Ethiopia's economy: fast growth that has not reached most people

What the economy is built on

Ethiopia runs a mixed transition economy with a large public sector, moving slowly toward markets while keeping the commanding positions in state hands.

The sectoral split is unusual for a country growing this fast. On 2021 figures, agriculture accounted for 37.5% of output, services 36.25% and industry 21.85%. Most economies that grow at Ethiopian rates do so by moving people out of farming into factories, and this one has not.

What remains in state hands is deliberate. Banking, telecommunications, insurance, air and land transport and retail are classed as strategic and are expected to stay under state control. Ethiopian Airlines is the clearest case of that policy working: a state carrier that made Addis Ababa a transfer hub for the continent.

The corridor is the constraint that sits above all the others. Since losing the coast in 1993, Ethiopia has moved the overwhelming majority of its trade through Djibouti along a single road and a single railway, the electrified line to Addis Ababa opened in 2018. A landlocked economy paying port fees and transit costs to a neighbour on every import and every export carries a permanent margin against it that no domestic reform can remove.

The country has no stock exchange. It had one under Haile Selassie, the ākisīyoni gebeya, and today has the Ethiopia Commodity Exchange in Addis Ababa, established in 2008 to give farmers a transparent price and a graded market for coffee and sesame.

Why coffee carries more weight than any other crop

Coffee was the largest export in 2024, and the plant is native here. Coffee is Ethiopia's largest export, and the crop reaches further into the population than any other economic activity in the country.

Around four million smallholder farmers grow it, and the sector directly affects between a fifth and a quarter of the population. It was the largest export product in 2024 and contributes around a third of export revenue. Roughly half of Ethiopian coffee is drunk inside Ethiopia, which is unusual among producing countries and reflects a domestic culture in which coffee is a daily ritual rather than a commodity for sale.

The 2024 to 2025 harvest was expected to rise by 25 to 50%, driven by a national planting campaign.

The structural problem is the shape of the sector rather than its size. Four million smallholdings means four million units that have to be certified, financed and traced individually, and the European Union Deforestation Regulation requires exactly that kind of traceability. For a sector built on smallholders farming under forest canopy, compliance is a documentation problem before it is an agricultural one, and Europe is the largest market.

What the government built with borrowed money

The growth model since 1991 has been state-led investment in infrastructure, financed heavily from abroad, and the largest single object of it stands on the Blue Nile.

The Grand Ethiopian Renaissance Dam is a hydropower project with an installed capacity of 5,150 megawatts and a reservoir holding around 74 billion cubic metres. It was built on the river that carries most of the Nile's water, by the country that supplies it, which makes it a foreign policy question as much as an energy one: Egypt depends on the flow entirely, and the filling schedule has been the subject of a decade of failed negotiation.

The dam is also a statement about how Ethiopia funds things. It was paid for largely from domestic sources, through bond sales to citizens and civil servants and a levy on salaries, rather than from a foreign lender, which is unusual for a project of that size anywhere and was a deliberate choice: a dam financed abroad could be stopped abroad.

The electricity matters domestically for a reason beyond households. A country with cheap power and cheap labour can host industry, and the industrial parks built during the 2010s were designed on that assumption.

The borrowing is the other half, much of it owed to China. General government gross debt stood at 43.1% of GDP in 2025 on the IMF's estimate, after 58.4% in 2018, and the ratio is lower than in comparable neighbours; the thin reserve position is the constraint that bites.

Why the factories came and what they pay

The textile strategy was explicit and the terms were generous. Foreign investors import machinery duty-free, take a ten-year tax exemption, pay rents well below market, and use water and electricity at low rates. Trade agreements with the European Union allow duty-free export.

Decathlon, H&M and Huajian all established production. The labour cost was what attracted them.

That figure is the argument. It is what made Ethiopia competitive against Bangladesh and Vietnam, and it is low enough that the jobs created have not moved households out of poverty at the rate the strategy assumed. A country pursuing industrialisation through a low wage is competing on the one variable it would most like to raise.

The strategy also depended on trade access that proved conditional. Preferential access to the United States market under the African Growth and Opportunity Act was withdrawn in 2022 over the conduct of the Tigray War, which removed a pillar of the export case for the parks in a single decision taken abroad.

