Ben's Econ Blog

1. Harrod-Domar Growth Model

-Growth depends on the level of saving, and the productivity of investment.

-More physical capital increases the growth.

-Higher income will give higher rate of savings.

= Harrod Domar Growth Model is nearly impossible to apply to Ethiopia, because the Real GDP per capita is already so low. Since the incomes are very low, there’s no capacity of investment or saving. In order to use the strategy, Ethiopia would have to come up with a solution for low income first.

2. Structural change/dual sector Model

-Primary Production: Raw Materials, Mining, Fishing, Forestry, and Agriculture.

-Secondary Production: Manufacturing and Construction.

-Tertiary Production: Education and Tourism

-Dual Sector is about Productivity.

= Ethiopia has a huge primary production, including its oil, coal and gold. This can be further developed by increase in its production efficiency. Tertiary production, especially education, is the most urgent factor that needs improvements. The government should try its best to decrease the percentage of illiterate within its population.

3. Types of Aids

- Humanitarian (individual country to country, a major organization to country), Bilateral (one country to another), and Multilateral (different countries into one organization)

-Increase saving ratios, Reduce Foreign exchange outflows, Reduce the dependency on private investment, and increase the living standards of people

= From 1950, Ethiopia received foreign aids from different countries, such as, Soviet Union, Sweden, and India. Ethiopia has borrowed money from European union, individual European nations, Japan, and China. The debt was about 1.6 billion us dollars in 2001. Because of its huge dept, the World Bank-International Monetary Fund-sponsored Highly Indebted Poor Countries (HIPC) debt reduction program.

4. Export led growth/ outward oriented strategies

-Increasing exports of goods where comparative advantage exists – higher incomes – Growth in domestic market along side growth in export market

-Requires: liberalized trade to gain access to markets, floating exchange rate, and minimal government regulation

-Focus on either primary products or manufactured products.

= Coffee has been the biggest export good of Ethiopia, but the trade hasn’t been liberalized between people. This discourages the citizens from becoming more passionate about increasing their incomes.

5. Import Substitution/ Protectionism

-Focus on producing goods domestically instead of importing

-subsidies provided

-tariffs or quotas imposed.

= Ethiopia imports food, animals, petroleum, chemicals, machinery, and vehicles. More sophisticated education is needed in order to support producing vehicles, machinery, and chemicals domestically.

6. Commercial loans

-Loans from banks and other financial organizations

-Loans to developing countries grew from 3bn to 12bn.

-From 1970s loans continued to increase.

-Higher interest rates and falling commodity prices defaulted their loans and many other loans had to be re-scheduled.

-Possibility of Indebtness.

= Foreign aids burdened Ethiopia even more by leaving debts for the economy to pay.

7. Fairtrade Organization

-Multinational power has grown

-Put pressure on farmers and other producers in the developing world

-Falling incomes

-Growth of fair trade organizations guarantee farmers and producers a fair price for goods.

-Sustain a reasonable standard of living and price stability.

= There hasn’t been fair trade organizations that can guarantee the farmers a fair price for goods. For the reason, the farmers weren’t encouraged to increase their productions. This would delay the growth of the economy. Creating a trade organization can be a solution to Ethiopia’s poor economy.

8. Micro edit schemes

-Lend small amounts to the poor in a developing country.

-Often offered by Non governmental Organizations

-Directly targeted at the people who need them -promote the culture from the bottom.

= Local organization, Vision organization for community development ,helped the women in Ethiopia to borrow money, and own their own businesses. It provided the women with independence,decreased the gender inequality, and increased the real output.

9. Foreign direct investment

-Multinational corporations has productive capacity in a number of countries. The profit and income flows that they generate are part of the foreign capital flows moving between countries.

-Foreign direct invetment(FDI) can mean that the MNCs can hold a disproportionate amount of power over the countries they operate in.

-The role of the corporations becomes more important. They look to locate part of their production in other countries to increase their advantages.

-It boosts the rate of economic growth, and increase in training and education.

=Ethiopia has competitive advantages in different areas and, with tremendous business opportunities, the country should

seen as an attractive investment location for nationals.

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Ethiopia itself has a lot of potential of increasing its economy, because it has a huge amount of natural resources. It is, again, the education that should be improved as soon as possible. Also increasing foreign direct investment is one of the fastest ways to accelerate the growth. To acheive above strategies, the government intervention is required. As increase in foreign direct investment and education is applied to the economy, according the harrod domar growth model, the saving rate and investment will aggrandize. Due to the cycle, it will result in further growth.

Constructing free markets that the citizens can participate in can stabilize the growth. So far, Ethiopians have no set ownership on their lands and properties. By providing laws that protect the ownerships, the economy encourages the people to take parts in the markets, increasing the growth.

