Chinese investment in Ethiopia

Article by Alexandra Reinhild Berndt

In the context of China’s Belt and Road initiative, China invested heavily in Ethiopia. Between 2000 and 2018, Chinese investments even reached $13.7 billion (Marks, 2020). For Ethiopia, Chinese FDI represents an opportunity for economic growth and development. Even though poverty has been reduced in recent years, the rate of poverty remains a significant problem, especially in rural areas (Worldbank, 2020). Chinese funds have created many development opportunities. However, there are also certain risks associated with Chinese FDI.

The Ethiopian hope

China mainly invested in Ethiopian infrastructure. Railways, highways and metro-systems are financed by Chinese funds. The Ababa-Djibouti railway line is a perfect example showing Ethiopia’s hope in economic growth.  The international railway system links Ethiopia with Djibouti and guarantees Ethiopia access to Djiboutian ports. It provides a “major export and import connection” as it connects “land locked Ethiopia” with “the Red Sea’s international shipping routes” (Mohapatra, 2017).  It is expected to increase employment and revenue and thus shows Ethiopia’s hope in economic development.  Furthermore, the Ethiopian government expects Chinese investments to create an increase in employment. Several industries (as the textile industry) are planned to be further developed with the help of Chinese FDI (Breitegger, 2019). Ethiopia thus aspires to lift people out of poverty by insuring the creation of new jobs. Additionally, the government hopes that the increase in industrialization leads to a growth in the Ethiopian middle class (Breitegger, 2019). Another important aspect making Chinese FDI so attractive for Ethiopia is that China “disburses large sums of development aid to African countries” without making “assistance conditional on maintaining human rights standards or adhering to democratic norms and values” (Marks, 2020).

FDI with no strings attached?

The increasing dependency on Chinese investment, however, is the main risk associated with Chinese FDI. US Vice President Mike Pence even accused China of creating a “debt trap” (Breitegger, 2019; Olander, 2020). According to Marks (2020), “China accounts for nearly half of Ethiopia’s external debt” at the moment. The future will tell whether the American accusations are true.

Beijing’s interests

China’s interest in Ethiopia is multi-faceted. There are four main aspects that are worth mentioning. Firstly, the revenues for Ethiopian workers are significantly lower making it attractive for Chinese firms to create factories in the labor-abundant country (Breitegger, 2019). Secondly, Ethiopia represents a large consumer market (Crabtree, 2018). Thirdly, Ethiopia is attractive for Chinese investment as the Ethiopian government loweres taxes for Chinese firms (Breitegger, 2019). Fourthly, the creation of Chinese firms in Ethiopia provides jobs for Chinese citizens. It is estimated that one million Chinese people live in Africa at the moment, many of them working in the construction industry.

Implications of the Tigray conflict

In November 2020, the conflict in the Tigray region between the Tigray People’s Liberation Front (TPLF) and the Ethiopian federal government escalated (Farole, 2020). According to Farole (2020), “thousands of civilians have been replaced and hundreds have died”. The escalation of the ethnic conflict has motivated the European Union to suspend “nearly €90 million in budgetary aid to Ethiopia” (Marks, 2020). This decision reflects the EU’s attempt to link financial aid with the commitment to democratic values. In contrast to the EU, China’s investment in Ethiopia has not been conditional on the commitment to democratic norms and Human rights thus far (Marks, 2020). However, the impact of the conflict on Chinese investment decisions remains unclear.

Conclusion

Chinese investments are very important for the economic development of Ethiopia. The Ethiopian government hopes that Chinese FDI reduces unemployment and poverty and increase economic growth. However, it remains unclear to which extent the Tigray conflict might influence Chinese investment decisions. Furthermore, the increase in Ethiopian debt raises the question to which extent Ethiopia is dependent on China.

1 U.S.A dollar banknotes
photo by Sharon McCutcheon published on Unsplash

References

Breitegger, B. (2019, January 26). Chinas Rolle in Äthiopien. Retrieved January 4, 2021, from https://www.deutschlandfunk.de/afrikanische-wirtschaft-chinas-rolle-in-aethiopien.724.de.html?dram:article_id=439399

Crabtree, J. (2018, February 23). Chinese investment hotspot and a state of emergency: What’s going on in Ethiopia. Retrieved January 4, 2021, from https://www.cnbc.com/2018/02/23/china-investment-state-of-emergency-ethiopia-latest.html

Davis, K., Jr. (2019, July 29). Ethiopia could be the first African country to show China it has bargaining power. Retrieved January 4, 2021, from https://www.theafricareport.com/15757/ethiopia-could-be-the-first-african-country-to-show-china-it-has-bargaining-power/

Farole, S. (2020, November 24). Ethiopia’s Tigray conflict reflects unresolved ethnic tensions. Retrieved January 4, 2021, from  https://www.washingtonpost.com/politics/2020/11/24/ethiopias-tigray-conflict-reflects-unresolved-ethnic-tensions/

Marks, S. (2020, February 03). Ethiopia plays Europe off China in bid to boost investment. Retrieved January 4, 2021, from https://www.politico.eu/article/ethiopia-plays-europe-off-china-in-bid-to-boost-investment/

Marks, S. (2020, December 16). EU suspends nearly €90M in aid to Ethiopia over internal conflict. Retrieved January 4, 2021, from https://www.politico.eu/article/eu-commission-suspends-nearly-90-million-euros-in-aid-to-ethiopia-over-internal-conflict/

Mohapatra, D. R. (2017). An economic analysis of Djibouti-Ethiopia railway project. Economic and Financial Analysis of Infrastructure Projects: An Edited Volume, 158.

Olander, E. (2020, January 14). China’s infrastructure finance model is changing. Here’s how. Retrieved January 4, 2021, from https://www.theafricareport.com/22133/chinas-infrastructure-finance-model-is-changing-heres-how/

Worldbank. (2020, April 16). Ethiopia poverty assessment: Poverty rate declines, despite challenges. Retrieved January 5, 2021, from https://www.worldbank.org/en/country/ethiopia/publication/ethiopia-poverty-assessment-poverty-rate-declines-despite-challenges