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• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP86T00589R000200250004-5
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 27
• Document Creation Date: January 12, 2017
• Document Release Date: April 22, 2011
• Sequence Number: 4
• Publication Date: June 1, 1985
• Content Type: REPORT

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Directorate of
Intelligence
Ethiopia: Economy in Crisis
ALA 85-10059
June 1985
Copy 3 8 6
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 Directorate of
Intelligence
Ethiopia: Economy in Crisis
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This assessment was prepared byl of
the Office of African and Latin American Analysis,
the Office of Central Keference a
computer support from) of the Office
of African and Latin American Analysis. Comments
and queries are welcome and may be directed to
the Chief, Africa Division, ALA, on F---Ior
Secret
ALA 85-10059
June 1985
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Secret
25X1 analyzed the political and security threat to the Marxist govern-
ment from the worst drought and famine in decades. Another, 25X1
25X1 assessed the impact on the regime of the
decades-old insurgencies in the northern provinces of Eritrea and Tigray,
where, coincidentally, the impact of the drought has been the greatest. This
latest paper takes a broader view of the economic pressures placed on the
government by natural devastation and its own inefficient socialist ideolo-
gy. We caution the reader that, because of the dearth of reliable economic
data on Ethiopia, many of the judgments are necessarily impressionistic.
pia. A recent study,
Scope Note This paper is part of a continuing effort to assess the dimensions of the in- 25X1
creasingly serious internal problems facing the Mengistu regime of Ethio-
iii Secret
ALA 85-10059
June 1985
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 .11.x.1. It
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Ethiopia: Economy in Crisis
Key Judgments Socialist Ethiopia-which celebrated its 10th anniversary in September
Information available 1984-is embroiled in its worst economic crisis to date. Severe drought and
as of 20 May 1985 longstanding production problems have caused agriculture-the backbone
was used in this report.
of the economy-to contract precipitously, and the effects have rippled
throughout the rest of the economy. Moreover, Addis Ababa, nearly bank-
rupt, has been unable to shoulder the burden of a massive relief effort for its
starving population, let alone meet the financial pressures inherent in
spurring growth.)
Although Ethiopia's economic crisis came to a head abruptly, it was a
decade in the making. The Mengistu regime's focus on collectivization,
concentration of resources on state-run agriculture, and low producer prices
stifled development in the all-important agriculture sector. Industry was hit
by nationalizations and resultant uncertainty over the future of the private
sector. Scant progress in settling international nationalization claims held
up disbursement of Western economic assistance. Moreover, recurrent
drought, social and political upheaval, burgeoning domestic insurgencies,
war with Somalia, and deteriorating terms of trade held down growth across
the board and undermined the regime's ability to purchase needed imports.
We see little likelihood that the government this year will take the bold
policy initiatives-such as price adjustments, technical and financial sup-
port to the private sector, and restructuring public spending-necessary to
give the economy new life. Instead, we foresee a continued reliance on donor
aid to feed the drought-devastated rural population, and the intensification
of austerity measures to control balance-of-payments pressures. Moreover,
although Addis Ababa almost certainly will ask for aid from the USSR and
Libya, we doubt Moscow and Tri oli will come through with enough
assistance to ease the crunch.
Ethiopia's economy will continue to deteriorate, in our judgment. Even if
weather is favorable, agricultural activity will be depressed at least through
1986 because the rural labor supply has been disrupted, draft animals have
died, seed and other inputs are in short supply, and the land itself needs time
to recover from drought. Aside from these drought-related problems, several
structural economic constraints will pose additional barriers to development.
These include a paucity of developed human and physical resources, low
domestic savings and investment rates, and a heavy reliance on fluctuating
coffee exports. Thus, even if Mengistu liberalized the economy-a course we
deem unlikely at best-substantial and continuing capital flows would be
necessary to put the economy squarely on the path to development.0
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Ethiopia's continuing economic problems will deepen Addis Ababa's de-
mand for both Soviet Bloc and Western help. Mengistu almost certainly
believes, however, that Soviet security assistance is more important than
Western economic aid in ensuring the survival of his regime, and thus will
seek above all to maintain strong ties with the USSR. I
Relations with the West will be of secondary importance to Mengistu, in our
view, and, because of the premium placed upon security assistance from the
USSR, the West will be unable to wean the regime away from the Soviet
Union with offers only of economic aid. Nonetheless, we expect Mengistu
will be pragmatic enough, if pressed, to yield on relatively minor points-
such as unsettled nationalization claims-in an effort to pry loose some
more Western aid.
Relations with the United States will be particularly prickly because of
Mengistu's deep suspicions of US intentions in the region. US pressure on
the regime is likely to result in a slight moderation of economic policies at
best-and this only if leverage is applied privately rather than publicly.
Secret Vi
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 ALL i [.I.....
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The Domestic Accounts
1
Agriculture
1
Industry
3
External Accounts
4
The Government Response
6
Further Economic Deterioration Likely
7
Supply of Critical Goods
8
Dealing With Financial Problems
10
Economic Restructuring
11
Result: A Faltering Economy
11
Political Fallout
12
Alternative Policy Scenarios in 1985
13
Turning to the East ...
13
... Or Turning to the West
15
Beyond 1985
Implications
16
Mengistu and His Economic Advisers
17
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Figure 1
Drought in Ethiopia
Intense drought
Drought stricken
Resettlement camp
Province boundary
Road
Railroad
0 200 Kilometers
0 2 0 Miles
Tigray ?\ o
\Aek'ele. N
N.
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Ethiopia: Economy in Crisis
The drought, famine, and refugee problems that have
focused international attention on Ethiopia over much
of the past year have tended to obscure the fact that
the country's economic crisis has been a decade in the
making. The government's inefficient socialist policies
have inhibited production and investment, held up the
disbursement of Western aid, and driven away skilled
managers. In addition, recurrent drought, social and
political upheavals, burgeoning domestic insurgencies,
war with Somalia, and deteriorating terms of trade
have combined in varying degrees to cut output,
create dislocations in trade and transportation, and
divert resources to security at the expense of develop-
ment.F__1
These underlying trends increased Ethiopia's vulnera-
bility to economic disruption, and it thus is not
surprising that drought last year helped precipitate a
widespread crisis. Moreover, we see little prospect for
any improvement this year, and Mengistu likely will
have to impose tougher austerity measures if he is to
revive the economy over the longer term. As economic
stresses continue, the potential for unrest from impor-
tant political constituencies will increase.)
Ethiopia's economy deteriorated sharply last year. In
our judgment, economic activity may have contracted
by an average annual rate of as much as 3 percent, in
contrast to the average 3-percent annual expansion
the government claimed for 1982-83 or the almost
1.5-percent annual growth of 1973-75, the period of
the previous catastrophic drought. Neither Addis
Ababa nor international financial institutions such as
the IMF have issued any official estimates of the
downturn, but the magnitude of food shortages re-
ported by relief organizations, the government's se-
vere financial crunch, and a surge in inflation in the
capital city all suggest that the already weakened
economy fared worse last year than during 1973-75.
