ETHIOPIA-CHINA ECONOMIC RELATIONS: A Classic Win-Win Situation?

By Chakrabarty, Malancha | World Review of Political Economy, Summer 2016 | Go to article overview

ETHIOPIA-CHINA ECONOMIC RELATIONS: A Classic Win-Win Situation?


Chakrabarty, Malancha, World Review of Political Economy


Introduction

Ethiopia is an important case study because it is a significant departure from the body of literature on China-Africa relations which has held that Chinese interest in Africa is primarily driven by hunger for resources. Agriculture is the dominant economic activity in Ethiopia. Nearly 85% of the population is dependent on agriculture, and agriculture accounts for about 41% of Ethiopia's gross domestic product (GDP) and 90% of its export earnings. The Ethiopian government has recognized that rapid agricultural growth is a necessity for poverty eradication and high rates of economic growth. Therefore, agriculture is the cornerstone of the "Growth and Transformation Plan," and the country has embraced the strategy of Agricultural Development Led Industrialization.

Ethiopia experienced high rates of economic growth from 2003 onwards and has outperformed most other African countries. Its GDP grew at a rate of 10.9% from 2003 to 2013 as compared with 4% from 1993 to 2003.1 Ethiopia's growth is largely led by rapid growth in agriculture, and there has been a remarkable growth in agricultural production from 2000 onwards. The compound annual growth rate of production of major food crops, viz. maize, sorghum, wheat and barley from 2000 to 2013 was 7.2%, 9.7%, 8.9% and 6.9%, respectively.2 Output growth in the case of Ethiopia's two major export crops, coffee and sesame, was even more pronounced.3 After a period of decline in production, coffee production picked up in 2003. Production of sesame seeds grew very rapidly at a compound annual growth rate of 21% from 2000 onwards mainly due to a growth in Chinese demand. Increase in the total agricultural production largely came from an increase in acreage and higher yields due to greater public investment in agriculture.

The period of high growth rates in Ethiopia was also marked by an intensification of Ethiopia-China economic relations. Bilateral trade between the two countries expanded rapidly, and China is currently the country's top export and import partner. Ethiopia's imports from China increased rapidly from 2002 onwards, and China now accounts for over one-fifth of Ethiopia's total imports. Growth of Ethiopia's exports to China is a more recent phenomenon. Prior to 2005, China was a relatively unimportant export destination for Ethiopia, with a share of just 2.4% in 2004 which rose to 11.1% in 2012. Despite being an agricultural exporter, Ethiopia has attracted significant volumes of Chinese official financial flows and foreign direct investment (FDI). Chinese official financial flows are largely directed to building critical infrastructure in Ethiopia, whereas Chinese FDI is directed to the manufacturing sector.

This article attempts to study the nature of China's economic activities in Ethiopia and its impact on Ethiopia's development process. The next section gives a brief summary of the existing literature on Ethiopia-China relations. Following this, the article discusses Ethiopia's trade with China, and Chinese development assistance and FDI in Ethiopia. Based on this analysis, the penultimate section discusses the impact of China on Ethiopia and the last section concludes. The data sources for this study are as follows. Trade data have been obtained from the UN Comtrade Database using the World Bank's WITS Software up to five-digit level of the Standard International Trade Classification (Revision 3). Bilateral FDI from Organisation for Economic Co-operation and Development (OECD) countries to Ethiopia has been obtained from the OECD database. The data on Chinese official finance and FDI in Ethiopia are from Aid Data (China.aiddata.org) and the CEIC database, respectively.

Literature Review

There are a few studies that have explored the bilateral relationship between China and Ethiopia. The earliest such study was undertaken by Chris Burke, Lucy Corkin and Nastasya Tay from the Centre for Chinese Studies in 2007. Burke, Corkin, and Tay (2007) explored China's political, investment, trade and aid profile in Ethiopia. …

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