Alemayehu Geda

Finance and Poverty in Ethiopia: A Household Level Analysis

In this paper, using the rich household panel data of urban and rural Ethiopia that covers the period from 1994 to 2000, we attempted to establish the link between finance and poverty in Ethiopia. Our results show that access to finance is an important factor in consumption smoothing and hence poverty reduction. We also found evidence for a poverty trap due to liquidity constraints that limits the ability of the rural households from consumption smoothing. The empirical findings from this study could inform finance policies aimed at addressing issues of poverty reduction.

Macroeconomic Performance in Post-Derg Ethiopia

This paper appraises macroeconomic performance in post-Derg Ethiopia, organizing its analysis along four thematic categories important in explaining growth and macrodevelopment: (1) the political framework underpinning the macroeconomic performance, (2) the macrogrowth framework, (3) the market structures under which economic agents function, and (4) constraints to economic agents. The method employed is the before-after approach. The study revealed that although performance is very good when judged in the context of the structural problems of the post-Derg period, sustainability of the results is highly questionable. The latter is the result of the dependence of major macro variables on vagaries of nature, especially a good rainy season, and external shocks that are accentuated by lack of structural transformation in the economy over the last three decades.

Determinants of Foreign Direct Investment Inflows to Africa

Based on a new analytical country classification of African economies as fragile, factor and investment driven economies, we identify the main determinants of FDI inflows to Africa. Using a panel co-integration approach for the period 1996–2012 we find market size, availability of natural resources, openness to international trade, a stable macroeconomic environment, better infrastructure and an effective bureaucracy to have a strong positive impact in attracting FDI to Africa. On the other hand, political and macroeconomic instability and high financial and transfer risks have a negative effect in attracting FDI to the continent. However, the effect of these factors varies significantly across the analytical country classification that we have developed. Among all FDI determinants only government effectiveness and natural resource abundance are important across all countries. This suggests the importance of emphasizing different policies in different countries or country groups. Moreover, our analysis also suggests that the new analytical classification developed in this study can be an important guide for operational and analytical works of continental organizations such as the African Development Bank, the Economic Commission for Africa and the African Union.

To be or not to be: dilemma of Africa's economic engagement with China and other emerging economies

In this study an attempt to examine the China−Africa trade potential and the implications of exploiting that potential is made. The potential is examined using the Trade Complementarity Index and the stochastic frontier gravity model of trade. The results suggest that there is considerable potential to expand China−Africa trade. Apart from reforming trade policies, removing other behind-the-border socio-political-institutional constraints and improving trade facilitation would contribute to realization of this potential. However, the realization of this potential may entail locking African countries in primary commodity sectors (and hence de-industrialization). A non-parametric test using the ‘Galtonian regression method’ as well as a multi-country version of the Heckscher−Ohlin−Vanek trade model is employed to test this pattern. The results suggest that African countries are characterized by re-deepening specialization in the primary commodity exports sector owing to Chinas commodity demand surge. We also found that the indirect impacts of this demand surge are more significant. This calls for strategic policy engagement with China, India and other emerging economies such as Brazil with the aim of balancing between the temporary resource windfall gain and the future industrialization and development of the continent.

Capacity building in fragile and post‐conflict states in Africa

Capacity building in fragile and post‐conflict situations is specially challenging for policy makers in that it represents a situation that needs to be carefully managed. Understanding the dynamic link between capacity building and conflict requires understanding the nature and determinants of conflicts, their duration, intensity and the modalities for their cessation and post‐conflict reconstruction. This study attempted to do that from systemic or theoretical perspective. A major common theme that runs across the literature is that post‐conflict recovery and sustainable development and the associated capacity building exercise in Africa need to have the following four feature: (1) first a broad development planning framework with a fairly long‐time horizon and an overarching objective of poverty reduction; (2) second, social policy‐making in such countries is expected to be distinct from non‐conflict countries. This signals the need to articulate country specific policies and (3) third, intervention in such states requires a high volume of aid flows and (4) forth it need to be preceded by deeper understanding of African societies by donors. This study by outlining such basic issues from theoretical perspective resorted to an outline of three core areas of capacity building that are needed in post‐conflict and fragile states: capacity building to address immediate needs of post‐conflict states, capacity building to address the core economic and political causes of conflict, as well as, capacity building to address issues of finance and financial sector reconstruction. Each of these aspects is discussed in detail in the study. The study underscores the need to view and understand capacity building exercise as part and parcel of a broad developmental problem which requires broader developmental solutions.