The First 10 Years:
Economic and Social Restructuring
Major changes were imposed on Ethiopia's economic
and social structure during the revolution's first
decade (1974-84). All land was nationalized soon
after the overthrow of Haile Selassie, and, although
farmers were given user rights to land they were
working before the revolution, the government urged
collectivization strongly. The government also took
control of all banking and insurance firms, shipping,
railroads, airlines, utilities, most large-scale manu-
facturing, and a large part of the construction sector.
Nonetheless, the private sector still dominated handi-
crafts and small industry, domestic trade, and road
transport. n
The government achieved considerable social pro-
gress and a more equal income distribution, accord-
ing to the World Bank, although living standards
remained very low. World Bank reports indicate that
agrarian reform and the abolition of rent paid in
crops-led to an improvement in the food intake and
real incomes of the rural population. We believe this
came at the expense of the urban population and
resulted in a decline in rural-urban income differen-
tials. In addition, the school enrollment rate of
elementary-school-age children increased from 19
percent to 47 percent, and access to health care
services increased from 15 percent to about 40 percent
of the population, according to World Bank statistics.
Even so, health services, housing, and sanitation
facilities are limited, and life expectancy in 1982 was
only about 46 years, compared with 59 for all low-
income countries.
25X1
The Domestic Accounts
Agriculture. Ethiopia's famine alone provides dramat-
ic witness to the downturn last year of the agricultural
sector-which accounts for almost half of national
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Figure 2
Economic Activity in Ethiopia
Dese\? j {
Z Gondar A.,/'
b
~,T~,'Addis_
a'~~
.10 azret
Alp
Principal grain area (teff, sorghum,
barley, wheat, oats, maize)
Coffee Cotton
Nomadic grazing Sugarcane
Oilseed crops
J 'U Textile mill
1% Hydroelectric dam
Petroleum refinery
Cement plant
output and 85 percent of employment, according to the IMF, and the US Embassy had long reported as
the IMF. Having pieced together information from chronic constraints on the sector:
government sources, the US Embassy and relief
groups, we believe agricultural production could have ? Soil degradation caused by erosion, deforestation,
fallen by as much as 15 percent in 1984, compared and primitive farming techniques, and recurrent
with a 3-percent decline in 1973-75. In our judgment, drought and lack of irrigation for smallholders,
however, drought only compounded adverse condi-
tions that such sources as the FAO, the World Bank,
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which limits water control even in years of sufficient
rain, have held down output.
? An underlying population growth rate of between 2
and 2.5 percent annually and accompanying in-
creases in national consumption requirements have
placed added pressures on already overworked land.
? Such government policies as low producer prices,
marketing restrictions, and limitations on interre-
gional grain movements have reduced incentives for
farmers to produce for market. Scarce credit, gross-
ly inadequate extension services, insufficient and
expensive fertilizer and seeds (all a result of the
government's decision to concentrate resources on
state-run agriculture rather than smallholders), and
an increasingly overvalued currency have capped
production of food and export crops alike.
? A continuing civil war has held down food output in
the north.
? Poor roads and misallocations of vehicles, the ineffi-
cient government marketing system, and inadequate
storage facilities have hampered food distribution
throughout the country.
As a result of conditions such as these, the agricultur-
al sector has been in trouble for much of the past 15
years. On the basis of World Bank data, for example,
farm output has grown less than 1 percent annually
since 1970, compared with over 2 percent yearly in
the previous decade. Drought and internal turmoil
caused production to stagnate throughout much of the
1970s, and per capita
output declined markedly. Even a 2.5-percent growth
rate of farm output in the late 1970s and early 1980s
barely covered per capita requirements, and allowed
no recovery to previous consumption levels.)
We believe that subsistence food crops, which,
constitute between one-half and two-thirds of total
25X1 agricultural production, were hit hardest last year.
According to the press and the US Embassy, condi-
tions were particularly critical in the traditionally
food-deficit northern region, where rain had not fallen
in significant amounts for three to four years. Severe
pest infestations and the failure last year of the
seasonal small rains that usually begin about Febru-
ary or March devastated the midyear crop, which
normally accounts for between 5 and 15 percent of
total food production. FAO estimates indicate that
the main basic grains harvest in November and
December of 1984 fell as much as 25 percent below
the average of the previous three years.
In our judgment, state-run and export agriculture
were less affected last year by drought and the longer
term constraints on production, although some losses
probably did occur, particularly in the last half of the
year when the drought intensified and transport bot-
tlenecks almost certainly disrupted the supply of
needed inputs. US Embassy reporting suggests that
water shortages were not as bad in the central region
of the country, where most state farms, which produce
such crops as wheat, sugar, and cotton, are located, or
in the south, where coffee is grown. Moreover, state
farms were somewhat protected from the drought
because, even though they represent only 5 percent of
cultivated acreage, they contain most of Ethiopia's
irrigated farmland and are allocated close to 80
percent of the fertilizer and 70 percent of the seeds
imported by the government, according to IMF data.
In addition, coffee, which provides more than three-
fifths of Ethiopia's export earnings, is fairly resistant
to drought.
Industry. We believe industry, which accounts for
about 10 percent of national output and probably
employs less than 10 percent of the labor force, also
was hit by input shortages and transportation bottle-
necks associated with the drought:
? According to the IMF, Ethiopia's meager industrial
base is largely comprised of agricultural processing
and import substitution (motor vehicle assembly,
metal products, cement, and chemicals) that are
mostly government owned, and cottage industries
that are mainly in private hands. Output is aimed
almost exclusively at the domestic market. Conse-
quently, industry would have been hit on the supply
side by a falloff in basic grain, livestock, cotton, and
fruit and vegetable production, and on the demand
side by sluggish consumer spending.
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 25X1
25X1
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? On the basis of US Embassy reports, Ethiopia's
ports were congested with food aid, and the internal
transport system was tied up with the relief effort
(including the government's resettlement program),
especially in the last quarter of 1984. These trans-
port bottlenecks probably disrupted the supply of
industrial imports and the distribution of finished
goods.
Even before the drought, however, the industrial
sector was reported by the IMF and, World Bank to be
suffering from chronic shortages of raw materials,
modern equipment, and spare parts-which likely
worsened with import cutbacks instituted last year as
the foreign exchange crunch intensified-and from
capacity constraints. Moreover, widespread national-
izations in the 1970s and consequent uncertainty over
the future of the private sector had held back invest-
ment in handicraft and small industry
Services. The government sector and privately owned
services-primarily road transport and domestic
trade-probably made some gains last year, but only
because of the massive, largely foreign-financed, re-
lief effort. If recent trends are any guide, government
spending probably grew on the order of 10 percent
last year, even though Addis Ababa's official response
to the famine was lackluster, according to most press
reports and statements from relief officials. Nonethe-
less, the government provided administrative person-
nel to relief camps throughout the country, undertook
a sizable resettlement campaign to move people from
drought-stricken areas of the north to more fertile
areas in the southern parts of the country, and was
responsible for part of the cost of moving food inland.
