The Need For Minimizing or Eliminating Foreign Aid in Ethiopia
By Ejigou Demissie
Ethiopian Review, February 1994
In the January, 1994, issue of ER, professor Richard Pankhurst eloquently presented how Ethiopia had often been wronged by the developed world in his article entitled “Fear the Ferenjoch Even when They Bring Aid.” I say amen to that and suggest that there is in fact a need to minimize or eliminate foreign aid in Ethiopia all together. It is not new knowledge to many that for several decades Ethiopia’s imports have consistently and substantially been
greater than her total exports. To, supposedly, close this import-export gap and improve the level of per-capita income (i.e., increase economic growth), the country’s leaders resorted, and continue to do so today, to the strategy of relying on foreign aid in an alarming rate. Such growth strategy was, and is today, followed due to the traditional economic view (assumption) that the flow of foreign aid contribute to the growth and development of Ethiopia in many ways:
(1) it will increase the capacity of the country to invest by supplementing domestic savings,
(2) it will provide a cushion to reduce the foreign exchange strains that are implicit in a development program, and
(3) it will enable Ethiopia to obtain capital goods (imports) and technical skills beyond the limits imposed by her economy’s foreign exchange earnings capacity. Some have even argued that not only do capital imports invariably accelerate the rate of economic growth, but inadequate foreign aid would lead the country to “sudden death.” If this was true in practice, not only Ethiopia, but many of the developing countries would have died suddenly long ago. In Ethiopia, only a negligible amount of the foreign aid had, and is, been added to improve savings (investment).
Instead, it was, and is today, used to increase consumption. I might add, consumption of not the majority of the population, but a selected few. If the primary objective of foreign aid in Ethiopia, however, is to improve her economic growth, and the economic growth she achieved is related to the aid she received and continue to receive, one finds that there is no support for the view that aid has helped Ethiopia. As a recipient of foreign aid for a long time, Ethiopia’s economy today could have at least shown some improvement let alone grow. But is has not. What we have seen over the years in Ethiopia is, no growth in the country’s economy as a result of foreign aid. In fact, one could argue that an inverse relationship (a negative correlation) exist between foreign aid and economic growth in Ethiopia. The high unemployment rate. illiteracy, low per-capita income as well as the country’s rank today at the bottom of the least developed countries in the world bares this argument out. What foreign aid has done, and is
doing today, for Ethiopia is create undesirable social, political, and economic consequences by strengthening oppressive government and institutions. In other words, foreign aid has hindered Ethiopia’s economic growth by preventing these institutional changes to democracy in the country. Most of the aid to Ethiopia is in the form of loans, often on a very unfavorable terms, and the result has been, and is today, serious debt servicing problem for the country. The huge burden of debt servicing of foreign aid has affected, and continue to affect, Ethiopia’s economic growth and self reliance by reducing domestic savings and increasing the demand for foreign exchange necessary to finance imports and transfer real income abroad to repay loans. In my view, a continuous aid flow means a surrender of national sovereignty to some extent. Therefore, Ethiopia must minimize and if possible terminate its dependency on aid by a definite time. Determining the definite termination date for foreign aid makes it possible for Ethiopia to advance planning for its future. One way to achieve this objective is to implement policies that will narrow (close) the import-export gap by a definite time period. Among the policies that could be considered to accomplish this objective are increased output, high tariffs on imports, increase exports, a balanced budget, and high interest rates and taxes. The success of implementing these policies to achieve the objective, however is dependent upon institutional reforms, and the structural limitations of the country. Devaluation of exchange rate is one other policy which may accomplish this objective but should not be considered (as is currently done by the TGE) since it has a more damaging effect on the country’s economy. Unless other policies are in place to safeguard the economy, devaluation will only result for Ethiopia to pay more for its imports and receive less for its exports, hence, further widening the gap between imports and exports rather than reducing it by a definite time period. Loans are made in the past, but repayments occupy the future. What happened in the past is history and what happens in the future is politics — and there is a great difference
between politics and history. However, the experience of history provides no support for those who today believe or advance misleading arguments that foreign aid will play an important role in the economic growth and development of Ethiopia. In fact, the opposite is closer to the truth
where, in general, foreign assistance to Ethiopia has not helped her economic growth, rather it has deterred it. In short, since the growth which Ethiopia failed to achieve is related to the aid it received, one finds that there is no need and support for today’s continues flow of foreign aid
to the country.
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Ejigou Demissie, Ph.D., is an Associate Professor of Agricultural Economics at the University of Maryland Eastern Shore.