Ethiopian Macroeconomic Modeling in Historical Perspective: Bringing Gebre-Hiwot and His Contemporaries to the Ethiopian Macroeconomics Realm

Much of the macroeconomic analysis in Ethiopia is hardly linked to the country’s pioneer development thinkers. The latter, however, articulated the Ethiopian development problems and what should be the appropriate policy direction to address them nearly a century ago. This articulated development thinkers of the early 20 th century Ethiopia had captured the imagination of prominent Ethiopian historians and their students. Ethiopian economists seem to lag behind in appreciating the theoretical insight of these pioneer development thinkers. This article is aimed at bridging this gap. The paper will, first, reviews the economic ideas of theses reformer-intellectuals and then build a linear model based on the synthesis of their development thinking. The model is then solved to render analytically solutions that will give theoretical insights on historic and contemporary macroeconomic issues in Ethiopia. I argue that some important development concepts such as the deterioration of the terms of trade of developing countries, the vicious circle of poverty and structuralist analysis of North-South macro economic interaction has, contrary to the statement in existing development literature, has its origin in early 20 th century Ethiopian Development thinking.

The Macroeconomics of Africa: Import Compression and External Finance

This chapter will examine some of the main features which might usefully be included in a macro model for Africa. It is hoped that this discussion will help in formulating an actual prototype African macro model, which might form a working component of the North-South model developed in Chapter 6. Although the relevant African macroeconomic framework for this should broadly be similar to that outlined in Trap (1993), there are, nevertheless, a number of other specific features not properly dealt with in Trap (1993), which an African macroeconomic framework might usefully include. The first such feature is an ‘import compression argument’, as discussed in Ndulu (1986, 1991) and Rattso (1992b). Two other features, which I will argue should also be incorporated into macro models of Africa, are the ‘fiscal response to external finance’ and ‘Dutch disease’ phenomena. Hence, an attempt will be made to integrate these features into the prototype African macro component of the North-South model developed in Chapter 6.

The Effect on Africa of External Shocks Generated in Developed Countries

In this chapter, an attempt will be made to assess the impact of a range of global shocks on African economies, using the model specified in Chapter 6. The chapter does not exhaust the full potential of AFRIMOD for the analysis of external shocks and economic policies. Rather, the model will be used to examine a number of crucial external shocks and policy simulations. The chapter is organized as follows. Section 7.2 describes the accounting framework used in the model. This framework serves both as a consistent database of the world and as a base run value in the calibration of the model. Section 7.3 briefly discusses the model solution algorithm employed, the stability conditions of the model and calibration procedure followed. In section 7.4 the results of selected external shocks and policy simulations are discussed. Finally, section 7.5 brings the chapter to a close by highlighting a number of conclusions arising out of the preceding discussion.

External Finance and the African Economy: A Macro Approach

In the previous chapter, some determinants of the supply of external finance were discussed. Such flows have a number of macroeconomic implications that require careful management. Specifically, three such implications may be outlined. The first of these relates to the recipients’ fiscal response in the face of such flows. Section 5.2 will discuss this issue in the context of the wider literature on recipients’ fiscal response. The second and related impact of such flows relates to the upward pressure, which they place on the level of domestic prices, and the resulting appreciation of the real exchange rate. As discussed in Chapter 2, this falls within the ‘Dutch disease’ literature. Section 5.3 will examine this issue in relation to Africa. In section 5.4 the positive impacts of external finance will be examined. In most African economies this relates to the possibility that external finance offers to finance imports. The latter, in turn, will have a positive effect on investment and growth, by relieving the import compression situation discussed in Chapter 3. An econometric analysis focusing on this issue is given in section 5.4. Finally, section 5.5 brings the chapter to a close by highlighting a number of conclusions, arising out of the preceding discussion.

Modelling Africa Within a Global Economic Framework

In the preceding chapters, the trade and finance problems of Africa were examined from both theoretical and empirical angles. In this chapter, I will attempt to locate these problems within a global economy context. This is important for two main reasons. Firstly, it helps one to identify the position of Africa within the world economy. Secondly, it allows one to assess the extent to which Africa’s entry into the world economy represents an obstacle to development efforts being undertaken in that continent. This exercise will be formally undertaken using the increasingly popular methodology of modelling North-South economic interaction. Notwithstanding the proliferation of such models, the modelling of the South remains, at best, rudimentary. Indeed, almost no examples of North-South models focusing specifically on Africa have been developed to date.1