Issue: 2020: Vol. 19, No. 2

Sino-Ethiopian Relations from Meles Zenawi to Abiy Ahmed: The Political Economy of a Strategic Partnership

Article Author(s)

Daniel Kibsgaard

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Daniel Kibsgaard holds a master’s degree in the Theory and History of International Relations from the London School of Economics and Political Science. He researched China-Ethiopia relations for his undergraduate dissertation at the University of Exeter. Daniel spent the Spring of 2020 as the leadership gifts intern at The Carter Center in Atlanta. He can be reached at [email protected]
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Introduction

Ethiopia has emerged as one of China’s closest political and economic partners in China’s wider engagement in Africa. In exchange for infrastructure development and support in its ambitions for industrialization, Ethiopia offers business contracts for Chinese firms and has been a loyal supporter of Beijing in international forums. Although a close strategic partnership between the countries was established after the 2005 elections, Prime Minister Abiy Ahmed’s reform agenda appears to be drawing him back to Western actors.  Far from representing a shift in alliances, this move is consistent with Ethiopia’s historic pattern of balancing external powers against each other to reaffirm its own independence.

It is too early to say how the COVID-19 pandemic will impact this relationship, but Chinese humanitarian aid is unlikely to appease African states’ desire for comprehensive debt relief. Beijing has stated it will help resolve debt difficulties, but on a bilateral basis. This most likely will not include write-offs and may ultimately serve to increase Ethiopia’s as well as the broader continent’s dependence on China.

China in Ethiopia

Ethiopia has been a key destination for China’s expanding construction and telecommunications companies. Under the framework of “resources for development,” Beijing typically mobilizes its vast financial reserves to invest broadly in infrastructure projects across Africa in order to receive natural resources in return. However, with its growing populations, Africa has increasingly provided an opportunity for China’s burgeoning firms to find new markets as declining infrastructure contracts in China are forcing firms abroad. Furthermore, Africa acts as a “testing ground” for Chinese companies, while the expansion of Chinese businesses abroad also provides opportunities for better paid work and offsets pressure on the domestic labor market.

China is particularly attracted to Ethiopia because of the diplomatic clout Ethiopia holds in Africa. This is due not only to the various multinational institutions based in Addis Ababa such as the African Union (A.U.), but also the symbolism of Ethiopia as one of the only African states not to have been colonized. As President Hu Jintao stated in 2004, “Ethiopia could play a pivotal role in enabling China to consolidate its cooperation with other African countries.” Historically, African states have been instrumental in securing China’s United Nations Security Council seat and strengthening China’s position in international relations. Cooperation with China demands recognition of its One-China policy and there is an implicit expectation of diplomatic support when China is criticized internationally. This is reflected in the A.U.’s support of China’s position in the South China Sea dispute. However, China’s presence would not be possible without Ethiopia’s own enthusiastic embrace of Beijing.

Ethiopia’s Realignment to China

With the brief exception of Italian occupation 1936-1941, Ethiopia takes pride in its longstanding independence. This has been a challenging project historically, which Ethiopia achieved by playing off rival powers against each other to strengthen its own position. Meles Zenawi, whose Ethiopian People’s Revolutionary Democratic Front (EPRDF) overthrew the communist Derg regime in 1991 and who stayed in power until his death in 2012, demonstrated the continuity of this longstanding policy. He successfully ushered in the post-Cold War era by strategically realigning to China as a way to leverage against U.S. hegemony.

Although the U.S. helped the EPRDF come to power in 1991, Meles did not wish to remain within the American sphere of influence. Meles was fundamentally at odds with the neoliberal economic paradigm promoted by the U.S. Arguing that the proposals from the IMF and World Bank would not solve the problem of endemic poverty in Ethiopia, Meles once wrote that “development is a political process first and a socioeconomic process second.” He believed in state monopolies over key sectors of the economy, a heavily regulated private sector, non-interference of foreign direct investment (FDI) in the state’s policies, and a top-down approach to development. This statist emphasis on sovereignty in its economic development was inspired by Meles’s Marxism, and his admiration of East Asia’s rapid economic growth.