The drought was not the only impetus for government
spending. On the basis of official budget statistics, we
estimate that defense spending, particularly on the
northern insurgencies, annually drains almost $400
million in public funds, or almost half of all current
expenditures.' These military allocations are used
mainly to cover foreign and domestic personnel, fuel,
transport, and food costs; expenditures have remained
high since the late 1970s as the regime has responded
to the growing insurgent threat. Although the govern-
ment was to have started repaying its $2 billion arms
sales debt to the Soviet Union last year, we believe
Moscow, realizing the extent of Addis Ababa's finan-
cial crunch, rescheduled the approximately $200 mil-
lion due.
Prices. Further evidence of Ethiopia's economic dete-
rioration is a surge in inflation last year. The IMF
reported that inflation in the capital city jumped to an
annual rate of 30 percent during April through Sep-
tember, and we estimate that it probably averaged
about that for the year as a whole. Although that rate
of price increase pales in comparison with those of
Latin American LDCs and even such African states
as Somalia or Uganda, it is a marked contrast to the
slight price decrease reported in official data for the
city of Addis Ababa for 1983. Moreover, US Embas-
sy reporting indicates that prices in rural areas also
increased significantly last year. F_~
A number of factors probably contributed to Ethio-
pia's domestic inflation. Certainly, shortages of food,
fuel, and other domestic and imported goods pushed
up prices. We also suspect that the financially pressed
government covered a part of its deficit by expanding
the money supply because it was unable to obtain
adequate financing from abroad.' F---]
External Accounts
The malaise in Ethiopia's domestic economy was
mirrored by continued problems with the external
accounts. IMF statistics indicate the financial gap
(current account deficit plus debt amortization obliga-
tions) already had shifted from a $45 million surplus
in 1974 to a roughly $310 million deficit in 1983,
according to IMF statistics. On the basis of prelimi-
nary data from the IMF, we calculate that the
shortfall narrowed slightly last year, but still was a
near record $280 million:
? Export earnings grew only minimally, according to
our calculations, largely because a 10-percent falloff
in coffee sales prevented Addis Ababa from taking
' US Embassy reporting indicates that Addis Ababa also responded
to the deficit b piling up arrearages on debt owed to domestic
suppliers.
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Figure 3
Ethiopia: Selected Economic Indicators, 1980-84
Real GDP Growth
Percent
Composition of GDP, 1983
Percent
Gross Foreign Exchange Reserves,
Yearend
Million US $
25X1
Coffee Productionb
Thousand metric tons
Composition of Exports, 1983
Percent
advantage of higher world prices. Problems were ? On the other hand, on the basis of an assessment of
particularly intense in the last quarter of the year, IMF data, we believe that Ethiopia's imports fell
when a late harvest, a shortage of pickers, transpor- slightly in 1984. Imports rose during the first half of
tation difficulties, and smuggling problems caused the year because of the $120 million purchase of two
exports to fall more than 75 percent below the same Boeing 767 aircraft, but, as financial conditions and
period in 1983, according to US Embassy reporting.
We believe other exports-such as oilseeds, sugar,
fruits, vegetables, and hides-also were hit by
drought and transport bottlenecks.
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Ethiopia: Balance of Payments
Current account
-232
-222
-180
-257
-200
-100
Trade balance
-222
-229
-251
-352
-330
-280
Exports (f.o.b.)
433
384
409
392
400
350
Imports (f.o.b.)
655
613
660
744
730
630
-90
-92
-83
-106
-110
-90
80
99
154
201
240
270
20
-252
Change in gross foreign exchange reserves
- 97
a Estimated, assuming deliveries of $40 million of food aid.
Figures rounded to the nearest $10 million.
b Projected, assuming no change in gross foreign exchange
reserves, capital account inflows at about the 1984 level, and 1.3
million metric tons of food aid worth about $185 million.
transport disruptions worsened, we believe the gov-
ernment cut back its purchases. Indeed, the US
Embassy reports that, by the end of the year, the
Central Bank was refusing requests for foreign
exchange.
? As far as the debt burden is concerned, both interest
and amortization added to the country's foreign
exchange woes. Servicing the approximately
$1 billion nonmilitary debt took up about 30 percent
of merchandise export earnings, according to our
calculations, compared with less than 10 percent in
1980.
Only a raise in transfers-mainly famine-related
aid-provided a spot of relief. F__-]
Addis Ababa was not able to close its growing
financial gap last year through external sources be-
cause, according to our calculations, capital inflows
fell. Soviet financing declined sharply because, unlike
the previous year, Moscow apparently did not sell oil
to Ethiopia on credit.' If data from the first half of the
year are any indication, disbursements from the
World Bank and the African Development Bank-
Ethiopia's two largest institutional lenders-also de-
clined. Moreover, medium- and long-term capital
inflows from private sources probably remained low
because bankers were reluctant to shore up the falter-
ing economy. Only financing associated with the
Boeing deal-Addis Ababa last year had to cover only
15 percent of the package with its own money-and
perhaps increased use of short-term trade credits
slowed the decline.
By the end of the year, therefore, gross foreign
exchange reserves had plummeted to $41 million,
down from $119 million
at the end of 1983. The 1984 level was the lowest in
more than 30 years and equivalent to only two and a
half weeks' import cover.
The Government Response
We believe Mengistu and his inner circle of key
ideologues were late in realizing the intensity and
extent of Ethiopia's economic problems. The govern-
ment, for example, did not stiffen import and pay-
ments controls enough to prevent a continued decline
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in foreign exchange reserves last year. We also see no
evidence that the regime used the media, including
newspaper articles, speeches, and the like, to prepare
the urban population for coming hardships.0
In our judgment, a variety of factors played a role in
the regime's procrastination, including lack of infor-
mation and managerial expertise, poor communica-
tions between various arms and levels of the govern-
ment, and preoccupation with the extravagant 10th
anniversary celebration in September 1984. During
the emergency airlift of food to Mek'ele in October
1984, for example, the head of Ethiopia's relief
organization initially was unable to pry loose trans-
port aircraft from the country's armed forces. The
necessary planes were dispatched only after the resi-
dent Italian ambassador discussed the countrywide
transportation problem with Mengistu. F__1
The regime did little to rectify some of the underlying
causes of the deteriorating economy, such as lagging
exports, inappropriate agricultural policies, and low
investment and savings rates. Instead, Addis Ababa
responded by minimizing the political fallout of the
countrywide economic decline in propping up the
living standards of the military and urban population:
? The government, according to US Embassy report-
ing, ensured that soldiers and their families received
rations of basic foodstuffs, including commodities
no longer available in the capital. It also sought to
meet the equipment needs of the armed forces-
another major concern of the military-with contin-
ued imports from the Soviet Union.
