Ethiopia is one of the poorest countries in the world. At least 45 per cent of the population cannot meet their minimum basic needs. Human development indicators are amongst Africa's worst, including a very high level of illiteracy. The country was devastated by prolonged war, and has been reconstructing since 1992. The government has also engaged in economic reform to correct the policy distortions inherited from the Marxist-Leninist government of the Derg. Growth has increased but it has not yet had large benefits for the rural or urban poor. Thus, poverty reduction must be systematically incorporated into Ethiopia's development efforts. Given the scarcity of resources, careful choices must be made, and realistic priorities must be set in order to maximize the benefits of public spending to the poor. Priorities must include investment in the rural road network which will improve the integration of markets (and thus food-security), as well as the development of off-farm employment. Considerable effort must be made to boost the productivity of smallholders through improving the system of input-supplies, better extension, and micro- credit. Within the area of human development, needs are so large, that rapid improvement should be sought through the use of innovations in community-based service delivery. Facilitating informal safety nets, and providing cost-effective public safety nets to offset shocks such as drought, are also priorities. The dismantling of the socialist economic system has made it possible to expand activities of relevance to the poor. But the present war with Eritrea threatens further progress. If it can be brought to an end, the prospects for poverty reduction in Ethiopia are considerable.