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  • Writer's pictureGrowth Capital Analytics

A Paradigm Shift: Ethiopia's Journey from Development to Entrepreneurial State

Updated: Jun 29, 2023

How a new state ideology might shape Ethiopia’s economic future

In a recent executive committee meeting of Ethiopia's Prosperity Party (PP), Prime Minister Abiy Ahmed (PhD) unrolled an audacious vision for an “entrepreneurial state”. The Prime Minister proposed an audacious new vision to recalibrate Ethiopia's economic course – a shift towards an "entrepreneurial state". Over a two-hour presentation touching Ethiopia's economic, political, and social dimensions, the PM painted a transformative blueprint for a state that seeks to consolidate shared truths, build robust institutions, foster innovation, and construct a competitive economy.

The marching orders for the top leadership were clear: immerse themselves in this innovative doctrine and steer a transformative shift in the nation. This would involve conceiving inventive projects, even those avoided by the private sector, unlocking opportunities for private enterprise, taking calculated risks, investing where it counts, and strengthening the public service to enhance their performance.

This Week’s Growth Capital Analytics insight will elucidate the essence of an entrepreneurial state, contrasting it with Ethiopia's familiar developmental state model. Furthermore, if properly adapted, we'll explore how the new ideology could help Ethiopia navigate its current economic quandaries and attain its ambitious long-term objectives.

Unraveling the Entrepreneurial State

"Entrepreneurial state" signifies a paradigm where the state is a potent catalyst for innovation and economic growth, challenging the conventional belief that the state's role is merely to set favorable conditions for innovation, such as upholding property rights and managing macroeconomics.

This idea was largely propelled into the mainstream by Mariana Mazzucato, a tri-citizenship (Italian-American-British) economist, who champions the state as a vital economic player with the ability to forge markets and influence the innovation trajectory. The entrepreneurial state is proactive, undertaking risks that private entities might eschew, fostering nascent research, facilitating the growth of new industries, and shaping markets. Mazzucato cites the roots of today's digital economy—state-funded research into the internet, GPS, and touch-screen technology—to underline the state's key role. Such states are proactive and bold, making early-stage investments and tackling risks the private sector shies away from—a critical stance for sectors such as clean energy, where innovation is vital, but risks and time horizons loom large.

Does this entrepreneurial concept bear any resemblance to Ethiopia's developmental state ideology? Undeniably, there are similarities, yet crucial differences emerge upon closer scrutiny.

The 'Developmental State' vs the 'Entrepreneurial State

Both the "entrepreneurial state" and the "developmental state" agree on the state's active role in promoting economic development, but they highlight different facets of state intervention and originate from distinct historical and geographical contexts. The developmental state is often tied to the post-World War II East Asian economic miracles, particularly in Japan, South Korea, and Taiwan, and in recent years with the emergence of China as a global economic superpower. The state spearheaded economic development via industrial policy, export-oriented strategies, and private-sector cooperation.

On the other hand, the entrepreneurial state emphasizes the state's role in spurring innovation and technological advancement. It embodies a risk-taking entity, pumping funds into early-stage research that the private sector might shun. It also shapes markets, a model often seen in advanced economies and sectors like IT and clean energy. Mazzucato's arguments largely draw from the role the US government played in Silicon Valley's evolution, highlighting the government's risk-taking investments in high-reward research, and its ability to shape markets. In essence, while the developmental state focuses on industrial policy and export growth, the entrepreneurial state emphasizes technological innovation and change.

Diagram: Entrepreneurial State Vs Developmental State

The 'Entrepreneurial State' – Ethiopia's Economic Panacea?

In light of these definitions, Ethiopia appears to be inching towards an entrepreneurial state, underscored by recent liberalization and privatization reforms. However, Ethiopia, one of the least developed countries globally, lacks the resources and need to pioneer cutting-edge technology. Instead, it should focus on adapting and customizing existing technologies for local and regional consumption.

Furthermore, Ethiopia's infrastructural deficits, nascent industrial sector, and import dependency necessitate the continuance of certain elements of the developmental state model, such as guiding economic development through strategic planning, industrial and export policies, and strong public sector presence in critical sectors.