? According to the Embassy, the regime purchased
food on international markets specifically for Addis
Ababa and other urban areas.
? On the basis of trade and financial data and US
Embassy reporting, Addis Ababa resorted to stop-
gap measures and drew down foreign reserves for as
long as possible rather than cut imports sharply.
Early in the year, for example, the government
scrambled to ease its cash crunch by issuing un-
backed checks to foreign suppliers of luxury goods
and by delaying the deposit of funds sent through
the banking system to foreigners and international
organizations resident in Ethiopia.)
The government's response went beyond ensuring
resources for the military and sensitive urban consum-
ers. Addis Ababa also attempted to insulate the cities
from the poor economic conditions by waging a media
campaign. The regime publicized the international
relief effort to show that it was responding to famine,
and, according to Embassy reporting, even used troops
to prevent refugees from entering the capital and
displaying the true dimensions of the problem. At the
same time, the government charged publicly that the
famine was not the result of Ethiopian policies, but of
an inadequate Western response to Addis Ababa's
earlier warnings about the seriousness of the drought.
The government was apparently successful in its
efforts to defuse potential unrest among its most
important backers.
nothing beyond typical sporadic
spot shortages-caused by poor logistics-occurred in
the military, and the delivery of weapons and hard-
ware continued apace. On the basis of Embassy
reporting, we do not believe the government was able
to completely cover urban food and consumer goods
demands, but we suspect that memories of the 1977-
78 "Red Terror" that was imposed by the regime's
security forces muted public outcries.'
Ethiopia's economic policies this year are likely to
continue along the lines already drawn and will not
reverse the economic deterioration. Western donors
probably will continue to concentrate on alleviating
the immediate impact of the crisis, rather than push-
ing Addis Ababa to address its causes. Moreover,
even if foreign governments were willing to press for
fundamental changes in Ethiopia's economic policies
The Red Terror was a government-sponsored campaign to root out
opposition to the regime. Begun in November 1977, it had by
February 1978 resulted in the death of as many as 5,000 people in
Addis Ababa alone, according to published accounts. (u)
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Famine and the Insurgencies
The Mengistu government has been quick to take
advantage of the famine as a means of undermining
the northern insurgencies. The government has re-
fused to authorize the movement of relief aid to
rebel-held areas and has hindered international ef-
forts to reach those most at risk by, for example,
denying travel permits to officials from international
aid organizations. It also has tried to divert economic
resources away from the north; for example, the
regime recently excluded Eritrea and Tigray from an
International Fund for Agricultural Development
project, according to US Embassy reporting. F__1
Moreover, the Embassy reports that Addis Ababa-
perhaps believing that famine and insurgent relief
activities have weakened the rebels'fighting
capabilities-recently has conducted large-scale
sweep operations along the highways in Tigray Prov-
ince. The campaign appears designed to secure the
highways, thereby disrupting guerrilla operations and
logistic.flows and stemming the movement of refugees
into Sudan, where some of them are recruited and
trained for guerrilla operations. F_~
Finally, partly in an effort to undercut support for the
insurgencies, Addis Ababa has embarked upon a plan
to resettle by the end of 1985 some 900,000
northerners-down from the originally planned 1.5
this year, we doubt they would have enough leverage
on the Mengistu regime to be successful. F__1
We do, however, expect Mengistu to maintain policies
pragmatic enough to ensure Ethiopia the support it
needs from the military, urban dwellers, and the
international community. We have no doubts that
Mengistu is ideologically committed to radical social-
ization of the economy, and he has publicly stated
these views on numerous occasions. Nonetheless, he
has proved himself to be a pragmatist willing to slow
the pace of his economic revolution if need be. For
example, according to the Embassy, the government
quickly scaled down the goals of its resettlement effort
from 1.5 million to 900,000 people in the face of
difficult logistic problems. We expect the regime to
react with similar pragmatism throughout the year.
million, but still about one-tenth of the population of
that region-to other areas of the country. The
government, however, has encountered problems sup-
porting the program, and we believe the resettled
population will be unable to harvest a crop before the
end of the year. Addis Ababa, according to US
Embassy reporting, has been unable to provide the
seeds, equipment, and animals necessary for plant-
ing-not to mention the medical care, facilities, and
food needed to keep the new settlers healthy. Unfa-
miliar farming techniques, ethnic tensions, and spon-
taneous repatriation to the north also are slowing the
transformation to food self-sufficiency.
We believe that, over the longer run, the regime is
likely to concentrate more resources on the resettle-
ment areas than on extension services in the north-
particularly if the newly settled land is collectivized.
In our judgment, the combination of more fertile land
and continued government attention to the program
will allow the resettlement areas to produce more
food than similar plots in the north. Nonetheless, the
continued provision of substantial amounts of govern-
ment aid would increase the likelihood of the pro-
gram becoming a long-term drain on government
finances-especially if the farmers were allowed to
keep most of their food rather than selling it to the
government. F__1
Supply of Critical Goods
On the basis of the attention Mengistu has paid so far
to the loyalty of the military, we believe his priority is
to ensure it sufficient food, fuel, and other supplies.
During the recent petroleum crunch, for example,
military aircraft received fuel while relief planes were
grounded, according to the US Embassy. If potential-
ly serious food shortages develop in the armed forces,
as some US Embassy sources expect, we believe the
government would not hesitate to divert relief ship-
ments to the military. Moreover, on the basis of the
relatively greater importance the regime has placed
on urban areas, we believe the government is willing
to seize private supplies stored in rural areas to deliver
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The intensification of Ethiopia's economic problems
subtly alters the leverage available to Addis Ababa,
Western capitals, and Moscow in their dealings with
one another. Some of the actors involved will aggres-
sively continue to take advantage of these changes to
achieve various political goals, and tensions between
major players almost certainly will rise=
Addis Ababa can use its economic woes to stimulate
international official and public support for increased
aid flows, to cleave Western allies on their policies
toward Ethiopia, and to push for softer conditionality
on Western aid. The government already has em-
ployed the first two tactics. Addis Ababa's continued
willingness to host foreign government and press
representatives, for example, obviously has been
aimed at generating worldwide sympathy-and aid.
The propaganda gesture in early March, when the
Ethiopian Foreign Minister called in Western ambas-
sadors to decry alleged US plans to "send thousands
of trucks and aircraft" into Ethiopian territory to
deliver relief supplies, was an equally obvious at-
tempt to divide Western governments.
