the delivery of inputs and extension activities. Sectoral policies included plans related to education, roads, health, and agricultural extension, mainly involving substantial donor-financed capital expenditure. Government has since initiated more policies, strategies, national action plans and programmes in various sectors. Some of the policies of the early 1990s have since been amended, while others are still in their original form. 58. These reforms, combined with peace and favourable weather conditions for most of the past decade, produced good economic outcomes. As a result, Ethiopia’s recent economic performance has been very impressive. From 1992–2001, real GDP growth averaged 6 percent a year. Exports grew by about 5 percent a year, although there was considerable volatility across years. Annual inflation averaged about 4 percent and by 2000/01, investment had risen to 16 percent of GDP. These outcomes are much better than from 1975–91. Positive trends are expected to continue for the foreseeable future. 59. However, growth has been highly variable, reflecting the dependence of the economy on a rain-fed agricultural sector subject to capricious weather. The prices of Ethiopia’s primary export, coffee, have been on a declining trend and so have its terms of trade, especially in recent years when terms of trade declined by some 40 percent between FY00 and FY03, with the collapse of coffee prices. The 2001/2002 drought (which straddled FY 2002/03) was the most severe since 1984/5. Whilst there was widespread hunger and many people died, famine on the scale that Ethiopia endured in the 1970s and the 1980s was avoided. 60. The war between Eritrea and Ethiopia further disrupted this evolution. It unfortunately reawakened memories of the Derg era. Defence expenditure quickly rose again to an average 10 percent of GDP in 1999 and 2000. Most aid flows were frozen whilst public finance and revenue generation capacity weakened, resulting in social sector capital expenditure cuts, and large increases in domestic financing of the fiscal deficit, risking inflationary pressures. 61. Despite this setback, recent overall performance of the Ethiopian economy has been remarkable. The transition from war to peace, and from a controlled economy to a more market-oriented economy in the early 1990s, was relatively smooth, accompanied by a quick return to broad macroeconomic stability. 62. Ethiopia is one of the fastest growing non-oil economies in the world, with double-digit growth. In 2007/8, Ethiopia’s real GDP growth was 11.6 percent, marginally up from 11.5 percent in 2006/07. This rapid growth was driven mainly by the agriculture and services sectors, supported by strong export growth and sustained inflows of official development assistance and foreign direct investment. 63. However, the robust growth performance and considerable development gains from 2003 to 2007 came under threat in 2008 with the emergence of the twin - 55 -