be taken over ba a newinstitution, incorporated under Ethiopian Company Law and at first wholly ownedcba the Government. The pending legislation also provides for the licensing andcontrol of barls by the National Bank. Foreign banks are to be allowed toparticipate with local interests in Ethiopian banking comapanies constitutedunder the new law.

88. The State Bank of Ethiopia occupies a strategic position with respectto economic deve'Lopment. Although ultimately limited by the policy of theGovernment (especially the policy of the iinistry of Finance), it controls theexpansion of foreign trade through its exchange control and its credit policy.Private domestic investment is also to some extent directed by the bank'scredit ipolicy. The general a)proach of the State Bank to economic developmenthas on the wihole been conservative, particularly with respect to the foreignexchange position of the country. Althou,h the State Bank has performed a

liberal credit oolicy wTith respect to the private sector in recent years, it1,as done so wit-Yin the lin-its of a non-inflationary increase of money supply((iscussed in the ensuing paragraphs).

89. The monetary (levelooment of Ethionia has been marked by a steady risein money supplyV during the past ten years as indicated in the following table:

E) ?'Iillion 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962

lioney Supply(Dec. 31) 117 144 1h3 161 178 199 201 203 223 2h1 255

Sour-ce: State Banlc of Ethiopia.

90. Money supply has increased 8%' a year over the period 1952-62. However,the annual growth rate in money supply during the first five-year plan period,1957-62, was limited to 5,,, which was only slightly more than the estimatedgrowth rate of GNP of 3-4%. It is to be expected that money supply would growfaster than GilP in an economy which is becoming increasingly o-onetized.J Hence,the grou7th in money supply does not appear to have created inflationary pres-sures in the economy. Total Tnoney supply amounted to ll,) of GNP in 1962, whichis not, at this stage of development, exceptional. 2J There seems to be room

l/ Thle actual derree of monetization is not known although a U.N. studyoffers a guess Of 30%.

2] Ratios of 10-20% appear to prevail among the less developed countries and20-30% among thle more developed.

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for a continuing gradual expansion of money supply without any serious risksof inflation. The maximum allowable rate wjill in large part depend on condi-tions imposed by external financial relations, i.e., export income and capitalinflow.

')1. The expansion of money supply is directly related to the development ofthe balance of payments, public accounts, and credit policy of the banks. Thefollowing table shows some of the major factors which have had a direct orindirect influence on money supply:

i1'alor Factors in iloney SupplyE'..Iillion Change from 195-4- 1 9g- 1957- 1958- 1959- 1960- 1961-

to . . . . 1955 1956 1957 1958 1959 1960 1961 1962

I-Toney Supply +17 +10 +20 -1 +1 +18 +12 (+10)

Eoreign exchange re-serves +12 + 7 +16 -20 -11 + 9 + 8 +18

State Bank claims onGovernment (net) +10 + 8 + 3 +15 + 3 + 2 - 2 -14

State Bank claims onprivate sector (netof time and savingsdeposits) -2 - 1 + 5 +12 +15 +10 + 3 +10

Source: All figures from International Financial Statistics, II-F, May 1963,for reason of internal consistency in table.

'32. Government requests for funds from the State Bank have been compara-tively 3mall during the period 1955-62 and have probably contributed only ina limited extent to the increase in money supply in the period. State Bankcredits to the private sector rose by almost Et 80 million from 1954 to 1962,of .. hich E'i' 25 million were absorbed as time and savings deposits. The ex-pansion of State Bank credits to the private sector seems to be the domesticfactor which has contributed most to the increase in money supply. Foreignexchange reserves although fluctuating considerably during the period 1951% -62,wTere at the end of the period only E`; 39 million higher than at the beginning.

93. As already mentioned, the State Bank credit policy for the privatesector has been rather liberal during the past few years. The balance of out-standing loans, advances, and local investments in the private sector by theState Bank rose from E$ 35 million at the end of 1958 to E$ 96 million at theend of 1962. This has meant an annual increase of 28%, which must be regardedas fairly raoid growth compared .with the growth in GIIP, foreign trade, etc. TIEfollowin:': is a breakdown of the major sectors in which these credits have beengranted:

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State Bank Credits to Private Sector _____dx_196

~~~ ~~~~~ ~~~~~ ~~Index 1962Balance End of Year 1958 1959 1960 1961 1962 (1958=100)

(E$ Million)

Construction 7.7 9.4 11.8 14.0 14.0 182Real estate 3.7 4.4 5.1 5.5 5.8 158Business loans 6.7 7.1 9.3 11.5 16.0 240Merchandise and bills 2.7 4.5 4.5 4.6 8.5 311Advances on current account 10.8 18.9 26.5 33.9 40.3 372Other 1.6 2.1 1.8 2.2 2.2 138

Total 33.2 46.4 59.0 71.7 86.8 261Local Investments 2.2 5.4 7.6 8.0 9.h 428

Grand Total 35.4 51.8 66.6 79.7 96.2 272

94. The Development Bank of Ethiopia (DBE) was established in 1951 tofinance and promote industrial and agricultural projects. DBE is a whollyGovernment-owned bank, with a subscribed capital of E$11 million (includingE$1 million from the State Bank). The DBE has a wholly-owned subsidiary,Ceres Company Ltd., engaged in the financing and storage of seasonal crops.The DBE, from 1951 to September 30, 1962, granted loans of over E$26*5 million,of which about 54 per cent were for industries, over 35 per cent for agricul-tural development and coffee and the remaining 11 per cent for small agricul-tural and miscellaneous purposes.

95. The DBEfs overall policy direction rests in an ex officio Board andthe day-to-day operation is in the hands of the General Manager, who is ap-pointed by and is a member of the Board. Its professional staff numbersabout 35 and besides its headquarters in Addis Ababa, it has three branches.The DBE continues to face a shortage of trained and qualified staff and thishas been one main cause of the DBE's not being able to play an important rolein the development of the industrial and agricultural sectors. Because theDBE has not been as active in financing projects or in meeting the growingneeds of the economy as might have been expected, there have been proposalsto create new institutions, public and semi-public, to fill the institutionalgap. In fact the Government has allocated E$4 million in the 1964 budget fora new Investment Bank.

96. A total review of the functions and operations of the DBE wouldseem in order prior to the creation of the investment Banlkc or any othernew development-type bank, with a view to establishing a coordinated institu-tional structure fulfilling all of the development bank functions necessary tobe filled in a systematic manner without overlap and duplication of limitedstaff. IBRD has a particular interest in this matter in view of its two loansto the DBE. Appendix 5 includes a detailed description and operations of the DBE.

97. There is neither a money market nor a capital market in the usualsense in Ethiopia. The Government plans, howzever, to issue bonds beginningin 1963. There is a small share market comprising shares of about a

dozen companies. The state Bank has developed the market by sellingfrom its own portfolio. Total turnover of shares has been less than E$1million a year.

98. The present credit system does not yet include some of the basicfeatures necessary for successful economic development. Savings institutionsare lacking and there is hardly any mobilization of private savings outsidethe 17 places where the State Bank has its offices. This of course is aserious institutional gap. The Second Five-Year Plan recognizes the problem,but makes no concrete proposals. For practical purposes there is no organizedagricultural credit system; as yet this problem has not been seriously tackledby the Government. As development of agriculture is a long-tern proccss,

the creation of an adequate credit service for small and medium size farmersis an important need.

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H. Prices and aTEges

99. No indices are available on living costs in Ethiopia.. There areindications, however, that living costs have been rather stable fora long time. The only exception appears to be a rise in rents inAddis Ababa which, however, affects only a limited part of the total popula-tion, particularly the foreign temporary residents. Wholesale prices forimported commodities have been largely unchanged from 1953 to 1962, withsmall differences among individual commodities. Retail prices in AddisAbaba for certain major food commodities show no significant changes since1957. Ethiopia has a price control system which is said to be involvedonly in more obvious cases of speculation and profiteering. There are noprice stabilization schemes at present. However, the operations of theGrain Corporation are intended to have a price stabilizing effect both fororoducers and consumers.

100. There is no minimum wage in Ethiopia, and there are no indicesfor wages. Total wage and salary bills for the manufacturing industries,and the numbers ermployed, are available for the years 1957-60. Accordingto the available statistics the average annual wages amounted to E$432 in1957 and E415 in 1960. This decrease might in part be explained by theincrease in employment in sugar production during this period, where annualwages were substantially below the average :or industry- generLFlly during 1960,which in turn might in part be explained by some seasonal unemploy&nent in thesugar industry. Salaries siimilarly also fell from E$3,300 per head to E$2,500per head, which nay in part be e-plained by the fact thlat the expansion of thead1linistrative and technical staff have been to a large extent Ethiopianized.(In 1957 there were about 500 foreigners and 500 Ethiopians in the inanufactur-ing industries; in 19%60 there were tile same number of foreigners but the numberof Ethiopians increased to 1,400). Information on the Wonji sugar estate showsthat the average daily wage for unskilled workers was Eth$1.10-1.20 in 1962/63,slightly higher than several year-s ago.