In addition, Mengistu could continue attempts to
extract more assistance from Moscow by highlighting
the growing Western involvement in Ethiopia. The
Soviet Union, according to US Embassy reporting,
objected to the stepped-up Western presence. After
Mengistu visited Moscow in December 1984 to dis-
cuss the famine, however, the USSR came through
with a modest amount of economic aid. F-1
Ethiopia's economic troubles and the accompanying
rise in Western exposure in the country increase the
West's leverage over Addis Ababa, because the cessa-
tion of trade, aid, and commercial ties to Ethiopia
would have a greater impact now than before. OECD
countries could apply pressure in an effort to liberal-
ize Ethiopia's economic policies, moderate the go-
vernment's foreign stance, or reduce internal repres-
sion. The amount of leverage applied, however, is
heavily dependent upon the degree of cooperation
among the participating governments. F_~
Although the provision of substantial amounts of
food aid has increased US leverage over Ethiopia, the
overall level still is limited. US food aid is distribut-
ed in rural areas, which are not a high-priority
concern of the Mengistu government. Moreover, the
United States alone is unable to exert much pressure
on the regime in trade and financial matters; coffee-
Addis Ababa's major export to the United States-is
in demand in other markets as well, and US banks
and investors have only a small exposure in Ethiopia.
Given Mengistu's nationalism and deep distrust of
the United States, we believe public pressure for
policy changes would only serve to stiffen the
regime's resolve to oppose US positions. We believe
Mengistu's public strategy would be to deflect atten-
tion away from the issue without fundamentally
changing his policy stance. Addis Ababa's agreement
in March to undertake feeding activities in the north
reflects this approach, because the sites chosen al-
25X1 Addis Ababa's ability to gain aid is likely to wane in
coming months. As famine spreads through the Afri-
can continent, donor governments will have to make
tough decisions regarding the allocation of limited
food resources among increasing numbers of coun-
tries at need. Widespread publicity over famine in
other African countries could push the Ethiopian
problem from the forefront of public awareness, with
a consequent falloff of private contributions. More-
over, adverse publicity over the regime's policies
toward such issues as resettlement and food for the
rebel-held areas has the potential of weakening both
official and public support. F_~
ready are government-feeding areas.
We see no major changes in Soviet leverage over
Addis Ababa. We believe Moscow will continue to
provide military aid, and Mengistu's need for this
equipment will keep Ethiopian-Soviet ties strong.
Moreover, we believe Addis Ababa's desire for these
goods will more than counterbalance any discontent
over the paltry amount of relief assistance that
Moscow has given. F__1
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to the cities. In fact, US Embassy reporting indicates
that a disproportionate share of Ethiopia's scarce
transport resources were bein used to move food to
the capital earlier this year.
$800 million promised under the Tripartite Agree-
ment of 1980 and has not been pleased with Ethiopia's
use of some of the funds,
Political concerns also will dictate the government's
policies on the supply of food to famine-stricken areas
and refugees, in our view. Addis Ababa has made no
secret that it will rely on Western donors to feed the
rural population, and we believe that, as conditions
worsen in government resettlement camps, donors-
who thus far have been reluctant to openly support the
coercive program-will be pressured to expand feed-
ing operations there. At the same time, Addis Ababa
will continue to oppose food relief for rebel-held areas,
especially if such aid gets much publicity. Even
though an agreement reached in Geneva last March
between Western donors and the head of the govern-
ment's relief organization calls for more food aid to
the rebel-held north, the regime is willing to allow
distribution only in areas clearly under government
control, according to the Embassy. Moreover, the
Embassy reports that some food aid under govern-
ment control has been shipped to resettlement areas
instead of the north, as intended; we expect these sorts
of diversions to continue.
25X1 Dealing With Financial Problems
The government is likely to continue its patchwork
approach to the financial crisis. We believe the regime
already has asked and will continue to petition the
Soviet Bloc for more aid. Moscow is likely to come up
with some project assistance-for example, an irriga-
tion project agreement recently was signed-but
probably will not furnish enough new aid to ease
substantially the payments crunch. Indeed, the US
Embassy reported that a recent jet fuel shortage was
caused because the Ethiopian Government failed to
allocate sufficient foreign exchange and Moscow re-
fused to deliver without a cash payment.' Nonethe-
less, we do believe the Soviets will provide sufficient
aid to prevent serious threats to Mengistu's hold on
power, and may further reschedule repayments on
Ethiopia's military debt.
25X1 Mengistu could turn to Libya, but we doubt Qadhafi
would come through with large amounts of new
assistance. Tripoli already has disbursed much of the
market has placed Libya in a financial bind of its
own. Finally, on the basis of some of his statements,
Qadhafi, in our judgment, may think he lacks suffi-
cient support from Ethiopia in various political are-
nas, such as the OAU, to make further large invest-
ments worthwhile.)
In the absence of substantial external support, the
government probably will have to widen its recently
announced austerity program. We do not believe the
measures-proclaimed in February and tightened in
March-will be enough to completely ease financial
pressures. Mengistu has called for strict petroleum
rationing and import cutbacks, including banning
importation of automobiles, "unnecessary" luxury
items, and textiles. In addition, Mengistu has imposed
a national drought-relief tax-similar to a decree
enacted during the 1973-75 drought-that will equal
one month's pay for all workers, and has declared that
all Ethiopians will be called on to serve tours at relief
shelters and resettlement camps.F_~
Other strategies for dealing with the financial crisis
also are available. We believe continued rejiggering of
the budget and development plan-perhaps including
some consumer price increases-and more widespread
import cutbacks are likely. In addition, Addis Ababa
could sell more of its roughly $60 million in gold
reserves, consummate a deal with Iran to sell all or
part of its aging fleet of F-5 fighter aircraft, begin to
build up arrearages-a practice not followed in the
past-or seek a rescheduling of its nonmilitary debt,
first through bilateral approaches and only secondari-
ly through the Paris Club.6l
The government also might overcome its unwilling-
ness to go to the IMF, which, if official pronounce-
ments are any guide, it apparently views as an arm of
6 The US Embassy reports that in January this year Addis Ababa
sold some 13,000 troy ounces of gold, then worth about $4 million.
Addis Ababa, according to US Embassy reporting, has offered
virtually its entire fleet of F-5s to Iran at a total price of $63
million. Although the Ethiopian Government technically must
request US permission to sell the planes, we doubt it will do so if the
deal is set.
' In our judgment, the shortfall likely also resulted from Moscow's
continuing difficulties this year in producing and supplying crude
25X1
25X1
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25X1
US foreign policy. We believe Addis Ababa would
concentrate its efforts on obtaining cc`npensatory
financing for export shortfalls and would only reluc-
tantly undertake negotiations for a standby arrange-
ment. The Fund, however, would require politically
unpalatable measures such as a devaluation of the
birr, which is pegged to the US dollar, in return for a
standby. As a result of the perceived political cost of
such measures, we believe there is a good chance that
Ethiopia soon would fall out of compliance with the
Fund.
