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The Great Recession and Developing Countries
FY94, but rose tenfold, to nearly US$2.4 billion, by FY08. As a result, Ethiopia had become increasingly exposed to external shocks and could not afford to be indifferent to the problems in the world economy. Assessing the impact of the global crisis on Ethiopia, however, is complicated by the country’s own macroeconomic problems predating the global crisis. These problems took the form of high inflation and a severe shortage of foreign exchange, beginning in the mid-2000s. Despite the absence of droughts, which tend to affect its agricultural production, the country’s inflation rate, which was in the single digits in previous years, increased to 12.3 percent in FY06, to 15.8 percent in FY07, and to 25.3 percent in FY08. At the same time, the trade imbalance widened from US$1.9 billion in FY04 to nearly US$5.3 billion in FY08. International reserves, measured in months of import cover, fell from 3.7 months in FY04 to 1.9 months in FY08. Ethiopia’s economic problems in FY09 (the first year of the global crisis) were therefore a by-product of both its domestic problems and the external shocks.
Assessing the Direct Impact The global financial and economic crisis coincided with a sharp slowdown in Ethiopia’s international trade, with both exports and imports falling dramatically. International Trade Although exports are a relatively small component of the Ethiopian economy, they have grown rapidly in recent years. Until the early 2000s, the value of Ethiopia’s exports and imports fluctuated between US$500 million and US$1.5 billion, showing a modestly rising trend. For example, during FY97–FY03 (the “preboom” period), exports grew at an annual average rate of 4 percent and imports at 7 percent. The government adopted a new industrial policy in FY02 that provided attractive incentives for firms operating in such strategic sectors as agribusiness, textiles and garments, leather and leather products, and flowers. This fueled an increase in exports, as well as their diversification. During FY04–FY08, (the “precrisis boom” period), exports grew at an unprecedented annual average rate of 25 percent (figure 5.2). The precrisis boom period was also one of the most favorable periods for economic growth in Ethiopia’s history. It was marked by peace,5