101. T!.Tage earners have recently been allowed under the new labor lawto form trade unions. Twenty trade unions with some 20,000 members wereregistered at the end of 1962. The unions are organized on a plant basisbut are federating into industry-wide unions, The right to bargain islimited under the new law which, in practice, makes strikes illegal byrecuiring compu1sory arbitration by a Government appointed board inlabor disputes where the parties are unable to agree and a strike is inthe offing. The present Labor Relations Board is composed of govern-ment officials but is supposed to include in due time representativesof employers and employees. Legislation on Labor Protection and Inspec-tion Services is under consideration. A general system of social securityhas not yet been introduced, but there are certain elements of socialsecurity in the Civil Code Proclamation 1960, which provides for suchthings as severance pay, compensation in the case of accidents or profes-sional diseases, some medical treatment and hospitalization, and certainsickness and maternity benefits. Unemployment is a problem which has

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not yet been studied; a general manpower survey is now contemplated.

I. External Finance and Trade

102. The following table illustrates trends in the Ethiopian balanceof payments:

Balance of Payments(Eth$ million)

1957 1958 1959 1960 1961 1962

Exports f.o.b.l/ 200 160 167 190 195 205

Imports c.i.f. -169 -187 -199 -208 -232 -259

Trade Balance +31 -27 -32 -18 -37 -54

Other services, net -18 -26 -28 -10 -13 -33

Transfers (excl. grants)net -7 + +8 -5 -7 +11

Balance on Cur-rent Account +6 -49 -52 -33 -57 -76

Foreign public grants 12 18 31 20 25 33

Foreign public loans 9 17 17 25 19 69

Repayments -3 -2 -14 -3 -5 -7

Foreign publiccaDital in-flow, net 18 33 34 42 39 95

Frivate capital net -4 11 1 2 22 6

Errors and omissionsnet -2 -2 1 -1 0 -2

Balance onCaoital Account 12 h2 36 43 61 99

Foreign reserves +18 -7 -16 +10 +4 +23

];/ Including non-monetary gold.

Note: The table is based upon balance of payments estimates given to themission by the State Bank in April 1963. The figures are not com-pletely reconcilable with other State Bank estimates of foreignexchange reserves, or with recent RIF estimates because of variousdegrees of completeness, and adjustments. They seem, however, toreflect the real situation as close as any other estimates. The parvalue of the Ethiopian dollar has been unchanged since 1946.

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103. 1957 was the last of a series of years in which the Fthiopian tradebalance showed a surplus. The import value has shown a comparatively steadyupward trend of 8% a year over the past ten years. Exports on the otherhand have varied considerably; primarily with variations in coffee exports.The 1962 export value was only about 20% larger than that of 1953 and only 2%

larger than that of 1957. Both 1953 and 1957 were, however, boom years. Thetable shows that exports since the depressed level of 1958 have been makinga steady recovery and that the 1962 export value was a new all time high. Asthe service accoumt is regularly negative, the balance on current account alsousually shows a deficit.

10h. There has been a noticeable increase in the amount of foreign grantsand loans receivesd. During the period 1950-56 the net public inflow averagedEth$6 million a year. From 1957 and onwards there has been an almost con-tinuous rise in the inflow. As most of this capital is provided to finance

specific imports, there is an obvious correlation between this capital inflowand imports. As for the composition of the public capital inflow, grantsusually exceeded loans, except for 1962. During the period 1957-62 grants -

amounted to Eth$1h0 million, while gross public loans amounted to Eth$156million, of iwihich 40% of the loans were received in 1962. A large proportionof the foreign grants has been coming from the United States and the restfrom Germany, Sweden, etc. Part of the U.S. grants have been granted ascommodity aid (PL 480 title II, III, IV). In the ten year period 1952-61,

35% of 11.S. grants went for the development of agriculture, and 29% forpublic health and education. The stress since 1962/63 has shifted from the

first to the second field. The largest lender in the public sector is IBRD.At the end of 1961, 50% of all outstanding loans were from IBRD, 12% fromU.S. (mainly DLF) and the residual mainly from Yugoslavia, Russia, Czechoslo-vakia, and 14est Germany. But the draw-down of almost Eth$60 million of creditsfrom the United States, DLF and Eximbank cluring 1962, for the building of twonew jet air-oorts and purchase of two jet planes altered the proportions sub-

stantially.

105. The private capital inflow consists of direct investments and short-