Economic Restructuring
We do not believe the economic crisis will lead Addis
Ababa to change its socialist development path. In our
judgment, environmental, financial, and ideological
constraints will sharply limit the government's ability
to spur agricultural production in the short run, and
we expect only minimal adjustments in agricultural
policies. Indeed, the US Embassy has reported that
Addis Ababa is backing off from producer price and
other adjustments recently agreed to with the World
Bank because the regime, under pressure from some
Western governments to liberalize agriculture, in-
creasingly views the issue in political terms. More-
over, although we do not rule out some modest
increase in producer prices, we doubt the government
has the money to fully offset the 10- to 20-percent
decline in real producer prices that occurred just from
1980 to 1983. We believe that the government also
lacks the funds to substantially increase supplies of
consumer goods to the peasants-an inducement to
produce for market-or improve extension services,
including the provision of agricultural inputs, im-
proved technology, and credit. Given the current cash
crunch, such a program probably would involve sub-
stantial reductions in resources available to state
farms, which would be ideologically unacceptable.
Instead, we believe Addis Ababa will continue using
its economic and financial troubles to expand control
over economic activity. The government already has
pushed the relatively few remaining private traders
out of the coffee export market in an attempt to
control sales, and has
turned bread, fruit, and vegetable distribution over to
the kebeles-neighborhood associations to which all
urban Ethiopians must belong. The transport of over
2,000 party cadres to organize the 360,000 people
already resettled suggests that the government will
continue its efforts to collectivize agriculture. The US
Embassy has reported rumors that the regime will
also soon monopolize imports of tires and spare parts.
The effects of drought and Addis Ababa's probable
responses will ensure continued economic deteriora-
tion this year. US Embassy reporting indicates that
carryover stocks from the poor harvest in November/
December will be be exhausted by mid-September,
and we believe the minor crop due to be harvested this
June will not fill the remaining gap. The disruption of
rural labor supplies by massive refugee flows and the
government's resettlement program, a lack of seeds,
draft animals, and other inputs, the late arrival of the
small rains, and pest infestations could cut production
by one-fourth, according to the US Embassy. More-
over, we do not believe these problems will be over-
come in time for the main harvest this winter. Market
and transport problems will continue to inhibit distri-
bution of the crops that are grown. 0
Under these circumstances, we believe the food crisis
will worsen, and official estimates of the number of
people at risk are likely to climb above the current 7.7
million. As more people are considered to be at risk,
the 1.3-million-metric-ton emergency food aid re-
quirement established by the United Nations and
Addis Ababa's relief organization in December 1984
will become increasingly outdated. Recent cutbacks in
Canadian and EC food aid suggest, moreover, that
donations will not even reach the December estimate,
and much of the food that already has arrived has not
been distributed. As a result, famine and disease-
particularly cholera, measles, and pneumonia-are
likely to spread to other parts of the country. Food
shortages likely will worsen in the cities, although we
do not believe conditions will be nearly as desperate as
in rural areas. Economic dislocation will be particu-
larly severe in the north, where we estimate at least
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one-third of the population will have moved to Sudan
or to feeding camps in government-controlled areas or
have been transported to resettlement sites by the end
of the year. F_~
Other economic activity is likely to be dragged down
as well. The US Embassy reports that coffee bushes
flowered sparsely and berries matured late as the
drought marched south, and quality as well as quanti-
ty of production probably will be affected. We believe
other commercial crops-such as oilseeds, fruits, and
vegetables-have been hit not only by drought, but
also by shortages of fertilizer, pesticides, and agricul-
tural equipment on the state farms where they are
grown. We expect the small industrial sector to be
increasingly strapped by input constraints caused by
reduced production of domestic agricultural products,
import cutbacks, and transport problems that will
disrupt distribution. F___]
Looking at the external economy, we judge that
balance-of-payments problems will continue to plague
Addis Ababa:
? We expect export earnings to drop significantly,
possibly to $350 million. Embassy reporting sug-
gests that Addis Ababa may not be able to meet its
International Coffee Organization quota of almost
90,000 metric tons because of production problems,
lack of trucks to transport coffee to the ports, and
increased smuggling. Moreover, most experts expect
world coffee prices to fall this year as exports pick
up elsewhere in response to quota increases. Sales of
other agricultural products-livestock and commer-
cial crops-also could drop.
? Commercial grain purchases will continue to eat up
foreign exchange revenues. We estimate that it
would cost the government about $70 million to
cover the capital city's grain needs for one year
using only spot purchases on the world market and
no domestic supplies. We doubt, however, that the
regime will have to pay out this much; if it were to
cover only three-fourths of the country's needs with
imports and obtain deals such as the one recently
concluded with the French, this year's foreign ex-
change costs would drop as low as $15 million.
? Amortization payments will grow by one-fourth, to
reach about $100 million, according to our
calculations.
? Addis Ababa cannot afford to further draw down
reserves. F-1
On the basis of the critically low level of foreign
exchange reserves and in the absence of extraordinary
increases in export earnings-such as the sale of
Ethiopia's F-5 aircraft-or increased capital account
inflows, non-food-aid imports necessarily will drop
this year. Addis Ababa already has taken some steps
to reduce its import bill. On the basis of Ethiopian
trade data from previous years, we believe the an-
nounced cessation of durable consumer goods and
textile purchases will cut imports by some $80 million.
The regime's petroleum conservation campaign
should net some additional foreign exchange savings;
if Addis Ababa were able to cut total oil consumption
by one-fourth-admittedly a herculean feat consider-
ing the oil used by the military and in resettlement
activities-Ethiopian trade statistics lead us to believe
that the petroleum bill would fall $40 million or so
this year.
Addis Ababa, however, likely will have to cut back
even further to make ends meet. We expect the
government to concentrate its next efforts on capital
goods, which generally account for one-third of all
purchases, and raw and intermediate goods, which
make up almost one-fifth of the import bill. Under
these circumstances, the small industrial sector would
be hardest hit. Because durable consumer goods
imports have been banned, any further attempts to cut
consumer imports probably would require reductions
in commercial food purchases-potentially a political-
ly explosive move, and therefore likely to be taken
only as a last resort. F__1
Political Fallout
Ethiopia's economic problems and the government's
probable responses will contribute to political instabil-
ity and the prospect of coup attempts. On balance,
however, we believe Mengistu will be able to hold on
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to power because he will successfully manipulate the
political constituencies-the military and the urban
population-needed to maintain control. Indeed, if
previous research is any guide, deteriorating economic
conditions per se are not likely to endanger govern-
ments.' Rather, it is the skewed impact of recession-
and of attempts to cure it-on politically important
groups that is threatening. In that regard, we expect
Mengistu to try to insulate especially his military
power base from hardship as much as possible.
25X1 Increased spot shortages or reductions in military
rations could occur, but overall we believe Mengistu
will ensure that the Armed Forces receive adequate
provisions of food and materiel. Moreover, we believe
Mengistu will give the military additional benefits;
the recent promotion of a large number of senior
officers, for example, may have been the regime's
attempt to ease dissatisfaction over austerity mea-
sures. In addition to these inducements, however,
Mengistu will continue to monitor the military closely
for any signs of dissent and, in our judgment, will
move quickly and effectively against potential trou-
blemakers.
