The Cost of Conflict

The Cost of Conflict, Instability

Since 2015, anti-government protests, conflict, and instability have been ravaging Ethiopia. Especially in the past two years, the breakdown of law and order has become the new normal. Thousands have lost their lives and in 2018, 2.3 million were internally displaced—a world record high. In fact, in the last two and a half years, excluding the latest operation in Tigrai, 113 conflicts have erupted across the country. As a result, the federal government’s expenditure to secure public order and security swelled from ETB14.2 billion in 2017/18 to a staggering ETB24.2 billion in 2019/20. Though without a known updated figure, the latest operation in Tigrai is sure to compound Ethiopia’s security bill. EBR’s Ashenafi Endale explores the direct and indirect costs of conflict and instability, as well as the overall economic losses.

On December 1, 2020, international development partners and members of the diplomatic community residing in Ethiopia were convened to be briefed by top government officials at Hyatt Regency Addis Ababa. At the center of the meeting was Ambassador Dewano Kedir, Permanent Secretary for business diplomacy at the Ethiopian Ministry of Foreign Affairs. He asserted that the government is now ready to talk business.

“Since the law enforcement operation has ended after the capture of the regional capital of Mekelle, the government is ready to solve investors’ concerns,” Dewano told participants inquiring about the state of peace and investment environment.

The meeting was held two days after Prime Minister Abiy Ahmed (PhD) announced the conclusion of the law enforcement operation in the state of Tigray while addressing Parliament on November 30, 2020. “Our focus will now be on rebuilding the region and providing humanitarian assistance,” Abiy told members of Parliament (MPs).

The UN refugee agency, UNHCR, reported over 30,000 people were displaced from war zones in Tigrai and have migrated to Sudan, fueling a refugee crisis in a nation under transition. “Close to 30,000 refugees is very small. We have rebuilt the lives of millions of internally displaced people over the last two years. We have enough experience,” Abiy asserted while addressing Parliament.

The federal government launched a military campaign in the region on November 4, 2020, unusually announced in a late-night social media post and national TV broadcast by the Prime Minister. The operation targeted deposing the Tigrai People’s Liberation Front (TPLF) and maintaining law and order

“Restoring peace and stability is critical,” says Fekadu Degife (PhD), former President of the Ethiopian Economics Association. “The government cannot implement an economic or any other policy if there is no peace and stability.”

Recurring violence and instability seem to be enduring characteristics of Ethiopia. It has been five years since achieving peace and stability in the second most populous African nation became the top agenda. It started when anti-government protesters in the state of Oromia took to the streets in November 2015. The protests engulfed the country by soon spreading to the state of Amhara and several other parts of the country.

In the ensuing three years of almost continuous protests, hundreds died, thousands were imprisoned, and business and transport activities were severely interrupted and hampered. The government was forced to declare a state of emergency twice during the period.

The pressure from protesters demanding broader economic and political reforms forced the government and the then ruling party to exercise reform, resulting in the appointment of Abiy as Prime Minister in April 2018. Immediately after taking power, Abiy implemented several reforms to open up the political space by releasing political prisoners and allowing exiled politicians to return. He also ended the hostility of 20 years between Ethiopia and Eritrea.

But the period of peace and stability was short-lived. Ethnic conflict, violence, and a breakdown of law and order quickly become the new normal. Thousands have lost their lives in the past two years and the number of internally displaced people reached a world record high of 2.3 million in 2018.

The Prime Minister revealed the extent of the problem to MPs. “In the last two and a half years, excluding the latest operation in Tigrai, 113 conflicts erupted across the country,” he said. “Oromia leads with 37, followed by 23 in Amhara, 14 in Addis Ababa, and 13 in Benishangul.”

Breaking down the cost
The effects of conflict and instability range from the loss of life and destruction of physical resources to the disturbance of economic activities and general social disorder. The impact can be analyzed from two perspectives: direct and indirect costs of conflict. Direct costs refer to the expenditure spent to neutralize conflicts and restore the rule of law. On the other hand, indirect costs reflect wasted financial resources invested on destroyed public infrastructure, damaged properties of investors, as well as funds required to reconstruct damaged infrastructure and compensate investors.