term credits. Direct investment was large in the early 1950's when the llonji

sugar estate was established. During 1957-59 direct investment amounted, how-ever, only to Eth$3_5 million. During the following three years there has

been a new up-swing with the level ranging from Eth$15 to 20 million. Thisinvestment during 1962 consisted mainly of retained earnings. Private short-term credits have varied erratically and have been mainly trade credits ex-

tended in both directions.

106. The foreign exchange reserves of Ethiopia have usually been fairlylarge compared with, for example, annual imports. The State Bank reservesreached a high in 1957 of Eth$174 million (U.S. -.70 million), more than twiceas much as in 1952. The large trade deficits in the two following years,primarily due to a sudden fall in export income, brought the reserves downapproximately 20%, to a low in 1959. Subsequent measures to rebuild the re-

serves were successful, and by the end of 1962 reserves were Eth$164 million

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(U.S. 865 million). Reserves of other banks usually amount to only a fewmillion Ethiopian dollars. It should be noted that the end of Decemberf:igures, which have been quoted, usually mark the lowest point of the year,and that reserves by the end of April are usually some 20% higher than inDecember. The end of 1962 reserves equal 65% of 1962 imports. The follow-ing table shows the development of this ratio over a series of years.

Ratio of Reserves at End of Year toLnports During Same Year

1952 1i 1956 1957 1959 1960 1961 1962

70 90 107 106 65 68 63 65

Note: Total reserves according to State Bank; imports c.i.f. according toCustoms Trade Returns.

107. The development of this ratio shows that the growth of imports hasleft the growth of reserves far behind, and that the effect of the suddentrade deficits in 1958 and 1959 has not in this respect been repaired. Theextremely good rat;io that prevailed between reserves and imports during thecoffee boom 1954-57 has been wiped away, and the current relationship isnot as good as the one which existed before the boom started. Internationalcomparisons indicate, however, that the ratio is still above the average formost nations. 1 Thether the reserves will prove to be adequate or not, isbasically a question of how much exports, and especially coffee exports, willfluctuate in the future. Import variations have hitherto been fairly few,and when they have occurred, temporary large increases have always been ac-comoanied by a capital inflow. From 1951 to 1962 exports (according to cus-toms trade returns) reveal decreases from one year to another, ranging be-ttween Eth$9 million and Eth$49 million. The maximum decrease in foreign ex-change reserves over any consecutive period of time has Veen Eth$47 millionaccording to State Bank estimates for the period 1957-580J. A repetition ofsuch foreign exchange decreases could be managed within the present reserves,even taking into account the required Statutory 30% of foreign exchange coverfor the note issue. The foregoing comments on the adequacy of the Ethiopianforeign exchange reserves do not take account of Ethiopian drawing rights withIj ATF.

108. The external debt of Ethiopia was at December 31, 1962 u.s. A65 mil-lion (Eth$162 million), of which a large proportion remains undisbursed. IBRDwas the major creditor with U.S. $24 million, Eximbank was the second withU.S. $6 million. The debt service is scheduled to rise from present levelof U.S. $7.2 million to U.S. 88.2 million (Eth$20 million) in 1965, which is

! This is probably a slightly exaggerated figure; compare note to Balanceof Payments table in paragraph 102'.

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equal to 8 and 10% respectively of the 1962 export value. Debt serviceis then scheduled to taper off slowly to U.S. $5.4 million in 1970, andU.S. $3.6 million in 1973. Ethiopia has an open line of credit with USSR(U.S. f$100 million equivalent), Czechoslovakia ($9.8 million equivalent)and Yugoslavia (jlO million) of which only minor parts have been committed(see Table 1). The USSR line of credit was signed in 1959. Loan conditionsinclude 2-1/2% interest rate, repayment in 12 equal installments in rublesor commodities beginning one year after project completion. Three loanswere signed 1959.-62: for an agricultural program, an oil refinery andtractor imports. The total loan sum amounts to U.S. $13.4 million, of whichU.S. $1.7 million had been disbursed by December 31, 1962.

109. Ethiopian exports were Eth.$205 million in 1962. Since 1959exports have been composed basically of 50% coffee, 10-15% hides and skins,about 10% cereals and pulses, slightly less than 10% oilseeds, and about5% chat. Fruits and vegetables, spices, and processed food products, suchas canned and frozen meat and fishmeal, make up the rest. The proportionof processed export commodities is very low. The development of exportshas been quite irregular. There has been a long-term trend of growth intotal export value, however, which for the period since 1951 with roughstatistical methods can be estimated at between 4% and 5% a year. Exportvolume has varied up and down with peak years in 1953, 1957 and 1961 (23%above that in 1953). Coffee exports averaged 34,000 tons during 1951-56,and rose to about 50,000 tons in the next six years, with a volume of above60,000 tons in 1962, almost double that of the first half of the 1950's.No other rmajor commodities have shown any significant long-term increasesin volume. Of other exports, only the export volume of vegetables and fruitsindicates a consistent and raPid progress of almost 30% a year, the tonnagerising from 1,200 tons to 14,000 tons in ten years. (The export value offruits and vegetables was Eth.