Urban areas will not fare as well despite the govern-
ment's attempts to purchase food commercially and
truck in stocks from outlying areas. The US Embassy
is increasingly reporting shortages of food and other
basic commodities, and living conditions for the aver-
age city dweller are likely to deteriorate further in
coming months as the government implements addi-
tional austerity measures and as industrial output
falls. Moreover, the Embassy reports that the
drought-relief tax announced in February is expected
to break many small businesses and make Ethiopian
workers with no savings on which to draw dependent
on special allowances to live. Inflation and black-
market activities will continue on the upswing as
shortages become more pervasive. F_~
25X1 Urban unemployment is likely to grow as economic
activity decelerates. To this end, Mengistu's recent
call for all Ethiopians to work for a time in relief
shelters-although probably designed primarily to
highlight the government's role in addressing the
famine and drive home the urbanites' higher standard
of living compared with the drought-devastated rural
poor-may also have been planned to sop up idle
workers. The regime also could increase military
inductions from the ranks of the unemployed as it has
before.)
As overall living standards worsen, we believe Men-
gistu is likely to step up his publicity campaign
stressing the need for austerity in the face of a
countrywide natural disaster. He also will rely on his
spies-both within the military and the civilian
kebeles-to find and report on emerging discontent,
which the regime's security forces will quickly crush.
The US Embassy reports that, although discontent is
at record levels in Addis Ababa, residents are careful
to complain only in private conversations, because
they are frightened and because there are no indepen-
dent organizations, such as labor unions, through
which they can voice dissent. Moreover, many civil-
ians, according to the Embassy, fear that a successor
regime would be even worse than the current one.
If all else failed and serious unrest erupted in the
capital, the kebeles and the Army probably could
maintain order, at least initially. Moscow would be
likely to continue its unwavering support for Mengistu
and, along with the Cubans, probably would supply
additional security assistance to contain a regime-
threatening outburst.)
Turning to the East ...
Mengistu, in our view, might contemplate long-term
economic integration with the Soviet Bloc in an
attempt to gain more economic aid or as a reaction to
concerted pressure applied by the West to restructure
the economy or moderate Ethiopia's foreign policy. As
part of this strategy, he would try to interweave
Ethiopia's economy with that of the USSR through
such moves as shifting trade largely to the Soviet
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Soviet Economic Aid:
Comparison and Contrast
Ethiopia's economic relations with the USSR are
relatively limited, and it is the West, rather than the
Soviet Bloc, that remains the primary source of
Ethiopia's nonmilitary trade and aid flows. Moscow's
leverage over Addis Ababa is gained through its arms
deliveries, which have totaled about $3 billion since
1974. The $2 billion debt incurred from these sales is
denominated in hard currency, but we believe Mos-
cow has rescheduled payments that were due to begin
last year. Moscow also almost certainly helps cover
the cost of the approximately 5,500 Cuban military
personnel-down from 9,000 to 11,000 in 1983-that
are stationed in Ethiopia.F--]
25X1 Ethiopia's economic relations with the USSR differ
from those of economically dependent Communist
client states, such as Cuba, Mongolia, and Vietnam,
in several key aspects. The level of Soviet aid flows
and Moscow's involvement in Ethiopia's economy are
substantially less. Trade transactions are carried out
in hard currency rather than soft, and Addis Ababa
does not receive a subsidized price for exports to the
USSR, as does Cuba. Moscow also does not extend
balance-of-payments support to cover trade deficits.
Nonetheless, Addis Ababa does receive some
concessions-oil subsidies and commodity credits-
that are granted to few other nonclient LDCs.F-----]
Bloc-which now accounts for about one-third of
imports and less than 5 percent of Ethiopia's ex-
ports-and allowing greater Soviet input into econom-
ic policy making. F__]
25X1 We do not think this course is likely. Mengistu and his
advisers almost certainly realize that Soviet aid gener-
ally is paltry and Soviet goods are of poor quality.
Moreover, Moscow's aid program traditionally does
not supply direct hard currency support and only
meager food assistance. Finally, we believe Mengis-
tu's desire for autonomy will limit his willingness to
increase Ethiopia's economic dependence on the Sovi-
et Union
Almost all of Ethiopian-Soviet trade-which gener-
ally accounts for about 15 percent of Ethiopia's total
nonmilitary trade-consists of Addis Ababa's oil
imports. Moscow has met nearly all of Ethiopia's
crude and refined petroleum needs since 1980. The
USSR offers the crude oil at a discount from world
prices but has insisted on increasingly tough terms
during renegotiation each year, according to US
Embassy reporting Mos-
cow also provides small amounts of machinery and
equipment. Ethiopia's exports to the Soviet Union
generally are negligible in value and consist mainly of
agricultural products.
economic aid since 1974,
compared with more than $1.5 billion in official
development assistance from the West. About half of
Moscow's aid has been in the form of commodity
credits and oil subsidies-an unusual concession by
the USSR when dealing with a Third World ally, and
one also granted only to Afghanistan. Ethiopia is the
second-largest recipient of Soviet aid extended to
Sub-Saharan Africa, behind Nigeria.
On the Soviet side, Moscow has sufficient leverage on
Ethiopia with current arms deliveries, and we do not
believe the USSR is willing to take on the burden of
another economically dependent client state. Econom-
ic stringencies at home have brought about a converg-
ing interest in both the USSR and Eastern Europe to
keep economic aid levels from growing. In addition,
concessionary grants make up only a small part of the
Soviet aid program, and Moscow instead emphasizes
assistance projects in LDCs that benefit its own
economy. If the Soviet Union did perceive the Men-
gistu regime to be under a direct threat caused by
25X1
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economic problems, we believe Moscow would re-
spond with military and security su ort rather than
stepped-up economic assistance.
... Or Turning to the West
We agree with the US Embassy assessment that
chances are remote that Mengistu over the coming
year will reverse his present policies in favor of a
large-scale economic reform program designed to
revitalize the private sector. To lay the groundwork
for significant economic progress, such a program
would have to include: disbanding agricultural collec-
tives, returning nationalized property to the private
sector and settling compensation claims, freeing
prices, and rationalizing budget expenditures. The
last move probably would require cuts in defense
spending-now accounting for two-fifths of current
expenditures-which would weaken the regime's abil-
ity to deal with the debilitating northern insurgencies.
Moscow's response to such a strategy probably would
be muted as long as the regime did not permit major
increases in Western influence or sever its military
relationship with the USSR. Indeed, Moscow might
acquiesce if the strategy resulted in Western aid flows
large enough to reduce the Soviets' need-and Men-
gistu's requests-to provide economic support. F__1
25X1 Wide-ranging economic liberalization, however,
would not be a quick fix to Ethiopia's problems
because the country lacks the physical and social
infrastructure to support sustained, balanced growth.