(1) Inequality of income= Benefits are delivered unevenly as growth occurs. In other words, the rich becomes richer while the poor becomes poorer. The income distribution is already one of the biggest problems that developing countries face. The growth would benefit the society, and increase the profit for multinational corporations.

According to the survey in 1998, 3.0% of the total income was earned by the lowest 10% of the population, wheras the highest 30% earned more than 80% of the country’s total income.

(2) Pollution: As an economy grows, it will push the firms to increase the outputs. This will increase the air and water pollution, because of increase in the number of factories and facilities. Also, since most developing countries have weak protection on its forests and environments, economic growth could accelerate the deforestation and environmental degradation.

Ethiopian wolves, lions, and Gelada Baboons are under the danger of extinction. Local hunting, agriculture, and housing developments cause deforestation too. Increase coffee production is one of the main causes.

(3) Loss of non-renewable resources= As the production increases drastically, the efficiency of the economy in using the resources would decline. Faster the production is, available resources would last for a shorter time period.

Ethiopia has deposits of coal, gemstones, kaolin, iron ore, soda ash, and tantalum, but only gold is mined in significant quantities. In 2001 gold production amounted to some 3.4 tons.

(4) Loss of Land= Increase in production of an economy decreases the amount of available land.

The agriculture of Ethiopia accounts for 46.3% of GDP, 60% of exports, and 80% of the total unemployment. Because of deforestation, originally 35% of the land was covered with trees, but it declined to 11.9%. In terms of loss of land, soil erosion and deforestation are two big problems that Ethiopia is facing,

(5) Lifestyle changes= The push for growth changes the income and consumption of families and communities.

The lifestyle of Ethiopia hasn’t been changing, since the education level stayed the same. Enrollment is one of the lowest among the African countries, and almost half of the population is illiterate.

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Ethiopia needs to increase its efficient use of natural resources. Although the country has deposits of different natural resources, the economy is mostly dependent on the mining of gold. By increasing the production/mining of coal and gemstones, it will benefit different industries that are related to the resources. In a long term, when there’s not much gold, they can depend on other natural resources and make sure the growth to carry on.

(1) Poverty Cycle: Poverty and inequality are the factors that hold the developing countries from further improvements. People receive little education and almost no health care. Also, because the income is very low, the citizens would have no extra money to invest/save.

Low income levels = Low saving levels = A lack of funds for investment = Lower incomes (The cycle continues.)

- Most of the Ethiopians cannot fulfill the minimum stand of food per day that World Health Organization set. This indicates the poverty level of Ethiopia, and its ever lasting poverty cycle. The difficulties that farmers are facing, such as drought, are discouraging the farmers from increasing their production, which becomes worse as it goes.

(2) Institutional and political factors: There are physical problems (difficulties in reaching rural areas) and data information problems that make collecting tax hard within the country. The property rights are also being insisted on the traditional base, preventing the trades between people.

- Since a majority of the population are devoted to agriculture, most of its population is in the country side. This makes it harder for the government to achieve accurate tax collecting. The property right is also not as clear as that of other countries. Because of its government, people cannot own or trade lands with each other.

(3) International Trade barrier: Developing countries trade with developed economies.They are mainly dependent on primary exports. Diversification has been occuring ever since the trades became active. Developing countries had to increase its primary exports gradually, to satisfy the increasing demand of import. Because of natural disasters, the inelastic supply of primary products alter a lot, which makes the prices unstable. Also, as the developing countries strengthen themselves by trading with one another, poor countries become poorer. Overproduction causes the prices to be unstable. Some producers would be left out, because of the mass producers. Since the production increases, storage would become expensive and hard.

- Ethiopia is the original source of coffee bean, and still has one of the biggest coffee production in the world. Ethiopia is the world 10th livestock producer, which exports gold, leather products, and oil seeds. Recently it started exporting plants and flowers, too. With its newly constructed dams, it started exporting electric power to its neighbor countries, too. Although the country has large mineral sources and potential of oil, because of the unstable government, the resources are not being used efficiently.

(4) International Financial Barriers – indebtedness: A lot of developing countries, similar to the other foreign countries, borrowed money from institutions; however, it became hard for them to repay as the oil crisis occur.

- The government has a public debt, which is 31.7% of the GDP.

(5) Social and Cultural factors:

Religion- Encouraging/discouraging the work force.

Culture/traditions- Modern or Classic? Does it degrade or improve the society?

Gender issues- What’s the role of the women? Equality of opportunity?

- The education of the government is poorly organized, and as a result most of the citizens are illiterate. About 60% of the citizens are Christians, and the rest are either traditional faiths or Muslims. The role of women is still very small in the country, limited to house chores.

