Economics of Civil War: The Solution for a Distressed Ethiopia

Ethiopian soldiers on their way to the war front.

I try to stray away from political topics on this blog, but this war is a very personal one and I can’t help but write about what’s going on in my country right now.

The Background

Ethiopia is currently undergoing a civil war, dubbed the Tigray War, particularly because it’s going on at the time of this writing, between the Ethiopian National Defence Force/ENDF (the national guard) and the Tigrayan Defence Force/TDF (special forces of the Tigrayan Government). The war began just before midnight on 3 November 2020 in the Tigray Region of Ethiopia when TDF attacked the ENDF post who had been there for decades, protecting Tigray from neighboring Eritrea.

The World Health Organization estimates that up to 7 million people are in urgent need of food, medical and other aid across Ethiopia, 6 million of which needing health assistance. Critics are skeptical of these estimates however, as 7 million is the entire population of the Tigray region.

What This Means

Although those following the situation closely disagree on which party is directly responsible for the war, it has undeniably malnourished, displaced, injured and killed thousands. It has also had a big effect on the country’s economy.

Macroeconomic-data sources (Trading Economies, 2021) estimate the cost of the war to be half a billion dollars ($502m) by the end of this year alone, and the UN’s Antonio Guterres reported that since this war started, the Ethiopian government has spent over a billion dollars on this war.

Having already been in a trading deficit and massive foreign currency shortage, the economic implications of the war might collapse the country. Although we haven’t reached hyperinflation yet (currency depreciates by 50%), were already above 30% and inflation is an exponential phenomenon, so higher rates instigate even higher rates eventually leading to hyperinflation.

Ethiopia’s current inflation rate. Source: Bloomberg 2021

The economic consequences of isolating Tigray (and other northern regions affected) is far from negligible. With people isolated in their homes, banks closed and farmlands turned battlefields, the lack of agricultural and economic productivity in the region is evident. Definitely a major loss for the aggregate production of the country.

What is The Solution

Well the first step would be a ceasefire, something very optimistic at this point since it’s been tried and rendered ineffective. The next best(and more realistic) option is the victory of one party in the war over the other. At least that would allow for economic rehabilitation, as both governments have proven track records of tremendous growth.

In that hypothetical scenario, an immediate rush of aid towards the people affected by the war is necessary. A country can’t be productive if its citizens are dead/malnourished. The next step would be reopening the national banking system. Although it’s not widely digital yet, commerce in Ethiopia largely occurs through banks and the masses are well past the days of cash.

The last problem is inflation. I’ve always said this even before the war, but we need to apply the theory of comparative advantage. It states that “An economy with the ability to produce a particular good or service at a lower opportunity cost than its trading partners should prioritize production of that product and buy everything else” (David Ricardo) Ethiopia is primarily an agrarian society and 85% of the population are farmers. Farming is what we’re good at with a comparative advantage, and Ethiopia’s plethora of farmland/ideal tropical location is critical.

The aforementioned David Ricardo quote put into context.

This, paired with application of modern agricultural technology, would guarantee Ethiopia middle-income status. Currently, there is little to no agricultural technology being applied, probably because of its high cost, but even the most basic farming aides like pesticides and fertilizers had very low adaptation. Other areas were lacking are in seed quality, and irrigation.

Conclusion

The current economic landscape is disheartening for the 110M+ Ethiopians who once thought their country had escaped third world economic status. Prior to the global pandemic and the war, Ethiopia’s economy was one of the fastest-growing in the region, expanding by an average of 10% a year for the past decade to 2019. But given the war is ongoing with new developments everyday, few figures and estimates are released, and the total impact of the conflict is something we have yet to see.

One thing for sure is that its economic effect will be felt for years after the war if we don’t act quick.

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The Culture | Ethiopia | Finance

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