Meles consequently felt that Ethiopia’s economic growth would be secured by collaboration with China. While South Korea and Taiwan were his favored examples, China’s rise represented a serious political challenge to American development hegemony and the concomitant loan conditionality that Meles had tried to resist. This began with Meles’s visit to China in October 1995 and Chinese President Jiang Zemin’s reciprocal visit to Ethiopia in May 1996. Ethiopia was closely involved in the first Forum on China-Africa Cooperation (FOCAC) in 2000 and was the first African country to host the meeting in 2003.

However, Sino-Ethiopian relations only seriously intensified following Meles’s violent suppression of protests over the disputed 2005 election results and resulting Western criticism of the crackdown. When the European Commission suspended general budget support and the World Bank froze new lending programs, Meles was pushed closer to China. At the 2006 FOCAC summit in Beijing, Meles stated that “China was always at the side of Africans, which created mutual trust between us. China also deserves credit for never interfering in the political affairs of the continent.” Meles seemingly ignored or overlooked the fact that only a few years earlier, China sold more than $1 billion in arms to both sides during the Ethiopia-Eritrea War (1998-2000), bypassing the U.N. embargo.  Furthermore, as a member of the U.N. Human Rights Council, Ethiopia helped defeat all motions criticizing China in 2007. Crucially, party-to-party relations were significantly expanded and in 2010, a Memorandum of Understanding was signed between the EPRDF and the CCP. Economic ties also increased rapidly. According to a 2012 World Bank survey, Chinese FDI increased “from virtually zero” in 2004 to $74 million annually in 2009. During this time, the EPRDF reestablished a single-party state, securing 99.6 percent of seats in Parliament in 2010, and 100 percent in 2015.

Ethiopia’s realignment appeared all but complete when the foreign ministers of Ethiopia and China published an article in 2014 which expressed the aim to “upgrade our cooperation to a fully-fledged strategic partnership.” However, this strategic partnership was primarily focused on the party-to-party relationship between the EPRDF and the CCP which contributed to the development of a ruling-party oriented capitalism in Ethiopia. This is illustrated by EFFORT, an endowment run by EPRDF officials that owns more than 60 companies in major industries, and routinely receives preferential treatment when entering joint ventures with Chinese firms.

Ethiopia consequently saw the consolidation of political power and economic assets by the former revolutionary leadership, as inequalities and dissatisfaction widened. China thus became enmeshed in the EPRDF regime at the expense of Ethiopia’s private-sector and democratic institutions. It should nonetheless be noted that Addis Ababa used its alliance with Washington in the Global War on Terror to strengthen Ethiopia’s authoritarian turn by justifying draconian anti-terror legislation that severely curtailed freedom of speech. Before delving into the more recent political ramifications of this partnership, an overview of China’s impact on Ethiopia’s infrastructure and industrialization development will be provided.

Infrastructure

Ethiopian and Chinese officials typically depict their economic relations as “win-win,” most notably with regard to the vast investment in infrastructure. For example, the completion of the Chinese-funded Addis Ababa–Djibouti Railway in 2018 reduced a week-long journey to a 12-hour ride, facilitating goods transport and cutting costs for 90 percent of Ethiopia’s external trade. Even though the railway has been beset by major issues, such as a lack of supporting infrastructure and insufficient revenue, it still strengthens Ethiopia’s prospects for economic growth.

While these infrastructure projects are benefiting Ethiopia in important ways, they are designed to serve Chinese interests first. China’s infrastructure projects are largely funded by concessional loans which have low interest, a five-year grace period and a grant component of more than 35 percent, making them extremely attractive. Whereas these loans do not contain any political conditionality, they are heavily tied to stipulations requiring the use of Chinese companies, labor (especially at the managerial level), and materials. This, in combination with political ties, low bidding prices, and the ability to outcompete Ethiopian firms, explains the success of Chinese firms in Ethiopia.