In the last five years, federal and regional security apparatuses as well as the national defense forces have been entrusted with counterbalancing conflict and violence in various parts of the country. This has heightened the nation’s spending on public order and security.

Ethiopia’s official defense expenditure—growing by 20Pct on average in recent years—was ETB17 billion in 2019/20. However, when compared with the economy’s size, the share of military expenditure is currently at an all-time low. After declining from historic highs of 10.28Pct in 1989 and 9.51Pct in 1999, Ethiopia’s share of military expenditure to gross domestic product (GDP) was 0.6Pct in 2019, according to the Stockholm International Peace Research Institute (SIPRI).

The official defense budget, however, only indicates the recurrent budget allotted for personnel and routine operations. Capital expenditures on equipment and campaigns are usually confidential. Additionally, official military expenditure does not include and cover the costs of other security apparatuses such as federal and regional police forces.

A more precise figure can be drawn by analyzing governmental expenditure on public order and security. This outlay mushroomed from ETB14.2 billion in 2017/18 to a staggering ETB24.2 billion in 2019/20, according to a National Bank of Ethiopia (NBE) report. In the fourth quarter of 2019/20, the expenditure on public order and security jumped to ETB9.9 billion, double the amount compared with the third quarter.

This expanded expenditure was not without reason considering the period was blotted by political tension, escalating to a point of no return following the assassination of artist Hachalu Hundessa in July 2020. Although there isn’t an updated figure, the latest operation in Tigrai is expected to drastically increase Ethiopia’s spending on peacefulness.

This is not surprising, according to Wasihun Belay, independent Analyst. “Expenditures during military operations tend to increase,” explains Wasihun. “The logistical work to undertake even small military operations is huge.”
Indirect costs of instability and conflict can be calculated by analyzing wasted financial resources invested on destroyed public infrastructure and the resources required to rebuild. Private investment and property damaged and the cost of compensation and rebuilding is also a heavy burden.

“The money spent on this military operation could have been invested on development projects. A lot of youth participated in this military operation from both sides. Property and infrastructure which could have had contributed to the economy were damaged. Financing being withheld by external sources is also affecting us. Unless we finalize peace and security issues faster and rebuild our image, FDI will drop. Business is slowing down due to mobility shortages and lack of government support. Export is affected,” Ambassador Redwan Hussein, Head of the State of Emergency Communication Secretariat and State Minister for Foreign Affairs, said publicly.

“The impact on the economy is not simple. These difficulties obviously slow the rate of economic growth but it will not reverse the ongoing economic reform. The attention and resources allocated for the law enforcement operation has significantly impacted economic progress. We must prepare ourselves to exponentially increase our efforts, to compensate for the time and resources wasted on this operation,” added the Ambassador.

The Prime Minister, on his part, did not disclose the investment loss due to the destruction nor the resources required to rebuild. However, bridge, road, airport, telecom, electrical, and other infrastructure was damaged, severely affecting the lives of people in the region. For instance, Axum Airport, built with ETB527 million, was damaged extensively.

“Ethiopia’s economy was already entering a recession due to COVID-19,” argues Wasihun. “Reconstruction will take time. Searching for funds, designing projects, floating bids, then undertaking the actual construction is not simple.”

But it is not only public infrastructure that’s damaged during conflicts. “Over 300 investment projects were damaged during the conflicts of the past two years,” Lelise Neme, Commissioner of the Ethiopian Investment Commission (EIC), told journalists during a briefing held last month. “The government is preparing to provide loans for affected investors at low interest rates. Additionally, the government will extend their loan repayment periods, postpone their debts, and also permit the import of equipment and raw materials duty free.”

The Office of the Attorney General disclosed property worth over ETB4.5 billion was damaged by conflicts in Shashemene town in the last two years. “Shashemene has lost most of its infrastructure, factories, and hotels due to conflict and requires significant resources to rebuild,” says Wasihun. “Apart from the physical damage, it eroded the confidence of foreign and local investors.”