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The education and the unstable government are still the problems of the country. Because the citizens don’t have any access to higher education, they only limit themselves to agriculture or simple productions. Also, since the government regulate the ownership of lands, people don’t get any opportunity to increase their income. Those two barriers not only prevents the standard of living and GDP from growing, but also decreases the overall growth rate.

The Five Factors

1. Natural Factors

- Increases in the quantity of available land for agriculture increase economic growth.

- It might have negative effects on soil and its quality, contribution to global deforestation.

- The increase in population(labour) applied to fixed quantity of land might cause decrease in marginal productivity.

Deforestation has been one of the biggest concerns that Ethiopia faced, because of soil erosion, malnutrition of soil, loss of wild animal habitats, and decline in biodiversity it causes. 35 % of the Ethiopian land was covered with trees at the beginning of the twentieth century; however, it decreased to 11.9% of the land. Every year, Ethiopia loses about 1410 square kilometers of natural forest. The current Ethiopian Government attempts to prevent deforestation but promote reforestation through education and developing non-forest land. Furthermore, the government used about 2.3 million euros to educate people. The trainees are taught to use proper irrigation to decrease soil erosion, also decreasing the deforestation.

2. Human Factors

- Increase in population = Increase in labour force = Increase in economic growth.

- Increase in population also causes the market demand, stimulating the production.

- If population grows faster than GDP, GDP per Capita falls.

- Improving the skills of labour through education is important in increasing the quality of labour.

GNP per capita of the country was $1541 in 2009, and the life expectancy of men was 52 years, while that of women was 54 years. From the beginning of the 1900s, the Orthodox Church has controlled the education in Ethiopia. School enrollment of Ethiopia is lower than those of most African countries. As a result, a half of the population is illiterate.

3. Population

- Supply of food= Adds the size of infant morality.

- Enviornment = Damaging the environment is necessary to improve the poverty.

- Setting of School age and Working age.

- Birth Rate, Health Care, and Family Planning.

- The role of women in society = Reduce in family sizes.

- Migration = Possibility of decrease in unemployment, underemployment, crime, and poverty.

The population tripled between 1967 and 1975 during Mussolini’s regime. The influx of italians and laborers pushed the growth during the period. Also the migration of working force from rural areas to urban areas caused the second growth. However, the migration decreased the population of workers to grow food. From 1975 to 2000, the urban population has been increasing with the percentage of 8.1%. Ethiopia has only 1 medical doctor per 100000 people. Poor sanitation and malnutrition are the main health problems that Ethiopian government is facing due to lack of educated man power and health facilities. There are only 119 hospitals and 412 health care centers in Ethiopia. 8% of infants die during or after birth.

4. Physical Factors

- Directly productive capital = plant and equipments : factories

- Indirectly productive capital = Facilitating capitals ; roads and railways

- Technological improvements affect the economy largely.

Ethiopia is considered as the “water tower” of Africa, because it has the greatest water reserves. However the country only has few irrigation systems to use it: 1% for power production and 1.5% for irrigation. Ethiopia has 681km of railway, which consists of Addis Ababa – Djibouti Railway. The railway is under the control of both Dijibouti and Ethiopia. As a result of Ethiopia’s 10 year Road Sector Development Program, Ethiopia had 33 297 km of paved roads in 2002. In 1936, Italy supported Ethiopia building infrastructure to connect major cities, and a dam providing water and power.

5.  Institutional Factors

-The banking system : Enables the businesses to grow and flourish.

-The educational system : Educate the workforce, increasing the growth.

The government owns the telecommunication services. It is not attractive to the private firms, but because the government is in charge of it, the rural area of Ethiopia also came to have an access on telecommunication system.

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–I think the biggest weakness of Ethiopian economy is its human factors. As you can see above, Ethiopian economy provides a weak education systems. Its enrollment percentage is the lowest compared to other African countries, and almost half the population are illiterate, which slows down the development of the economy. It is expected for the institutional factors and physical factors to promote as the human factors improve: Better educated working force can initiate more reasonable/suitable plans to strengthen the economy.

*Arguments for Protectionism

As goverments protect trade by regulating import, it will achieve greater aggregate demand, and higher national output. Because the domestic output of the country is high, it will appear more competitive. Furthermore, protectionism would stimulate the growth of developing countries, whose export is a huge part of their national output.

*Arguments against Protectionism

Protectionism can  decline the world output due to the multiplier effect; in a long term, protectionism of a country can cause decrease in export in other countries. Moreover, due to tariffs, domestic consumers would have to pay higher price than usual to purchase goods and services. Due to tariffs, some firms might become inefficient, depending on the benefits they get from the government policy. This can also lead the firms to become corrupted.