Ethiopian Business Review

Ethiopia, Kenya: A Beneficial Interdependence

On March 10, 2014, Kenyan President Uhuru Kenyatta accompanied by high level government officials and some of Kenya’s prominent private sector figures came to Ethiopia on a four day official visit. During the occasion, both nations vowed to strengthen cordial relations that started to flourish between Ethiopia and Kenya. They also agreed to deepen and expand the scope of their collaboration. 

Indeed, Ethiopia and Kenya have quite an admirable peaceful political and economic partnership, unlike most counties in the Horn of Africa, where conflict and violence are common. Perhaps Kenya is the only country in the world that has a better level of development than Ethiopia and allows Ethiopians to come to their country without a visa. Notwithstanding this aspect, the two countries have their own unique economic potential that has not been exploited thus far although many bilateral agreements were signed by both countries. I would argue that in terms of growth and development, Kenya and Ethiopia could fly together instead of jumping separately. Although this issue needs in-depth and detailed studies and implementation strategies, I will attempt to outline this potential in five thematic areas of potential synergy.

There is a vast market for both nations. Ethiopia is the second most populous nation in Africa with an estimated 90 million people. Kenyan’s population is also half the size of Ethiopia. Given, the sustained and strong economic growth registered by Ethiopia in the last decade (which the Ethiopian official sources claim to be above 10Pct) there is a huge market for Kenyan firms, which are more efficient compared to Ethiopian firms. Thus, the Kenyan firms demand constraint could be alleviated by strong economic cooperation of the two countries that will create a combined market size of over 140 million people.

Synergy in power and port use is another huge potential. Ethiopia has an enormous potential of cheap and renewable energy production. In hydro-power alone, the country has a potential to produce over 45,000MW. The country is also on the right track in the actual production of this energy in which its production will go to about 8,000MW (form the current level about 2,100MW) in the coming 3 to 4 years. Sourcing such cheap and clean energy from Ethiopia can reduce its cost for Kenyan firms by more than half. It is encouraging to see that the two governments have already reached an agreement for the supply of 500MW of electricity from Ethiopia to Kenya. 

In addition to this, landlocked Ethiopia can benefit from accessing the sea through the port of Mombasa and Lamu, in particular for the Southern part of the country. Although the government of Ethiopia doesn’t seem to be aware, studies in Africa show that a landlocked country can lag behind in terms of growth by at least 2Pct compared to a country with direct access to the sea. Thus, economic cooperation with Kenya and an optimal access to the sea can significantly reduce this growth handicap of Ethiopia as well as its strategic vulnerability.

Trade, in areas like industrialization, finance, Information and Communication Technology (ICT) is another way the two nations can work together. A comparative analysis of the level of development in commerce that includes trade and finance between the two countries shows that, the level of development in Ethiopia is way below that of Kenya. Thus, Kenyans have much to offer to Ethiopians and can benefit from it in the process. Similarly, the level of development in ICT in Kenya is something that the inefficient and non-accountable Ethio - telecom can learn by working with the Kenyan Safaricom, one of the big telecom providers in Kenya. The latter’s world class service of mobile banking (the M-Pesa) can be a case in point here. The Commercial Bank of Ethiopia can also learn a lot by working with its counterparts in Kenya.

Ethiopia can also learn from Nakumat and Uchumi, two of the biggest retail companies in Kenya, to stabilize the price of basic goods offered by local retail companies that are protected from foreign competition. Not only should Ethiopia learn from the working of Kenyan firms (such as Safaricom) but also, perhaps more importantly, how Kenyans mange to create a competitive environment, which allows Kenyan companies to work in a joint-venture with world class firms. Kenyan firms are performing well because they have a creative, well rewarded managerial group and efficient staff. These points are equally enjoyed by Kenyan firms operating in banking, trade and industry and Ethiopia can benefit a lot by learning and working with such entities in Kenya.

Tourism, air-transport and human capital is another potential area of benefit. Kenya has a well-developed tourism sector. Mombasa marine resource and Masai-Mara parks are among world class tourist destinations that attract over a million visitors each year. Ethiopia, on the other hand, has enormous potential in tourism (the historic routes, the Ertale live volcano in the lowest place on Earth being a case in point). However, it has not exploited this potential as can be inferred form the number of visitors that come to Ethiopia each year, which in 2006 was 290,000. This is more than five times smaller than the number in Kenya, 1,644,000 in the same year.

A joint effort of attracting tourists to both places through conscious joint planning by their respective airlines could bring about a win-win outcome for both. In addition, the Ethiopian Airlines with its state of the art facilities, workshops, and training center, can help the Kenyan Airways to build its capacity within the existing strategic and cooperative framework. 

Finally, the two can bring about synergy in regional peace, stability and democracy. A deeper engagement of the two countries in economic cooperation not only requires working  together on regional peace and political stability as they are currently doing (in South Sudan and Somalia), it can also help to establish a vibrant media in Ethiopia,  which is dearly missing in Ethiopia’s context but common in Kenya. Considering the long and rich experience of the Ethiopian government in bargaining hard for what it believes in terms of policy with its development partners, Kenya can learn a lot working with Ethiopia to challenge policies imposed by international institutions such as the World Bank, IMF and WTO as well as by influential partners with strong national interest at heart (such as the West and China).

In short, Ethiopia can bring market size, a cheap source of clean energy and perhaps skill in ownership of policy and negotiation power with development partners to the table. In the same manner, Kenya can bring efficiency in commerce, finance and communication, skilled human capital, vibrant, democratic and independent culture of media and water access to the table. There are also other synergies that may come with a joint operation of the two countries such as regional political security and stability and informed bargaining power with development partners. Thus, it is imperative to consider that economic cooperation and a special status of Ethiopia in Kenya and Kenya in Ethiopia, informed by in-depth study, is a win-win outcome for both countries. It will allow both countries to reach a higher and steadier state growth and development than is currently possible for both. In addition, this approach, on top of expanding regional infrastructure, might also provide a pragmatic approach to regional integration in the region and Africa at large.


2nd Year . April 2014 . No.14


Alemayehu Geda (Prof.)

Alemayehu Geda did his PhD in Development Economics at the Institute of Social Studies, the Netherlands, in 1998. After that he had been teaching at the University of London, School of Oriental and African Studies. He was also a research fellow at the University of Oxford. Prior to that he was at the World Bank in Washington on a special appointment to work on Global Model Building and the Place of Developing Countries in the World Economy. He is currently Professor of Economics at Addis Ababa University. Comments can be sent to ag112526@gmail.com

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