Ethiopia’s ambitious industrialisation strategy is expected to create opportunities in three main areas: power and distribution, logistics infrastructure and export-orientated manufacturing. While growth will be rapid, obstacles will prevent full realisation of government targets. Most notably, opposition to political reform and social unrest look set to challenge policy continuity.


Rapid economic growth underpinned by high levels of foreign direct investment

Ethiopia has consistently been one of the fastest growing economies in the world over the past 15 years, averaging annual real GDP growth of 10.4% between 2004 and 2018.[1]The economy almost tripled in size over the period in real terms, albeit to a level just one-fifth the size of Nigeria, Africa’s largest economy. High levels of foreign direct investment (FDI) – FDI stood at $3.6bn in 2017 compared to $109m a decade earlier –[2]look set to sustain the fast pace of economic expansion in the next five years: The IMF forecasts real GDP growth to average 7.2% over 2019-23.


Industrialisation strategy targeting power, logistics and manufacturing

Opportunities for investment in Ethiopia are focussed in three main areas: power and distribution, logistics infrastructure and export-orientated manufacturing.

The government’s aggressive industrialisation strategy, as laid out in the 2015-20 Growth and Transformation Plan, underpins these opportunities. In short, the government aims to develop Ethiopia into a leading hub for light manufacturing in Africa by 2025. This will require extensive expansion of power, logistics and manufacturing infrastructure.

The government will continue to lean heavily on foreign investment to achieve these goals. It has implemented pro-business domestic policy reforms and a network of public and private industrial parks complete with relocation incentives to boost inflows.


Power and distribution: A future battery for the region

Ethiopia aims to not only meet surging domestic power demand from a rapidly expanding industrial sector, but export surplus electricity to the wider East Africa region. The power project pipeline is dominated by hydropower facilities and, in particular, the 6.45-GW Grand Ethiopian Renaissance Dam (GERD).

Aside from hydropower, the government is widely tendering solar energy contracts to independent power producers, supported by the World Bank’s Scaling Solar initiative. For instance, in January it announced plans to tender for the construction of six solar plants with a combined capacity of 798 MW.[3] Major investment in grid infrastructure is also planned in order to both service demand within Ethiopia and facilitate regional electricity exports.


Logistics: Investment across rail and roads

At the same time, substantial investment into transport and logistics infrastructure is expected to create opportunities for foreign engineering, procurement and construction firms. In terms of transport, export-orientated investment will look to improve existing rail and road links to the Port of Djibouti, which handles 95% of Ethiopia’s international trade.

Government investment will also attempt to reduce the country’s dependence on Djibouti as an international gateway. The project pipeline already includes upgrades to road links with Eritrea, as well as projects to improve connections to the regional Lamu Port-South Sudan-Ethiopia Transport Corridor.


Manufacturing: Export hub in the making               

Meanwhile, pro-business reforms and improved infrastructure are allowing international firms in labour-intensive industries to take advantage of Ethiopia’s low wage costs at a time when wages are rising in traditional manufacturing centres, including China.

Textiles will be the main growth sector: FDI into the sector surged from $167m in 2013 to $36.8bn in 2017, according to the Ethiopian Investment Commission. Exports of textiles grew more than 13-fold from $18.6m in 2009 to $257m in 2018.[4]

There is also growing momentum for more advanced manufacturing, albeit on a smaller scale than textiles. UN trade data suggests that exports of gas turbines, air pumps and air conditioners all surged in 2018 to $29.6m, $15.2m and $8.7m, respectively, up from negligible levels in previous years. Meanwhile, exports of aerospace products grew from $2.3m in 2009 to $2.9m in 2018.[5]


Pinpointing challenges to industrialisation: Policy continuity and balanced investment

A heavy reliance on foreign capital to fund investment means that policy continuity will be essential to realising the government’s industrialisation strategy. However, both opposition within the ruling elite and the high likelihood of recurrent social protest will challenge policy continuity. Opposition within the ruling elite was dramatically highlighted by a failed coup attempt in June, which was largely a reaction against liberal political reforms made by Prime Minister Abiy Ahmed.

Meanwhile the state’s industrialisation-centred policy will only slowly boost incomes for the poorest segments of society. As a result, segments of the Oromo and Amhara ethnic minorities will likely continue to oppose economic policy that they believe favours the Tigrayan elite dominating government. Severe political protests against alleged marginalisation of minority ethnic groups erupted in 2016 and resulted in a state of emergency.

The interdependence of investment in the power, logistics and manufacturing sectors makes the above risks all the more salient: Power and logistics investment is essential in order to make manufacturing sector development possible, while manufacturing sector development is required in order to drive broader economic growth and make the colossal infrastructure outlays profitable.

Holdups in the development of any one of these three industries could thus delay development of the other two. The flagship GERD project is already severely delayed, with the initial projected start date of 2019 having been pushed back to 2022.


Will state-owned firms and China crowd out the competition?

Finally, whatever the extent to which Ethiopia’s industrialisation policy succeeds, opportunities for foreign firms to partake in investment projects will be partially restricted by large state-owned entities and pervasive competition from Chinese firms. For instance, in the power sector state-owned Ethiopian Electric Power Corporation operates the flagship GERD project and Chinese firms, including State Grid Corporation of China, have a significant footprint in related contracts. Meanwhile, in manufacturing Chinese firms and the EIC announced $2.3bn in planned Chinese investment in a range of industries over the coming years in May.[6]


John Davies is an economist and co-founder of research and analysis firm, North Shore Analysis. He has a special interest in emerging markets, global trade and heavy industry. Prior to North Shore, John worked for nine years at BMI Research where he held positions including Global Strategist and Head of Commodities Research. He also has experience at the UK Treasury and PWC. John holds a BSc in Economics and Politics from the University of Bath and is completing an MSc in Economic History from the London School of Economics.


[1] World Bank Development Indicators, 2019
[2] UNCTAD, 2019
[3] World Bank, Scaling Solar, 2019
[4] The International Trade Centre (ITC), 2019
[5] ITC, 2019
[6] ITC, 2019