$4 million in 1961 or 2% of the total.) Exportprices have shown a general decline. In 1962 coffee prices were down to 75%of their 1958 average and 50% of their 1954 high price average. Prices forcereals, pulses, oilseeds are down 20-30% from their 1958 high. Prices forhides and skins have, however, generally kept up fairly well. On the hiole,export prices declined 25% from the 1953-58 average to the 1959-61 average,and another 5% in 1961-62. Ethiopian exports are mainly directed to theUnited States (60-70% of the coffee) and Western Europe which, together, takeabout two-thirds. of exports. About 10% of the exports go to Aden and SaudiArabia, while French Somaliland, Lebanon, Egypt, Ceylon, Japan and Yugoslaviaeach account for between 2 and 4%.

110. Export prospects for various commodities (dealt with in thesectorial chapters above) and in total do not give rise to optimism. Coffeeexport proceeds may on the average for the 1963-67 period rise 5-10% above the1962 level (cf para.39). Exports of oilseeds will have to face increasingworld market competition. The export value of pulses may rise. The volumeof pulses exported has not risen in the past however, in spite of a veryfavorable price development. Export of hides and skins may rise with improvingquality of the produce; 1962 export value and volume was still below that of1951. Meat is probably one of the most promising export possibilities (cfpara.50). Sugar production is increasing and will probably soon exceeddomestic demand. It may succeed in finding a market outside Ethiopia. Exportsof potash are due to start in 1964 and should provide a not insignificantincome. In the Long run, exports of cement

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and refined oil products may be realized. The export prospects ofEthiopia will to some extent depend upon its relations to the varioustrade areas. As Ethiopia is not associated with EEC, the EFTA, and theCommonwealth Trade Preference System, her position may prove to be lessfavorable than that of many other African countries in this respect.Ethiopia is, however, well located to trade with the lMiddle East, Indiaand Ceylon, etc., which countries are beginning to assume importance astrade partners. Also, her exports to European continental countries out-side EEC, and to the United States, should be on a "most favored nation"basis and might possibly be expanded. On balance the outlook would tendto suggest in general a continuation of the long-term annual export growthrate of 4 to 5% (cf para. 109), rather than the Plan projection of anannual export growth rate of 11%. The difference derives largely fromnmore conservative estimates of the probable volume of coffee and processedmeat exports, and of the likely development of exportprices, whereas the Plan projections assume the maintenance of 1961 prices.

111. Tourism has in the past been a comparatively small source ofincome. Efforts are now being made on a small scale to attract moretourists. The establishment of jet service to Ethiopia is expected tohelp promote this industry.

112. Ethiopian imports amounted to Eth$259 million in 1962. Thevalue of imports has shown a steady upward trend of about 8% a year (since1951). There has been a definite change in the composition of importsduring this period. Imports of machinery and electric material have gone upfrom 5% to 20% of total imports (not including the special jet deliveriesin 1962), imports of vehicles from 6% to 20%, and of petroleum productsfrom 3% to 5%. On the other hand imports of finished textile commodities,which accounted for almost 45% in 1951 have, thanks to increased domesticproduction, decreased to less than 30%o. Imports of raw cotton went up atthe same time. Imports of sugar and salt amounting to 10% of total importsin 1951 have been almost completely substituted for by domestic production.Although import development reveals substantial substitution by domesticproduction it seems still to leave room for further import substitution ina number of fields, as textiles, soap, cement, etc. The development ofimports, on the one hand, is likely to slow down because import substitu-tion of major consumer commodities is likely to continue, while, on theother hand, the growth of imports of commodities and equipment directlyor indirectly connected with the growth of investment and other developmentexpenditure, will be dependent on the success in implementing the presentFive-Year Plan. It seems on the whole reasonable to expect that totalimports will rise, within the limits imposed by export earnings and externalaid. Import prices have been rising throughout the past 10-year period.As export prices have fallen, terms of trade have deteriorated markedlyover the past four years; approximately by 25-30% from 1958 to 1962.

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J. Planning

