Ethiopia’s rapid growth over the past two decades has resulted in a surge in income per capita levels, with the country approaching fast the middle-income milestone. Over the past decade, fast growth was driven by capital accumulation, but the extent to which this growth has been equally distributed is unclear. Public infrastructure spending accelerated dramatically in the first half of the 2010s, helping underpin fast economic growth. However, this approach seems to have had important shortcomings. Contrary to the findings of World Bank (2015) which examined an earlier period, total factor productivity (TFP) declined during 2011-2020, contributing negatively to growth. In addition, inequality at the household level increased between 2011 and 2016. Finally, macroeconomic imbalances have widened, a trend exacerbated by recent shocks.

This report discusses the drivers of growth in Ethiopia and, in the absence of official subnational gross domestic product (GDP) figures, examines whether there has been convergence in economic activity at the subnational level.

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In logistics, in particular, there is scope for further reform. Foreign participation in some critical logistics services such as freight forwarding and shipping agency services, warehousing, cargo consolidation, and packaging is limited to 49%. This is of concern for some international logistics operators that cannot have greater control on their subsidiaries in Ethiopia. In addition, transport services operations have been fully opened only for trucks of a minimum of 25 metric tons, while they should be open for smaller trucks as well. Authorities need to ensure that red tape does not harm the entry of competitors that have become open de jure, such as the dry ports, which can have a significant impact in reducing logistics costs. In addition to further improving transit through the Addis-Djibouti corridor by interconnecting the Ethiopia and Djibouti National Single Windows, development of new corridors could help improve resilience and diversification. To fully operationalize corridors, there is a need to design functional transit regimes, standardize technical aspects of transport services (especially axle loads), and harmonize rules for market access.

Moving forward in areas such as tariff reforms, policies affecting services trade, trade facilitation, and trade of environmental goods requires a coherent national strategy on trade integration and well defined lines of responsibility for government agencies. Many government departments are involved in administering different parts of trade policy, so it is important for senior leadership to adopt a high-level view of country priorities, including by factoring in AfCFTA implementation and WTO accession. Ethiopia has the opportunity to fast-track WTO accession with the aim of joining before 2025 to enhance the reform program and provide a clear signal to domestic and international investors of a legal commitment to a transparent and predictable trade regime. The WTO is also the premium forum in which global rules on climate change and trade are negotiated and implemented. It can help Ethiopia cope with climate impacts by allowing further export diversification, and it can help influence the policy discussions around trade of environmental goods and services (see Box 7).

Note: The technical annexes to the report can be accessed here.