The Economist - UK (2021-11-20)

80 Finance & economics TheEconomistNovember20th 2021

Benjamin Metzger of Barclays, another

bank.Unitedwasthefirsttodosowitha

securedloaninJune2020.Deltafollowed

witha bondofferingsoonafter.

Thedealshaveattractedmoreinvestors

thanbondssecuredbyoldaircraft(which,

unlike loyalty schemes, depreciate).

Scheme­backeddebttendstoboasta better

creditrating thanthe airlineissuing it.

Andinvestorsarecomfortedbythestruc­

tureofthedeals,whichusetheschemes’

cashflowstorepaydebt,andlimitriskif an

airline goes bust. Affinity Capital Ex­

change,a fintechfirm, isworking with

JPMorganto securitiseairmiles,sothat

theycanbemoreeasilytraded.

Thetrickforairlinesinallthisistobal­

ancethecostsandbenefitsofperkssothat

customers stay engaged, while carriers’

marginsarepreserved.Endless devalua­

tionscouldrattlethatequilibriumandup­

setsecuritisationarrangements.Sky­high

valuationsarenotassured. n

Ethiopia’sgrowthmodel

Lost promise

O

neofthemostextraordinarygrowth

records over the past two decades was

to  be  found,  perhaps  surprisingly,  in  the

horn of Africa. Real gdpper person in Ethi­

opia,  the  second­most­populous  country

in Africa, rose by an average annual rate of

9.3% from 1999 to 2019, just 0.4 percentage

points  less  than  China’s  pace  of  growth.

Now  a  year­long  war  between  Ethiopia’s

government and forces led by the Tigrayan

People’s  Liberation  Front  (tplf)  threatens

to spill into the capital city, wreak humani­

tarian  disaster  and  wipe  away  those  eco­

nomic gains. 

From  the  late  1990s,  a  roaring  Chinese

economy provided the impetus for a boom

in the rest of the developing world. As Chi­

na  became  richer,  some  of  its  industry

moved  abroad,  allowing  poorer  countries

like  Bangladesh  and  Vietnam  to  follow  in

its  wake.  In  the  2010s  some  optimists

hoped  that  this  process  of  sequential  in­

dustrialisation  might  eventually  shift  to

Africa. More than any other country there,

Ethiopia illustrated this potential. 

Three  decades  ago,  its  economy  was

among  the  world’s  least  developed.  Then

in 1991 forces led by the tplfoverthrew the

Marxist  regime  that  had  long  run  things.

Though  the  tplf­dominated  government

remained authoritarian, it began liberalis­

ing the economy and directing investment

towards infrastructure. Ethiopia’s gdpper

person  has  risen  more  than  sevenfold

since  1995,  faster  than  other  sub­Saharan

economies  and  the  emerging  world  as  a

whole (see chart). The share of Ethiopians

living in extreme poverty fell from half the

populationto under a quarter in the 2010s.

Ethiopia’s success was first owed to in­

creasing productivity in agriculture, which

lifted  incomes  and  helped  the  construc­

tion and service sectors expand. While em­

ployment in industry rose rapidly from the

late  1990s  into  the  2010s,  most  manufac­

turing  workers  laboured at  small  firms,

making  food  and  beverage  products  and

other  goods  for  local  markets.  Coffee  and

cut flowers remain big exports.

Yet  over  the  past  decade,  manufactur­

ing for export has gained a foothold. In in­

dustrial parks scattered across the country

factories  sprang  up,  many  dedicated  to

making the textiles and clothing that often

represent  the  first  rung  on  the  industrial­

isation  ladder.  Apparel  giants  like  h&m

and Primark began sourcing products from

Ethiopian plants, and the value of clothing

exports rose more than sixfold from 2009

to 2019. Foreign direct investment roughly

quadrupled  from  2011  to  2017,  much  of  it

fromChina.Thevastmajorityofdirectin­

vestment—about 80%—flowed into the

manufacturingsector.

But economic development depends

moreonsustaininggrowthoverlongperi­

odsthanonburstsofexplosivegrowth.

FightinginTigray,oneofEthiopia’smost

importantindustrialcentres,hasidledor

destroyed many factories. Others are

increasinglybeingshutoutofmarkets.On

November2nd PresidentJoe Biden sus­

pended Ethiopia’s tariff­free access to

America,citing“grossviolationsofinter­

nationally recognised human rights”,

chieflybytheforcesoftheprimeminister,

AbiyAhmed.Planstoprivatisemoreofthe

economyarefalteringasforeigninvestors

losetheirappetite.

A  swift,  diplomatic  resolution  to  the

crisis  may  let  Ethiopia  salvage  something

of  its  economic  miracle.  Still,  the  road

ahead  would  be  difficult.  Even  before  the

Tigrayan  forces’  advance,  the  government

faced unmanageable foreign debts of near­

ly  30%  of  gdp:  a  heavy  burden  for  a  poor

country  coping  with  covid­19,  and  which

collects less than 7% of gdpin tax. 

Nor  can  the  destruction  of  capital  be

easily  undone.  Foreign  investors  may

prove difficult to lure back. China enjoyed

good  relations  with  the  tplf when  the

group  ran  the  country,  and  might  be  ex­

pected to provide support if the tplfwins.

But  it  faces  a  slowdown  at  home;  and  be­

cause  China’s  spending  in  Ethiopia  fa­

voured  manufacturing,  rather  than  the

production of commodities needed by Chi­

nese industry, it may treat its investments

there with less urgency.

A  protracted  conflict,  by  contrast,

would  undo  most  or  all  of  the  country’s

past  economic  gains.  Whatever  happens

next, Ethiopia’s case already demonstrates

that a state’s capacity to maintainorderis

the  most  important,  and  often  themost

elusive, condition for development.n

A remarkable development story

is in peril

Growth spurt

GDPperperson*,1995=100

Source:IMF *Atpurchasing-power parity

700

600

500

400

300

200

100

2015100520001995

Sub-SaharanAfrica

Emerging

markets

Ethiopia

GDP per person

22, $’

2.9

11.6

.0

Pre-war progress