:L13. Early this year the Second Five-Year Plan document, coveringthe period 1263-1967, was published by the Ethiopian Government.

L14. The First Five-Year Plan document (1957-1962) was largelyregarded as a confidential paper. It emphasized the need to develop theinfrastructure, primarily the development of a road system.

1L15. The Second Plan document, like its predecessor, discusses boththe private and public sector. It has to be read against the background ofthe long-term 20-year perspective which has been formulated with respect tothe general directions for the economy to move. Primarily, the objectivepresented a change from an agricultural economy to an "agro-industrialt"economy, i.e., an ecoomy with a growing industrial sector accounting fora larger share of the major product although less than agriculture. Morespecifically, by 1982 it is desired that the percentage of the populationengaged in agriculture declines to 72% (compared with 90% now), notwith-standing a projected increase of the rate of population growth during the20-year period due to improved living conditions.

116. The Second Plan document presents a growth target for the economyof 4.3% annually as compared with 3.4% estimated as realized during thepreceding period. It suggests that emphasis should be placed on investmentin directly productive sectors and less on infrastructure. Moreover, theinvestment level during the 5 years to come should be more than twice ashigh gs that during the previous period. The investment level is supposedto be financed for one third from abroad. The domestic contribution impliesa doubling of the savings level as compared with the previous period.

117. Finally, the Plan document recommends some institutional changesland reform is mentioned with a high priority. It also pronoses the settingup of an Industrial Promotion Service, a Technical Agency, an AgriculturalDevelopment Agency and an Investment Bank.

118. Sufficient information on the bases of the Plan and on the concretemeasures being taken to carry it out was unavailable to add much more tothe foregoing. In any case, the most important part of planning appearsstill to be accomplished: building up the statistical basis for action,preparation of and implementation of high priority projects, realization ofthe land reform and educational programs, inventory of existing publicinvestment under way and projected.

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IIIe LONG-TE-i-IROSPECTS AND CR1IT-TWORTHINESS

119. The future rate of growth of the Ethiopian economy will dependprimarily upon how well and how fast the country's economic potential isput to effective use. The economic potential holds promise, althoughimportant areas of natural resources have not yet been explored. Theagricultural potential, including cattle breeding and animal husbandry, aswell as processing of agricultural and animal products, probably holds themost long-term promise. If significant mineral resources should be found,this could, of course, change the evolving pattern and rate of development.The recent discovery of potash resources has encouraged petroleum and mineralprospecting efforts. Development of the agricultural sector will tend to bea slow, long-term affair, in view of past neglect and the nature of theproblerms discussed in the report involved in modernizing Ethiopian agricul-ture. Tnus, although the agricultural sector comprises the largest potentialfor long-term growth, and it is at the same time the principal sector ofthe economy, on which the major part of the population is directly dependent,it appears unlikely that there will be any substantial increase in agricul-tural output during the next, say, four or five years, i.e., up to the endof the Second Five-Year period.

120. The development of the country is of course to a large extent apolitical matter, involving the country's capacity to decide on priorities,give direction to the economy, carry through with measures necessary toorganize and develop administrative capacity and technical skills, andreform existing institutions and create the new ones essential to moderndevelopment, on the one hand, and mobilize and maximize financial resources,domestic and foreign, on the other. But it is also a matter of nationalaspirations, belief in development and willingness to modify customs andtransform traditions which tend to inhibit development. The EthiopianGovernment has made an important start on some of these problems; much,however, as we have seen in the report, remains to be done in reforming andbuilding institutions and practices as a solid base for econonlic development.

121. The administrative structure of govermnent generally leaves muchto be desired with respect to the crucial role it must inevitably play inthe country's development and the newly established planning organizationspecifically, does not occupy a position to enable it to carry enough weightto delineate and follow through on government development policy as outlinedin the Second Five-Year Plan. Some of recent developments in public adminis-tration, e.g., the adoption of a basic civil service statute, research andstudy by public bodies and experts on organization of local government, landmeasurement, tax reform, etc., hold some promise for improvement. Steps toimprove the coordination of planning implementation activities of variousministries are suggested in the current development plan, some of which maybe instituted soon, e.g., establishment of coordinating or liaison "cells"in each ministry. Coordination on the top level will not, however, followautomatically. In the same way that the central government, where most ofthe power in the country is concentrated, lacks focus and is weak on coordina-tion, so too government outside of the capital lacks direction and focus.

