4. Economic Policy and Performance

In the transition from centralized military rule to federalism in Ethiopia, an economy ruined by war had to be reformed extensively if it was to be viable at all. While environmental related shocks in the agricultural sector explained part of the dismal growth, the disappointing economic performance of the period was largely a reflection of poor economic management, a hostile business environment, and prolonged civil war. After the collapse of the military regime in 1991, the Transitional Government of Ethiopia embarked on the Stabilization and Structural Adjustment Program (SAP), adopting a new economic policy geared toward transforming the command economy to one based on the market and calling for an increase in private sector activity and a significant decrease in the role of the state in the economy. This policy was linked to donor demands for liberalization, making the state dependent on outside resources for economic reconstruction and territorial decentralization. The state’s role was to be confined to regulation and mapping out strategies for overall national economic development.