Increased openness is seen by some as a panacea for development while for others it is a recipe for disaster for the poor. Using the example of Ethiopia, this paper discusses some of the key challenges faced by some of the poorest African countries to beneficially engage in the world economy. Worldwide income growth has largely bypassed many African countries, and large parts of their populations risk increasing marginalization.

This paper documents the challenges faced by one of these countries, Ethiopia, by highlighting first the impact of a first wave of liberalization in the early 1990s, using the evidence from a rural panel data set. It was found that while liberalization had some positive effects in this particular period, the benefits were largely confined to those with good assets, not least in terms of geography and road infrastructure. In subsequent years, access to infrastructure seems to have been causing even further growth and poverty divergence within rural Ethiopia.

This evidence suggests that access to better infrastructure and communications will be key to have beneficial effects of further liberalization and engagement with the world econoy. Finally, we find some evidence that liberalization has shifted the nature of risks towards a higher incidence of market related risks with an impact on households, such as sudden output price collapses or input price increases. While it is not possible to infer from this that vulnerability to poverty has necessarily increased, one would need to recognize that these shifts in risk will require different responses from households themselves and from policy makers