- h4 -

Thus, one of the most serious limitations on the capacity of the govern-ment to promote economic development in Ethiopia is the nature of theexisting administrative structure and the institutional gaps at the centerand between the the center and the provinces and between the provinces andintermediate and local levels of government. Administrative reorganizationremains a pressing problem if growth is to be achieved.

122% The Government has played a large role in the economy in thepast and this tendency remains. The Government will probably expand itsparticipation in the productive sectors of the economy under the currentdevelopment plan. This tendency which results in part from the lack ofprivate Ethiopian entrepreneurs and private local capital formation, andin part from the traditions of the society, social, political and economic,will probably increase the level of investment and promote some economicgrowth, but it may also have a tendency over time to discourage privateinvestment and inhibit new initiatives, especially by overseas investors.A centralized government and a centralized economy with significant publicparticipation requires a well-staffed and well-trained public administrationin order not to become a brake on development. The present administrationwhich during the past few years seems to have increasingly attracted a numberof young and well-trained people still lacks enough middle and upper gradeadmhinistrative supervisory management and technical personnel. Top staffis therefore often engaged in too many and too varied activities. Theadministrative capacity may not for some time be equal to the developmentambitions of the Government. Nevertheless, the training of public adminis-trators is under way, and the goal of "Ethiopianization" as well as develop-ment serves as a spur. The problem of blending newly trained Ethiopian staffwith the foreign staff of advisers and technicians serving in Ethiopia inorder to achieve the optimum total performance is an important one, whichwill increasingly confront the Government .

123. Investment has in the past been concentrated on infrastructureand on housing and only a small proportion has gone into directly productiveactivities. The Second Five-Year Plan envisages a change towiard a higherproportion of investments in directly productive sectors as well as signifi-cant increase in the overall level of investrjient. It seems quite likelythat both of these trends will develop, but not to the full extent planned.Investment in manufacturing will no doubt rise substantially. Limitationson the degree of fulfillment of the Plan's objectives in this sector willprobably arise from entrepreneurial and private financing stringencies, twoelements expected to be supplied to a large extent from abroad. However,present inducements in form of tax advantages, customs duty exemption, etc.,have so far not been sufficient to attract foreign private capital on thescale sought. Thus, an increase in the private capital inflow in the nearfuture to the extent required by the Plan seems somewhat doubtful.

1L2L. The actual development effort made by the Government in thepast has been uneven. Actual capital expenditures have been rising fairlyrapidly, but as 'Late as 1962 did not amount to more than about 4% of GNP.

Government domestic financinr; of its capital expenditures may have amountedto about !40% during the past four years. Capital expenditures planned from1963 onwards show a considerable increase; a level of 8% of GNP in 1967,contemplated in the Plan, does not seem unreasonable. This increase is,however, based on a substantial rise in foreign aid, which is supposed tocover the Ahole rise in capital expenditure, which will mean foreign financ-ing of as much as 75-90% of total public capital expenditure during the 1963and 196L budget years. The actual and anticipated limited domestic financ-ing of capital expenditures must be viewed in light of total public revenuesand recurrent expenditures. The actual level of total revenue amounts tobetween 8-1l0p of GNP, which is comparatively low. No public borrowing hasbeen undertaken heretofore in the private market. The past increase inrevenue of about 8% a year can be regarded as fairly satisfactory. Therevenue estimates for the 1963 and 1964 financial years, as well as for thetotal Plan period, indicate, however, a much lower rate of growth in thefuture. Significant tax reforms of any magnitude do not seem to be in theoffing for this period, but a revenue increase based upon improved taxadministration and rising taxable incomes seems likely. This is not anambitious goal in view of the rapidly rising need for finance. The patternof recurrent expenditure is also rather unsatisfactory with defense, security,and administration accounting