Essentially, Ethiopia's future lies in achieving a balance—an "Entrepreneurial Developmental State (EDS)”, if you will, engaging proactively in long-term strategic planning while promoting innovation and technological change. The following policy recommendations highlight this path:

Increase Investment in R&D: Ethiopia's gross domestic expenditure on R&D, currently below 1% of GDP, must increase significantly. The government should encourage domestic and international organizations to invest in high-risk, high-reward research and development initiatives. An emphasis should be placed on sectors relevant to Ethiopia's context such as agriculture, renewable energy, and ICT. Unleashing Ethiopia’s full potential in these sectors will help address its key production and productivity challenges.

Fostering Entrepreneurship: The EDS should work towards creating a conducive environment for startups and SMEs. This could involve setting up entrepreneurship hubs, offering tax incentives for startups, easing bureaucratic red tape, and establishing accessible finance mechanisms tailored to the needs of Ethiopian entrepreneurs.

Once promising enterprises have been identified, it is essential for the Ethiopian state to participate in the investment, sharing the risks and rewards of these ventures. However, this process should also aim to ensure that the benefits of innovation and entrepreneurship are equitably retained by the state. This will enable a cycle of reinvestment into future entrepreneurial ventures and secure the shared prosperity of all stakeholders, driving a sustainable entrepreneurial ecosystem in the long run. This active investment role by the state will not only encourage more innovative startups but will also create a clear roadmap toward achieving shared prosperity.

Promoting Social Innovation-Based Entrepreneurship: parallel to aspiring to create new technologies, Ethiopia can stimulate innovation by encouraging the development of low-cost, small-scale infrastructures, technologies, and services that meet local and regional social-development demands.

As a means to supplement government efforts in bridging the existing gaps in infrastructure and social services, the promotion of social entrepreneurship must form a key part of the strategy. By fostering businesses focused on social impact, Ethiopia can expedite its progress toward achieving universal access to basic services and quality infrastructure. Such enterprises can deliver innovative, sustainable solutions in areas like healthcare, education, and sanitation, which not only address social challenges but also stimulate economic growth and job creation.

Leveraging Market Opportunities: Ethiopia's large population and strategic location in East Africa provide significant market opportunities. To fully capitalize on this, the state should work towards removing structural barriers to business, improving infrastructure, enhancing the ease of doing business, and opening up more sectors to private investment.

Capital naturally gravitates toward sectors with high-profit margins and efficient supply chains. Recognizing this, the Ethiopian government must accelerate ongoing reforms to dismantle structural barriers in its economy. This could include reforms aimed at improving supply chain efficiency, reducing bureaucratic hurdles, and creating a more transparent business environment. By doing so, Ethiopia can attract more investment into diverse sectors of its economy, spurring balanced growth and increased resilience.

Finally, Address the Formal-Informal Sector Dichotomy: In Ethiopia, as in many African economies, a stark division exists between the formal and informal sectors. The entrepreneurial developmental state must address this dichotomy by crafting flexible regulatory frameworks that accommodate the unique needs of informal businesses, while also offering support and resources to help these enterprises grow, formalize, and thus tap into their full potential. This must be coupled with the extension of social protection measures to workers in both sectors, fostering an inclusive and equitable economic environment.

In conclusion, Ethiopia stands on the precipice of significant economic change, charting a path toward economic prosperity. Our proposed approach marries the strategic and pragmatic aspects of a developmental state with the innovation-driven and risk-embracing characteristics of an entrepreneurial state.

With Ethiopia steadily shifting from a traditional developmental state, it must now imbue its strategic planning with the dynamism of an entrepreneurial state. Thus, Ethiopia's new journey towards an "Entrepreneurial State" should not be an outright abandonment of the developmental state model, but an evolution. It is a potent blend of the pragmatic with the innovative, tailored to Ethiopia's unique challenges and opportunities. The road ahead may be steep, but with the right policies and a balanced approach, the destination promises a reimagined economic future for Ethiopia.

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