This success is most visible in road construction, where the Chinese share of the total in Ethiopia in 2011 was between 70 and 80 percent. Although the majority of the permanent Chinese-employed workforce in Ethiopia is in fact Ethiopian, they are normally employed in low-skilled jobs, which prevents transfer of expertise and creates resentment. Furthermore, the equipment used to build roads is often outdated, stopping effective transfer of technology. This, in combination with the low bidding prices offered by Chinese firms, results in poor-quality construction.

Additionally, a significant proportion of road projects create losses. In some cases, Chinese contractors lose 40 percent of the contract price. This is only made possible because Chinese state-owned enterprises (SOEs) are backed by company savings and state bank loans, meaning that the Chinese taxpayer is effectively footing the bill for Ethiopia’s infrastructure development. This demonstrates how China’s SOEs act as instruments of Chinese foreign policy in that they are helping establish Beijing’s diplomatic foothold in Ethiopia.

China has also been heavily involved in constructing Ethiopia’s telecommunications. In 2006, China’s ZTE was granted a monopoly over the market as the Ethiopian government seemed to ignore its own procurement rules requiring competitive bidding. Government control and poor quality have resulted in some of the lowest fixed-line and internet access rates in Africa. Monopoly profits are in turn used to fund Chinese infrastructure projects, creating a circular flow of money. Moreover, Ethiopia is dependent on China for after sales. This dependency only seems to be intensifying as a $1.6 billion agreement was signed in 2013 with Huawei and ZTE to upgrade existing infrastructure.

Activists have claimed that Chinese authorities have provided the Ethiopian government with technologies that can be used for political repression, such as surveillance cameras and satellite jamming equipment. Moreover, a 2018 Le Monde Afrique report claimed that China had bugged the African Union headquarters in Addis Ababa. In addition to hiding microphones in desks and walls, China had allegedly been transferring confidential data to a server in Shanghai between 2012 and 2017. Although both the African Union and the Chinese government denied the accusations, observers say the incident demonstrates the lack of leverage African states have over China and warn against relying too heavily on China for their development. The A.U. now uses its own servers, and information no longer passes through Ethio Telecom, Ethiopia’s state-run operator built by China’s ZTE. This incident strengthened the U.S. government’s long-held belief that China uses its telecommunications firms, Huawei and ZTE, to spy on foreign governments and citizens.

The greater concern for Ethiopians is how Chinese loans have placed an enormous debt burden on the country, causing economic volatility. Ethiopia is the second-largest recipient of Chinese loans in Africa with more than $13.7 billion provided between 2000 and 2017. Government debt currently stands at 59 percent of GDP, with some 50 percent owed to China while foreign exchange is drained as imports outrank exports by as much as 400 percent. This unsustainable situation reveals the persistent structural weakness of the Ethiopian economy and has fueled public outrage in recent years. A Chinese Foreign Ministry spokesperson recently stated that China is open to restructuring loans to African countries, but the long-term health of the economy will depend on whether the government’s efforts to industrialize succeed.

Industrialization

In response to its chronic foreign exchange shortage, which predates its partnership with China, Ethiopia hopes to spur its industrialization by encouraging its comparative advantage in the leather industry and by emulating the successful East Asian industrial parks. China has played a mixed role in both efforts but with mostly positive results for industrialization prospects.

Despite initial fears that cheap Chinese imports would displace local manufacturers, the Ethiopian footwear industry responded by becoming more competitive and implementing effective industrial policies. Chinese footwear began flooding the Ethiopian market in the early 2000s, after economic liberalization in the 1990s opened a once-closed market, leading to fears of deindustrialization. However, a 2007 study of small and medium footwear enterprises by Tegegne Gebre-Eghziaber showed that while Chinese imports had been highly disruptive, the Ethiopian footwear industry had responded by either undercutting these imports or focusing on better quality. After several years of adjustment, 82 percent of the firms Gebre-Egziabher spoke to told him that they were now competitive against Chinese imports and that the leather sector in Ethiopia was booming. Furthermore, while Chinese imports were initially attractive for their cheap price, they declined in popularity after being revealed to have poor quality.

