Evaluate the role of the state in promoting economic development.
4.3.3 · 1.1.6
State helped- Around 10% growth a year (official) for 2004–2019.
- Poverty fell from 39% (2004) to 24% (2016) on the national line.
- Built GERD, rail, roads and a world-class state airline.
State failure- Debt default in 2023.
- Money-financed spending drove inflation to ~34%.
- State banks starved private firms of credit and dollars; few factory jobs.
ChainState directs saving and foreign loans into infrastructure → lower transport and power costs → higher productivity → LRAS ↑ → rapid growth from a low base.
JudgmentThe state was effective at building infrastructure from a low base. It was less effective at creating exports and jobs, and it overborrowed. The model needed markets to take over sooner.
Assess the likely effects of floating a previously fixed and overvalued exchange rate.
4.1.8 · 2.1.2
Benefits- Black-market premium fell from over 100% to about 15%.
- Gold exports jumped as smuggling became less profitable.
- Current account deficit narrowed to ~0.9% of GDP (2025).
Costs- Birr fell from 57 to about 164 per dollar.
- Higher import prices for fuel, fertiliser and medicine.
- Dollar debt burden rose in birr terms; dollar GDP per head fell.
ChainBirr floats and falls → official rate matches the market rate → exporters sell dollars through banks instead of the black market → foreign currency supply ↑ → rationing ends and imports of inputs resume.
JudgmentShort-run pain was smaller than feared because tight money and IMF support came at the same time. Long-run success depends on export growth and keeping inflation down.
Discuss the causes and consequences of sovereign debt default for a developing economy.
4.5 · 4.3.2
Causes- Heavy foreign borrowing for dams, rail, the airline and state firms.
- Exports too small to earn the dollars to repay.
- War, COVID and drought cut revenue and raised spending.
Consequences- Locked out of world bond markets.
- Forced into IMF programme and market reforms.
- But restructuring cuts repayments and frees money for recovery.
ChainForeign debt grows faster than exports → dollar shortage → cannot pay interest → default → borrowing costs ↑ and investment ↓ → slower growth.
JudgmentThe problem was not the level of debt (~40% of GDP) but its currency: dollar debt needs dollar earnings. Compare Kenya, with higher debt/GDP but more exports and remittances.
Evaluate the view that rapid economic growth always reduces poverty.
4.2.1 · 2.1.1
Supports- Growth of ~10% cut national-line poverty from 39% to 24% (2004–16).
- Rural roads and farm extension raised smallholder incomes.
- Safety net protected the poorest.
Challenges- Poverty at $2.15 a day rose from 27% to ~32% (2016–21) while official growth stayed above 6%.
- Inflation and war wiped out gains.
- Growth in construction created few lasting jobs.
ChainAgricultural growth → higher farm incomes → rural households spend more on food, health and school → absolute poverty ↓.
JudgmentGrowth cut poverty when it reached farmers and prices were stable. When inflation and conflict hit, growth and poverty moved in the same direction. Also question official growth data.
Assess the effectiveness of foreign aid in promoting development.
4.3.3
Effective- Safety net and food aid prevented famine on the 1984 scale.
- Aid-funded health and schools raised HDI.
- World Bank commitments of over $15 bn support reforms.
Limits- About 15 m people still rely on food aid.
- Aid can prop up governments and delay reform.
- Aid was suspended or diverted during the Tigray war.
ChainAid funds health and schooling → human capital ↑ → productivity ↑ → LRAS ↑ and incomes rise.
JudgmentAid works best for specific goals (health, safety nets) in a stable country with a government committed to development. It cannot substitute for peace and jobs.
Evaluate industrial parks and FDI as a route to industrialisation.
4.3.3 · 4.1.2
For- Hawassa park attracted global garment brands and created tens of thousands of jobs.
- Cheap labour and hydropower give a cost advantage.
- Follows the Chinese SEZ model.
Against- Loss of AGOA (2022) showed dependence on one market.
- Very low wages and high staff turnover.
- Dollar shortages and conflict deterred investors.
ChainTax breaks and infrastructure in parks → foreign firms invest → jobs, skills and exports → foreign currency earnings ↑ → structural change from farming to industry.
JudgmentParks can work, but only with stable politics, reliable trade access and a working foreign exchange market. Compare Bangladesh and China, where these were in place.
Discuss the economic costs of armed conflict.
4.3.2 · 2.3
Costs- Deaths in the hundreds of thousands; about 3 m displaced.
- Reconstruction needs ~$20 bn.
- AGOA access lost; growth slowed to ~6%; inflation rose.
But recovery possible- Growth back above 9% after the 2022 peace deal.
- Reforms followed the crisis.
- GERD and other investment continued.
ChainConflict → destruction of capital and loss of workers → LRAS shifts left; government spending moves to the military → deficit financed by money creation → inflation.
JudgmentConflict has short-run output costs and long-run costs through lost human capital and investor confidence. Peace is a precondition for every other development strategy.
To what extent is GDP per head a reliable measure of living standards between countries?
4.3.1 · 2.1.1
Useful- Ethiopia at ~$990 vs Kenya ~$2,550 matches its lower HDI (0.49 vs 0.63).
- Simple and widely available.
- Used by the World Bank to classify low income.
Unreliable- Dollar GDP per head fell a third after the float with no fall in output.
- PPP figure is about four to five times higher.
- Large subsistence farming output is hard to measure; official growth disputed.
ChainCurrency floats → birr loses value → GDP converted at market rates falls in dollars → country looks poorer without any change in real output.
JudgmentUse PPP and composite measures such as HDI alongside GDP per head. Ethiopia shows how exchange-rate changes can distort comparisons.
Evaluate the economic effects of a major infrastructure project.
2.3 · 1.3
Benefits- GERD (5,150 MW) can double power supply and provide cheap, clean electricity.
- Power exports to Kenya earn foreign currency.
- Funded partly by citizens' bonds: national ownership.
Costs- Cost over $5 bn; opportunity cost in a poor country.
- External costs downstream; dispute with Egypt and Sudan.
- Grid limits: many households still lack connections.
ChainMore reliable, cheaper power → firms' costs fall → factories and irrigation become viable → investment and productivity ↑ → LRAS ↑.
JudgmentThe benefits depend on the transmission grid and on industry using the power. Cross-border externalities make this a regional as well as national question.