Ethiopia has just seen 'historic' political change, while its China-inspired economics continue

Key Points
  • Ethiopia, one of Africa's most promising economies, swore in a new prime minister this week — while a nationwide state of emergency is ongoing.
  • New Prime Minister Abiye Ahmed's opening public comments have focused on bridging the ethnic divides which trouble the country.
  • Ethiopia's economy has held up despite civil unrest, with the government espousing a China-style state-led approach to economy management.
People working on an assembly line at Huajian shoe factory in Dukem, Ethiopia, on April 19, 2012.
Jenny Vaughan | AFP | Getty Images

East African economic powerhouse Ethiopia swore in a new prime minister this week, whose pledge to smooth out ethnic ruptures in the country could mean that unrest and violence no longer disrupt its economic development.

Abiye Ahmed took his oath of office on Monday, declaring that "Today is a historic day. We bear witness to a peaceful transfer of power."

Abiye's leadership is noteworthy as he is an ethnic Oromo, a group which hails from Ethiopia's Oromia region — of which the capital is also national capital Addis Ababa. Despite being Ethiopia's largest ethnic group, comprising roughly one third of the country's 100 million population, Abiye is Ethiopia's first Oromo prime minister.

"Our identity is interwoven and intermingled. We are born Ethiopians and we die as Ethiopians," Abiye said at his swearing in, as reported by Reuters.

Abiye Ahmed, newly elected prime minister of Ethiopia, attends the swearing in ceremony at the House of Peoples' Representatives in Addis Ababa on April 2, 2018.
Minasse Wondimu Hailu | Anadolu Agency | Getty Images

Abiye's rhetoric of national unity is pertinent given that he was elected into power by lawmakers in the midst of a state of emergency, imposed following anti-government protests which led to the resignation of his predecessor Hailemariam Desalegn. Oromos accuse the government of marginalization.

Abiye was a lieutenant colonel in Ethiopia's military and also holds a doctorate in peace-keeping from Addis Ababa University.

Ethnic tension impacting business

But despite the festering civil unrest in recent years, Ethiopia's economic fundamentals have remained strong.

Ethiopia is among the poorest countries in the world, and also suffers from recurring famine. But, the country has sustained gross domestic product growth (GDP) of above 8 percent since 2004, with this figure hitting double digits as recently as 2015, according to International Monetary Fund data.

Women queue for water with plastic cans in the outskirts of Addis Ababa, Ethiopia, on May 16, 2013.
Julio Etchart | ullstein bild via Getty Images

Unemployment was 5.4 percent in 2017, according to the World Bank — a similar figure to that of Nigeria, considered by some metrics to be Africa's largest economy.

But, ethnic tension is impacting business. "At least 40 foreign-owned assets, primarily flower farms and textile factories, were attacked during anti-government protests in 2015 and 2016," Ben Payton, head of Africa at consultancy Verisk Maplecroft, told CNBC this week.

"While such attacks have since dwindled, protesters clearly appreciate how they can hurt the government by targeting foreign investors," he added.

Following China's lead

Ethiopia's strong economic metrics could be thanks to its government espousing China-style state-led development. For example, public companies maintain monopolies over several areas of the economy, while citizens cannot privately own any land.

While Ethiopia has ostensibly been mimicking Chinese economic governance, it has also been a major recipient of Chinese funding abroad. Ethiopia is a key tenet of China's Belt and Road Initiative, a big bucks spending drive to resurrect ancient trading routes centered on China.

Workers at Huajian shoe factory in Dukem, Ethiopia, on April 19, 2012.
Jenny Vaughan | AFP | Getty Images

Ethiopia is a burgeoning manufacturing hub, with the intention of growing the sector to account for 25 percent of the economy by 2027, the state-run Ethiopian News Agency quoted a government official as saying last June. This has primarily been established through Chinese-funded industrial parks.

"The industrial park model has certainly worked well in terms of investment flows — foreign direct investment grew by 27.6 percent last year, largely because of investments in the new industrial parks," Jane Morley, Ethiopia analyst at Economist Intelligence Unit, told CNBC Thursday.

According to Chinese state-run newspaper the Global Times, Ethiopia is aiming to have 15 such industrial parks by June of this year.

Dealing with demographics

While Abiye has set his agenda on bridging ethnic divides during his first few days in office, managing the Ethiopian economy around its population could prove an issue.

Ethiopian farmers threshing grain with bullocks on January 18, 2017, in Lalibela, Ethiopia.
Eric Lafforgue | Art in All of Us | Corbis via Getty Images

Ethiopia's population, the second largest in sub-Saharan Africa after Nigeria, has a median age of 18, according to Morley.

"Clearly, far greater private-sector involvement is going to be necessary if sufficient jobs are going to be created and growth be made sustainable over the medium to long term," she said.

Despite the growth of industrialization, agriculture still accounts for one third of GDP. Low wages are an issue faced by those in newly-generated manufacturing jobs.

"Headline figures mask substantial variations," Morley explained.

But given the pressing civil unrest which overturned Ethiopia's political order two months ago, privatizing the economy while attempting to pacify ethnic divides would be a huge challenge for Abiye. He will likely "tinker at the edges of economic policy for the time being," Morley said.