# **1. Introduction**

Ethiopia’s development performance over the past decade has been one of the most successful among low-income countries. The country achieved rapid and inclusive economic growth averaging 10.9 percent in 2004-2014 (Figure 1.1), according to official data.<sup>1</sup> Substantial progress was made across a broad range of social and human development indicators (World Bank, 2015). Between 2000 and 2011, poverty declined from 44 to 30 percent while income inequality remained unchanged at one of the lowest levels observed worldwide (Gini coefficient: 0.3). Life expectancy increased by one year per year (from 52 to 63 years), fertility declined from 7 to 4 children per woman, and the share of the population without education fell from 70 percent to 50 percent. Ethiopia achieved the Millennium Development Goals on poverty, hunger and child mortality and access to water. Since 2000, the country moved from being the 2<sup>nd</sup> to the 9<sup>th</sup> poorest country in the world, according to gross national income (GNI) per capita (Atlas Method). Despite this impressive progress, the country faces deep challenges in every dimension of development. One key challenge is to sustain rapid economic growth.

Ethiopia has experienced a growth acceleration since the early 2000s. By taking into consideration population growth of 2.4 percent per year, real GDP per capita increased by 8.3 percent per year between 2004 and 2014.<sup>2</sup> This substantially exceeds per capita growth rates achieved in the first decade after the country’s transition to a market-based economy (1992-2003: 1.3%), under the communist Derg regime (1974-91: -1.0%), and during monarchy (1951-73: 1.5%). It has also exceeded regional and low-income averages over the past decade (Figure 1.2). Summers and Pritchett (2014) calculate that annual per capita growth across all countries has averaged 2 percent since 1950 with a standard deviation of 2 percent. Thus, Ethiopia’s recent growth performance has exceeded this global average by more than three times the standard deviation. More generally, this episode falls into the category of ‘growth accelerations’ discussed in the literature by Hausmann _et al._ (2004), Virmani (2012), and Rodrik (2013).

A first pass at the data highlights the relative importance of productivity growth, capital accumulation, and structural change. While agriculture was the main growth contributor at the beginning of the take-off, the services sector gradually took over in terms of importance and was later complemented by a construction boom (Figure 1.3). In contrast with many other fast-growing African economies, Ethiopia’s growth does not depend on natural resources. Private consumption was important on the demand side, though investment (especially public) has become increasingly important in recent years (Figure 1.4). Solow growth decompositions show that high total factor productivity growth and capital accumulation account for most growth (Figure 1.5). A Shapley decomposition reveals that most of the increase in value added per person arose from higher labor productivity (Figure 1.6). A rising working age population share boosted growth since 2005, but growth was held back by a decline in the employment rate owing to a rising student population. Labor productivity, in turn, increased mainly in agriculture and services, supported by growthpromoting structural change (largely from agriculture into construction and services).

> 1 The IMF (2013b) has argued that official growth rates may have been overestimated by as much as 3 percentage points in recent years.  Even by this more conservative estimate, a growth acceleration was observed.

> 2 Using UN population estimates and applying them to the official national accounts data of GDP in constant factor prices.

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