GDP: Inadequate Measure of Economic Health

Analysts may find it ironic that the current political crisis arrived after a decade of spectacular economic growth. The country was able to score the much-discussed double-digit gross domestic product (GDP) growth for the better part of this decade. At the same time, GDP per capita grew by leaps and bounds, reaching the current 863 dollars.

The Ethiopian government is proud of such growth. This was mainly because the Ethiopia People Revolutionary Democratic Front (EPRDF) has for a long time believed that the best means towards political legitimacy was robust economic development. Such developmental attitudes dictated that more money in people’s pockets, better access to education and health and transport and telecom infrastructure would entrench a political entity deep into the hearts of voters.

It seems the assumption was wrong. No one can deny that there is growth. All of us are witnesses to the paved roads and high-rise buildings. But there is the assumption that although wealth has been created in Ethiopia, it is not being distributed correctly. People are calling for a better distribution of resources in the wake of a decade of such growth.

The assumption is a function of the fact that development is indeed not catching to the expectations of people. And they are right to an extent. The growth of income per capita has slowed down – from the double digits to just 7.8pc the past fiscal year. People usually find their incomes are not growing as much as the cost of living in the country is.

Add to this unemployment. Although the official figures for unemployment stand at around 16pc, anecdotal evidence suggests otherwise. It is evident that there is a mismatch between the sort of human power that employers are looking for and the labour force there is. But it also seems unlikely that only 16pc are unemployed.

Such matters have compounded to create the political stalemate that exists today. And the fact that policymakers were caught unawares says much about the effectiveness of GDP growth in measuring the health of an economy.

Lack of income growth and job opportunities and a wealth gap are real concerns the world over. As a remedy, it is advised that governments should work hard to pay special attention to their GDP numbers to better the status of the country.

But GDP does not show the full picture, especially for those eking out a meagre existence. And as population numbers keep increasing and the Ethiopian economy keeps performing at a slower rate, the government is finding it harder and harder to open up enough amount of jobs. This is fueling resentment among the unemployed and educated youth. Nevertheless, the rapid economic growth masked these significant problems.

Although the government claims that there has been a double-digit GDP growth last year, the red alerts in the economy have failed to be discussed. External trade is not performing well, with imports having reduced but exports still stagnant. And resources are not being mobilised adequately, with tax revenue as low as usual. This critical components of the economy, which betray the accurate status of the private sector, are almost never mentioned.

The reason that the Ethiopian economy is growing is because of foreign direct investment (FDI), which rose by over 27pc last year. Many do not realise this, hearing only the double-digit economic growth and assuming that the economy is healthy, but that they are not being made privy to it.

GDP growth is critical to generating prosperity. For wealth to be distributed, it evidently needs to be created. The question is how the nation can continue to grow while also providing a path to prosperity for more Ethiopians.

Jobs are the means by which prosperity can be shared. This requires the need to build the economy from the ground up. While FDI is good for the country, what is critical is creating a healthy doing business environment that can allow the flourishing of new businesses, innovation and entrepreneurship. Reducing corruption and streamlining the public sector is one way of going about this. Privatizing mega-state enterprises and accelerating public-private partnerships (PPP) is another.

It is also necessary to measure the health of the economy by means other than just GDP. Policymaking should be less concerned with the overall performance of the economy and reorient focus on the sectoral challenges. The decreasing growth in people’s incomes should be a concern to the authorities, as do areas of the economy that are hampering the growth of the private sector.


By Shewangezaw Seyoum
Shewangezaw Seyoum works as a consultant. He could be reached at ( By Shewangezaw Seyoum

Published on Mar 24,2018 [ Vol 18 ,No 934]



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