for two-thirds or more of recurrent expenditure.Attempts to improve the spending pattern lhave not been particularly fruitfulin the past. Budget estimates for 1963 and 1964, and the Plan generallyindicate a new effort to improve the composition and pattern of expenditure.However, even the planned pattern of expenditures does not seem optimal fordevelopment, e.g. the planned recurrent expenditure for agriculturaldevelopment hardly seems sufficient to iake a significant impact, given theinstitutional problems, and the scope and importance of the sector. Theanticipated recurrent expenditure level leaves little, if any, room withinthe projected revenue level for additional domestic financing of capitalexpenditure. In short, the public development effort is not particularlystriking as far as public savings and public consumption of a recurrentexpenditure nature are concerned but appears satisfactory as far as capitalexpenditure is concerned, provided of course that the projected increase inforeign aid becomes available. This very availability, however, is likelyto be adversely affected by the limited domestic resource mobilizationeffort, which will diminish the country's capacity to match foreign capitalwith local resources .

125. Ethiopian development, to a large extent, will be influenced bya number of key external factors. The growth of her coffee exports, amountingto 50% of total exports, will be limited by her quota and by such increaseas the Agreement provides for to reflect the anticipated growth of worldconsumption. The average annual level of Ethiopian coffee sales proceedsover the 1963-67 period are likely to exceed by 5-10% the 1961-62 level.Export prospects of other commodities are mixed. The promise of rapidgrowth of meat exports, and of minerals, for example, potash, may well berealized. An encouraging fact is that mineral explorations have been startedbut the long-run impact can obviously not be foreseen now. In sum, exportprospects are moderately good suggesting a continuation of the long-termannual export growth rate of h to 5%. Also, on the import side, after an

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initial expansion of imports of capital goods and other "development"commodities for the establishment of import-substitution industry toreplace imports of non-development commodities such as textiles, shoes,etc., there may well be a reduction in the imports of consumer goods.However, imports are likely to rise more rapidly than exports during thenext few years, within the limits set by export eamrings and external aid.The increasing need for and dependence upon foreign public and privatecapital may find a favorable response overseas. The need for foreign aidis likely to rermiain comparatively high over a long period.

126. The Ethiopian external debt is not uncomfortably high although ithas recently increased quite rapidly. The foreign debt service amounts to'U.S. $7 .2 million, or 8% of export earnings (or about 10% of foreign exchangereserves)* The debt service is expected to increase to U.S. $8.2 millionby 1965. Ethiopia has an excellent debt service record. Foreign exchangereserves are at a fairly high level, equal to 8-9 months imports at thepresent level. Present export prospects do not seem sufficiently promnisingto finance a rate of growth of imports necessary to sustain the expectedrate of growth of the economy without a reduction of reserves and/or rapidlyrising inflow of foreign capital. The likelihood of Ethiopia's obtainingsubstantial foreign private investment seems comparatively limited, and itcan be expected that public capital will play the leading role in capitalinflow in the near future as in the past when about half of this inflow wasin the form of grants and soft loans, and half in the form of loans on con-ventional terms. Thus, on balance, in the light of its present externaldebt and foreign exchange positions as well as its past debt servicingrecord, Ethiopia appears creditworthy to service limited additional debt onconventional terms. However, since the outlook is for an increase incapital requirements exceeding the probable limit of this capacity to ser-vice debt on conventional terms, and since it is desirable to keep theforeign debt service within reasonable limits to allow some margin to servicesuch additional foreign private investment as the country may attract andsome margin to offset some of the uncertainties indicated in the report Aithrespect to export prospects, it would also seem necessary for Ethiopia toreceive credits on non-conventional terms. It also appears necessary tostrike a balance between loans on conventional and non-conventional termsso that the composition of new debt does not impose too heavy a burden onthe country's foreign debt service capacity. The very low per capita incomein the country and the relatively slow growth rate, on the one hand, andthe recent attempts of the Government to improve its general performance andto develop the economy, on the other, suggest that Ethiopia is eligible forassistance on non-conventional terms. In short, Ethiopia can for the timebeing be considered as a "blend" country, subject to periodical review ofthe strength of the economy, the performance of the government and theevolution and composition of the external debt.