Where the jobs have to come from

The demographic arithmetic is the hardest constraint in the Ethiopian economy and it is not primarily an economic problem.

Children under fifteen made up 38.8% of the population in 2025. Primary and tertiary enrolment have both risen substantially, and job creation has not kept pace with the number of secondary and post-secondary graduates. The country must create hundreds of thousands of jobs a year simply to absorb population growth, before any question of reducing existing unemployment.

The cities are absorbing some of it. Addis Ababa has grown into a construction site more or less continuously since the 2000s, and urbanisation is running fast from a very low base, with the great majority of Ethiopians still rural. That is the transition every fast-growing economy makes, and the question is whether the jobs waiting at the end of it exist in the numbers arriving.

Agriculture cannot take them. It already occupies most of the workforce on holdings that are small and getting smaller as land is divided between heirs, and land is state-owned, which means a farmer holds use rights rather than a title that can be sold or borrowed against. That single feature of the land regime blocks both the consolidation that would raise farm productivity and the collateral that would fund anything else.

What happens to the money people send home

Remittances are the quiet counterweight to all of this. The Ethiopian diaspora, built by the emigrations of the Derg years and the decades since, sends home sums comparable to the country's export earnings, and they arrive directly in households rather than through a ministry.

The complication is the exchange rate. For years an overvalued official rate and a parallel market running well above it gave senders every reason to route money outside the banking system, which cost the state the foreign currency it most needed. The float of the birr in 2024 was aimed squarely at that gap, and it closed the spread by devaluing sharply, which raised the price of every imported good in a country that imports fuel, fertiliser and medicine.

Who has actually got richer

The growth has produced wealth and concentrated it. Ethiopia had 2,700 millionaires in 2015, more than double the 2007 figure.

The composition of those fortunes is the significant part. They were built largely in economic rents, banking and mining among them, rather than in industrial production or infrastructure, which means the domestic capital that growth generated has not been recycled into the productive sectors the strategy needed it in.

At the other end, 68.7% of the population was in multidimensional poverty on 2019 data, with a further 18.4% vulnerable to it. Multidimensional poverty counts deprivation in health, education and living standards rather than income alone, and on that measure roughly six people in seven are either poor or close to it.

The government expected to reach middle-income status by 2025. That target was set before the Tigray War, the withdrawal of American trade preferences, and the inflation that followed both. None of the three was in the projection, and together they cost the country several years of the trajectory it had been on.

Why inflation has been the sharpest pressure

For households the headline growth rate has mattered less than the price of teff, and food inflation has run in double digits for most of the past decade. The causes stack: harvest losses in conflict-affected regions, the birr devaluation, import costs for fuel and fertiliser, and the monetary financing of a large public investment programme.

That combination produces the situation the country is now in. A fast-growing economy can register strong aggregate numbers while the real purchasing power of a wage in Addis Ababa falls, and the gap between the two is where most of the political pressure of the past decade has come from.

How the economy got here

The long record explains why the state occupies the position it does.

Ethiopia traded gold, ivory, musk and skins for salt and luxury goods for centuries, and coffee had become a significant cash crop by the late nineteenth century. After Aksum fell, the country lost its standing as a trading state, and commerce came to be regarded with contempt by a society that valued warriors and priests: Greek, Armenian and Arab traders became the intermediaries with the outside world.

When the Italians left in 1941 the economic structure was much as it had been for centuries, with a small monetised sector, trade largely by barter, limited wage labour and a negligible market for manufactures. Haile Selassie's three five-year plans from 1957 attempted a shift to an agro-industrial economy. Growth between 1960 and 1970 averaged 4.4% a year in per capita GDP, and by the early 1970s the economy had begun to diversify while roughly four-fifths of the population remained subsistence farmers in poverty.

The 1974 revolution nationalised everything. The record after it divides in four phases.

Since 1991 the government has privatised state enterprises and rationalised regulation, attracting foreign direct investment while keeping the strategic sectors. Ethiopia belongs to the African Continental Free Trade Area, COMESA and IGAD, holds observer status at the World Trade Organization, and joined BRICS in January 2024.

One thing has held across all of it: the relationship between the state and the economy. The Ethiopian state has been the principal economic actor under an emperor, under a military socialist government and under a federal republic, and each of the three understood that as modernisation.