The Ethiopian government also intervened to protect the footwear industry. It listed a number of areas of investment reserved for domestic investors only, including leather hides and skins. Furthermore, in November 2011, the export of semi-finished skins destined for footwear production was banned to further encourage domestic industry. In response to the poor quality of many Chinese products, the government established the Joint Committee on Quality Control, which demands Chinese exports be given a certificate by an inspector agency.

In addition to defending its leather industry, Ethiopia has embarked on an ambitious policy of opening industrial parks to attract foreign manufacturers and benefit from the spillover effects including skills and technology transfer. While China has been the most avid investor, many local firms do not benefit from subcontracting as happened in East Asia. This is seen in the fact that in 2011, 61 percent of total material inputs and supplies used in factories were imported. This is because many goods could be imported at a cheaper price from China than they could be sourced locally. This nonetheless contradicts a fundamental goal of FDI, which is to boost local competitiveness through active interaction with advanced foreign businesses. Whereas Ethiopian firms would like to see more joint ventures, Chinese firms have largely been unwilling, further hindering managerial skill and tech transfer. There have also been reports of rampant labor abuse and exploitative wages. Average wages at Chinese firms are nonetheless above the Ethiopian average.

China has responded to these criticisms and is increasingly encouraging spillover benefits. The Huajin International Light Industry City was built in cooperation with the Ethiopian government in 2017 and aims to serve as an Ethiopian supply chain cluster. To counteract the issue of China’s employment practices, Huajin has selected graduates from Ethiopian universities to receive training in China to become the future managers of its Ethiopian factories. This builds on previous efforts, most notably when China built Africa’s largest vocational training school in Addis Ababa in 2008. In addition, many of the issues associated with low spillover from Chinese firms have more to do with underlying conditions than discriminatory practices. This suggests that as expanding infrastructure development cuts costs and more Ethiopians receive qualified training, Ethiopian ownership of its industrialization will increase. A $1.8 billion deal signed in 2018 with the State Grid Corporation of China to secure power lines to cities, 16 industrial parks, and the Addis-Djibouti railway is a step in the right direction.

Progress is slow, however, as Ethiopia failed to reach its targeted 15-fold increase in textile and leather exports in 2015. Combined, they still only account for a fraction of total exports. Ethiopia’s traditional dependency on agriculture has not changed and Chinese investments have not significantly helped agricultural development. Nonetheless, Ethiopia has benefitted from this investment and the prospect of increased Ethiopian ownership bodes well for the country’s economic growth.  Unfortunately, the global economic stillstand induced by COVID-19 will undoubtedly impact this development.

The Abiy Era

Despite all the advances in the Ethiopian economy that the strategic partnership with China enabled, it also contributed to growing political and economic instability which came to a breaking point when Prime Minister Abiy Ahmed came to power in April 2018. His predecessor, Hailemariam Desalegn, was forced to resign two months prior after years of protests eroded his legitimacy and that of the EPRDF. Although protests began over corrupt land deals, they quickly turned into a wider uprising against corruption, repression and ethnic discrimination. Between 2015 and 2017, more than 1,000 protesters were killed and 21,000 were arrested in a predominantly Oromo revolt against the Tigray-dominated regime.

In response, Abiy, who is Oromo, has enacted wide-ranging political reforms to appease protesters and mend ethnic relations. Since coming to power, the young prime minister has released thousands of prisoners, moved toward democratization, and even brokered a peace agreement with Eritrea for which he was awarded the 2019 Nobel Peace Prize. In November 2019, Abiy dismantled the EPRDF and created a pan-Ethiopian coalition called the Prosperity Party (PP), which includes formerly marginalized ethnic groups. This move threw into question the future of Ethiopia’s strategic partnership with China as it was increasingly based on party-to-party relations between the EPRDF and CCP.

While China has not expressed concerns regarding this political development, it has greatly reduced its willingness to invest in the country. Less than two months after Abiy came to power in April 2018, China announced it was scaling back its investments in Ethiopia. Beijing also expressed frustration after major investments, such as the Addis-Djibouti Railway, failed to generate sufficient revenues. Abiy was seemingly able to win back China’s confidence when he renegotiated the repayment period for some loans from 10 to 30 years at the September 2018 FOCAC in Beijing.