Even if reforms were undertaken, therefore, substan-
tial and continuing Western capital flows-far above
the recent average annual levels of $200-250 million
coming primarily from the EC, the World Bank, =
would be
25X1 necessary to build a foundation for expansion. F1
seasonal main rains come, about another l million
metric tons of food aid will be required next year to
cover consumption requirements. The longer the con-
tinentwide famine lasts and the wider it spreads,
however, the lower the probability that donors will be
willing to cover so much of Ethiopia's needs. Refugee
flows and deaths, therefore, are likely to stay high.
Drought and famine aside, severe structural problems
will continue to impede economic development at least
through the remainder of the decade. A paucity of
physical and human resources-as evidenced by poor
transport and communications systems, and low
adult-literacy and life expectancy statistics-will cap
growth potential. Ethiopia will be unable to generate
the level of investment necessary to spur development;
a continued heavy reliance on fluctuating coffee
exports will limit foreign exchange earnings; and
official development assistance flows probably will
remain relatively low because of increasing donor
budget constraints! Moreover, high spending on com-
bating the northern insurgencies will continue to drain
economic resources from development. The govern-
ment's socialist economic policies will only intensify
these problems. F__1
A lack of substantial capital inflows, a dearth of
domestic capital, and susceptibility to recurrent
drought and famine will, in our judgment, translate
into continued economic problems and, probably,
declining living standards over the next several years.
Under these circumstances, increasing numbers of
people likely will turn to subsistence livelihoods, and
the black market will account for a growing share of
economic activity. Corruption will increase. Pressures
for economic liberalization will grow, as they have, for
example, in Somalia, Sudan, Tanzania, and Cuba.
25X1 The economy will become an increasing liability of
the Mengistu regime over the next few years as the
We expect the effects of drought to plague Ethiopia at
least through 1986 and perhaps longer. Moreover,
without the kind of fundamental and wide-ranging
policy changes outlined above, the country will be no
better able to deal with future crises than it is now.
Indeed, the US Embassy estimates that, even if the
8 Ethiopia receives only about $6 per capita annually in Official
Development Assistance, compared with about $20 annually for all
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government finds it more difficult to cover military
and urban consumption requirements. The danger of
instability most likely will come from the military, in
our judgment, and Mengistu, realizing this, will no
doubt try to defuse the threat by attempting to
concentrate resources on the armed forces at the
expense of the rest of the population. We do not
expect declining living standards and increasing num-
bers of unemployed to quickly translate into urban
unrest because people have been cowed by the regi-
me's pervasive security apparatus, expectations for
improved living standards are not high, and the
relatively small urban population will be more preoc-
cupied with covering basic consumption requirements.
Rural dwellers-who constitute about 85 percent of
Ethiopia's population-are isolated and, barring con-
tinued drought, are largely self-reliant.F_~
25X1 Implications
Ethiopia's economic problems clearly will deepen
Addis Ababa's need for both Soviet Bloc and Western
support. On the one hand, Mengistu is sure to contin-
ue to view the Soviet Union as the ideological model
to justify rule by a small clique, as well as the source
of military materiel necessary to maintain the support
of the armed forces, battle the northern insurgencies,
and offset Somali irredentism. On the other hand, the
regime will require increasing amounts of Western
assistance to prop up the battered economy. F___]
Mengistu almost certainly believes that Soviet securi-
ty assistance is more important than Western econom-
ic aid in ensuring the survival of his regime, and thus
will seek above all to maintain strong ties to the
USSR. Moscow, for its part, is sure to promote close
Soviet-Ethiopian ties in order to retain access to
facilities useful in supporting Soviet naval forces in
the Indian Ocean and Persian Gulf.
This is not to say, however, that relations with the
Soviet Union will run smoothly. We believe that
Mengistu will strongly resist efforts to rein in his
autonomy and flexibility in governing Ethiopia, and
that he probably will continue to be dissatisfied with
the level of Soviet assistance. Moscow, on the other
hand, will keep pressing for change in Ethiopia that
will institutionalize its influence and ensure a long-
term role for the Soviet Union in Ethiopian affairs.
Given his ideological and security concerns, relations
with the West will be of secondary importance to
Mengistu. In our view, the West would be unable to
wean the regime away from the Soviet Union with
any realistic offers of economic assistance. On the
contrary, the regime has been successful in gaining
Western economic aid over the past decade without
substantially altering its socialist economic policies.
Nonetheless, we expect Mengistu will be pragmatic
enough to yield on relatively minor points-if
pressed-in an effort to pry loose some additional
Western aid.
Relations with the United States will be particularly
prickly because of Mengistu's continuing deep suspi-
cions of US intentions in the region. As a result, we
doubt that Mengistu will attempt to attract much US
aid as long as he can continue to glean economic
assistance from other Western countries,
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Secret
Appendix
Mengistu and His Economic Advisers
Mengistu Haile-Mariam has become his country's
preeminent political figure through his control of
Ethiopia's top government, party, and military posi-
tions, as well as his demonstrated willingness to wield
power by the use of terror, purges, and imprisonment.'
He dominates economic decision making as he does in
virtually all other government matters, and policy
decisions are made on political, rather than economic,
grounds. Nonetheless
and pragmatic leader re ies on a group of moderate
25X6 technocrats to run the economy on a day-to-day basis.
Mengistu's Economic Advisers: Sign of a Pragmatic
Approach
Mengistu has several key advisers on economic
affairs:
? Addis Tedla, deputy chairman of the National
Revolutionary Development Campaign and of the
Central Planning Supreme Council and member of
the Standing Committee of the Provisional Admin-
istrative Military Council (PMAC).
? Wolle Chekol, Minister of Foreign Trade
? Berhanu Bayeh, Minister of Labor and Social Af-
fairs, member of the PMAC Standing Committee,
and chairman of the National Relief Coordinating
Committee.
? Goshu Wolde, Minister of Foreign Affairs.
These men share many common characteristics that
ease their interaction with Western officials. They are
all experienced government administrators, who have
held positions in the regime for many years. They are
experienced in dealing with foreign governments and
' He is chairman of the Provisional Military Administrative
Council, general secretary of the Worker's Party of Ethiopia
(WPE), and Commander in Chief of the Armed Forces. (u)
have attained international credibility for their abili-
ties. Moreover, they are generally more moderate and
pro-Western than most of their colleagues in Ethio-
pia's Marxist-Leninist government, and almost all
privately favor improving relations with the West,
including the United States. They speak English, and
almost all of them have received training in the
United States; two (Goshu and Wolle) have advanced
degrees from US universities.
The five do not, however, pose a political threat to
Mengistu. They have no authority to make critical
decisions in their areas of responsibility, according to
US Embassy reporting. In addition, note Embassy
officials, they lack independent power bases.F__-]
These shared characteristics strongly suggest, in our
judgment, that Mengistu selected these economic
advisers at least partly to smooth Ethiopia's relations
with Western governments so as to obtain increased
economic aid. We believe the five-although occa-
sionally harshly critical of Western actions-serve, in
effect, as buffers between Mengistu, who closely
identifies with the USSR and is committed to a
Soviet-style regime in Ethiopia, and his major sources
of aid.
25X1
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