Of course, instability and conflict are already affecting the annual foreign direct investment (FDI) flow. Especially after 2010, the annual FDI flow showed continuous growth to reach a record high of USD4.5 billion in 2017. This placed Ethiopia among the top five FDI destinations in Africa. But the flow started to decline in 2018 and was USD2.5 billion last year. In the first quarter of the current fiscal year, FDI flow was USD500 million, 20Pct lower compared with the previous year’s corresponding period.

The government is preparing to pay ETB2 billion in compensation for damaged investments of the last two years, according to Temesgen Tilahun, Deputy Commissioner of EIC. “A new legal framework allowing the government to compensate investors is under preparation. The legal move is especially necessary to attract local and foreign investors.” Further, NBE is also drafting a directive so that commercial banks can provide new loan schemes designed to redress investments damaged due to instability.

Wasihun says the cost of reconstruction and compensation is higher than the cost of conflict. “The government will be forced to divert finds from development endeavors or borrow money from internal and external sources,” Wasihun stresses. “This will fuel inflation, unemployment, and decrease production. This is bad news for the country with a budget deficit of ETB120 billion.”

The ultimate loss
After the war with Eritrea ended, Ethiopia turned towards development by redirecting its resources from militarization. As a result, public expenditure on development activities—mostly infrastructural projects—constituted a larger share of annual governmental spending. In fact, Ethiopia spent 37Pct of its GDP in the last decade to develop public infrastructure. This allowed the economy to grow at an average of 10.2Pct over the last fifteen years.

This trend continued until the nation began to be ravaged by instability and conflict, leading to a surge in spending on public order and security. “Obviously, the instability affected investment and the economy. But it is difficult to calculate its impact on GDP growth,” says Teka Gebreyesus, State Minister for Trade and Industry.

“Economic and trade activities, such as the supply of sesame from north western Ethiopia, declined,” argues Gudeta Kebede (PhD), Lecturer of developmental economics. “The impact of the conflict and instability on GDP growth will not be less than the adverse effect of COVID-19.”

As studies indicate, the rise of expenditure on public order and security adversely impacts economic growth by reducing resources available for productive investment. To support this argument, suffice it to assess how the lack of peace and instability affected the economies of Ethiopia’s neighbors South Sudan, Sudan, and Somalia.

The conflict in Darfur cost Sudan, between 2003 and 2017, USD88.7 billion, according to the International Monetary Fund (IMF). This continues to stunt the country’s economic growth even after the war ended. Two decades of conflict and instability also devastated the economy of Somalia, creating a country poorer today than 50 years ago. Although a government and constitution were established in 2012, Somalia’s annual economic growth rate has continuously declined and is currently below two percent while its debt has reached USD4.7 billion, constituting 100Pct of its GDP, according to IMF.

Conflict and instability are also responsible for making South Sudan the poorest country in the world. Four out of five South Sudanese now live below the international poverty line. Its economy has contracted for consecutive years while inflation is rampant. Between 2015 and 2017, the consumer price index rose by a staggering 1,100Pct.

Ethiopia has also had its fair share of conflicts. In 1975 during the war with Somalia and 1991, ensuant to the instability associated with a regime change, Ethiopia’s GDP growth fell to 2.6Pct. The war with Eritrea cost Ethiopia ETB25.4 billion, equivalent to 18 months of the national budget or close to half its GDP at the time.

Citing how the second World War turned the USA into a global industrial power, some experts believe that increased military spending raises technical competence and economic growth. This is because industries that produce and supply packed foods, clothing, ammunition, weapons, and other related items for the military, are likely to grow.

But if conflict and instability are drawn out, the structure of the economy changes to enter into a war economy as evidenced by the experiences of East African countries and others. “For instance, South Sudan remains in a war economy even after the conflict ended because of the war’s lengthy duration,” explains Gudeta. “The operation in Tigray, however, ended after one month. So, Ethiopia is far from reaching this devastating reality.”

Gudeta agrees. “Ethiopia is not experiencing a war economy, because the government did not augment its budget for the latest operation, nor did it divert resources from other development projects.” EBR

9th Year • Dec 16 2020 – Jan 15 2021 • No. 93


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