China’s move does, however, come in response to years of growing economic volatility. Despite averaging 10 percent GDP growth since the early 2000s, Ethiopia’s economic situation is deteriorating as foreign exchange dries up and its trade deficit grows. In December 2016, the Ethiopian parliament demanded to ascertain the country’s external debt repayment capacity before ratifying new concessional loan agreements with China due to rising Chinese interest rates and shorter repayment periods. In addition, the IMF raised its debt distress rating to “moderate” in 2017 and then to “high” in 2018.

In response to decreasing Chinese willingness to extend new loans, Abiy appealed to Western donors who were more than happy to step in. Western actors are throwing their support behind the new Prime Minister who is hailed for his pro-democracy and pro-market reform agenda. In December 2019, the IMF and World Bank pledged over $5 billion to the country to cover about 60 percent of the total financial need for Abiy’s three-year Homegrown Economic Reform Program. The United Arab Emirates also entered the fray with a $3 billion aid and investment package in 2018 revealing interest from Gulf States as well. Far from signaling the end of Chinese involvement in Ethiopia, these recent developments demonstrate Ethiopia’s rising importance in international politics and its increasing ability to find the best deal to further its own development.

That said, the COVID-19 pandemic complicates this picture. While Ethiopia has not yet registered a large number of confirmed cases which would confirm a widespread outbreak, the country and Africa broadly are struggling to face the global crisis. Although China is doing commendable work in fighting the virus (e.g. cooperating with Ethiopian Airlines to distribute much-needed medical supplies to 12 African countries), humanitarian aid will not substitute for debt relief. African debt to China stands at $143 billion with $8 billion due this year, creating an untenable situation for countries like Ethiopia that could lose up to 10 percent of GDP with the world economy brought to a standstill. African leaders such as Ghana’s finance minister therefore believe China is not doing enough and are calling for a moratorium on all external debt as well as debt write-offs. Prime Minister Abiy recently published an article on Project Syndicate in which he called on “developed countries (including China)” to help Africa and match their rhetoric with action.

However, observers do not expect China to go far beyond its support for multilateral efforts such as the World Bank’s $160 billion emergency economic program of which Ethiopia is an initial project country. Instead, China will continue to review its bilateral loans on a case by case basis and is unlikely to stray far from its historical approach of suspending loan payments, restructuring debt, and debt/equity swaps. Beijing has only forgiven five percent of its loans to Africa, but these were largely zero-interest and with its own economy to worry about it will not start now unless other states do so as well.

After already having much of its debt restructured in recent years, Ethiopia may be forced to hand over greater ownership of infrastructure projects such as dams and the Addis-Djibouti Railway. Although this is not necessarily a bad thing and can provide much needed foreign exchange, the greater cost could be political. With Chinese loans already being so dependent on diplomatic support for Beijing’s policies, Prime Minister Abiy may yet be forced to align closer to China, which could impact his own domestic reform program. On the other hand, the crisis presents an opportunity for African states to leverage their unity in multilateral negotiations with China and break with Beijing’s insistence on bilateralism. China’s Foreign Ministry has stated that it will help resolve African governments’ debt difficulties but in the absence of American leadership and with Europe preoccupied at home, China is better placed to resolve the issue on its own terms.

Conclusion

Ethiopia gained much in terms of infrastructure and industrialization from its 15 years of close cooperation with China. However, Ethiopia’s unsustainable debt levels force it to reduce its dependency on Chinese loans for its growth, just as Beijing does not want to overexpose itself to Addis Ababa’s volatility. Meanwhile, Abiy’s pro-democracy and pro-market reforms have resulted in renewed Western engagement. Combined, these developments have halted further intensification of Sino-Ethiopian relations and reasserted Ethiopia’s historic ability to balance external powers against each other in its own interest. Yet in the absence of sufficient multilateral mobilization and uncertain Chinese debt relief, COVID-19 may seriously challenge this foreign policy dictum.

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