AS Policy Debate: Unlocking private sector’s powerhouse in the big three: Land, Finance and Communications

This breif article will discuss three areas that the current administration ought to look into as part of its plan to bolster the role of the private sector in a bid to realize the country’s vision of graduating to Low and Middle Income Countries (LMIC) by 2025:

Belachew Mekuria (PhD), for Addis Standard

Addis Abeba, January 03/2019 – What a government can do in leading a transformation agenda has limits, particularly considering the excessive overheads that it operates under and its limited capacity in the creation of massive jobs that our generation is in dire need. The power of the private sector to thrive through innovation, building on new ideas by continuously employing entrepreneurial skills and finding new ways of doing things in a more efficient manner has no bounds. Ethiopia’s experience with the private sector can at best be described as repeated attempt to attract same from outside instead of unlocking the one within. It is, in other words, less organic and ultimately very fragile due to its excessive reliance on foreign capital/skills.

More importantly, the government has dominated the economic life of society for far too long particularly through undesirable monopolies of areas where the private sector would have played a leading role in helping the country reach where it aspires to reach in a shorter time-frame. This breif article will discuss three areas that the current administration ought to look into as part of its plan to bolster the role of the private sector in a bid to realize the country’s vision of graduating to Low and Middle Income Countries (LMIC) by 2025. The driver of the vision being massive job creation in the productive industries coupled with enhanced efficiency in the agriculture sector, private agency must be brought to the front burner.

The three broad policy issues briefly discussed below (land, finance and communication) have for long been dominated by government’s heavy hand throughout modern history of Ethiopia.

Land

A subject yet to resurface in the discussions of the current administration that we can legitimately call the ‘new dawn’ in Ethiopia’s history is land policy. It relates one way or the other to the many controversies we face at the moment, be it political, social or economic. Land and landed property being the bases for wealth creation, it inevitably underpins many of the conflicts and grievances observed in many parts of the country. Therefore, land policy is a subject that the government must, if it has to address the underlying causes of the socio-economic problems, re-examine with full embrace of available options and with no “red lines.”

When one looks at Ethiopia’s land rights structure, the heart of the policy discussions has always been that of equity versus efficiency. This controversial debate on the equity versus efficiency justifications for guiding land policy choices assumes a central place in modern Ethiopia’s socio-political discourse. Accordingly, it is argued on one side that, in order to ensure equitable access, land should remain under government ownership, while on the other side of the coin, some claim that for efficient utilization of land and ensuring tenure security, private ownership should be adopted. Some also suggest the realization of both equity and efficiency objectives is possible in any one of the ownership structures that a particular state policy ventures to advance.

Although a central argument of classical economic theory is a concern for externalities associated with the public ownership of productive assets, scholars in the socio-economic field have successfully refuted this argument. One such scholar is the late Economic Sciences Nobel Prize winner, Elinor Ostrom, who provided a conclusive response to the externalities argument on the basis of the common pool resource management strategy. Where communities are empowered to design control, distribution and enforcement tools for the benefits and costs of a particular resource pool, a more robust system is possible, irrespective of private or public ownership policies relating to those productive assets. However, the practicability of Ostrom’s thesis for resources as vital and expansive as land is questionable as collective development of rules for communal utilization may not necessarily be easy in the manner that we see in cases of fisheries or forests, examples that her studies had focused.

If one looks at Ethiopia’s land tenure system throughout the modern times, it has had all forms of ownership other than private. When the 1995 Federal Constitution once again declared state ownership of land (as was done by the 1975 legislation of the Derg), but decentralized its administration, most of the literature of the time focused on debating private versus state ownership structures. Among those literature, the 2002 research report by the Ethiopian Economic Association (later, the Ethiopian Economic Policy Research Institute) particularly made justice to the subject by corroborating  scientific arguments with extensive empirical data. The research was conducted with the objective of assessing the current land tenure system and its implications on the overall performance of the agricultural sector. The report was written on the basis of a survey of close to ten thousand farm households across all of the regions of the federation except Gambella, as well as a survey of the opinions of professionals, experts, development/extension agents, politicians and other stakeholders. The household survey was conducted to document the views of farmers about the size of land holdings, farm and non-farm income, opinions about the current land tenure arrangements and their preferences, were they to be given the freedom of choice.

The findings of this report indicated a substantial preference towards private ownership. Moreover, based on the finding that 90 per cent of the households surveyed were not interested in selling their land, if they were allowed, the survey also discredited the government’s fear that in the event of privatization, land would become concentrated in the hands of those who could afford to buy. This research examined Ethiopia’s land tenure from an economic perspective, and drew useful insights into the economic policy debates in the choice of the ownership structures that was not however heeded by the then leadership. Almost all the regions have adopted their own constitution in line with the federal principle of state ownership, continuing the 1975 piece of legislation on public ownership of land.

The widely accepted approach that is now becoming more or less a trend is to recognize various modalities of holdings (private-with exclusive ownership right including transfer, public (with commanding mandate given to the government to grant land to various public purposes) and communal that allows a wider level of flexibility in managing land and landed resource, having a profound implication on economic transformation.

The onus is now on the current administration to bring this topic back to the forefront and once again table it for public debate. It is also expected that the various contending political parties will engage the public on this subject as they develop their political manifesto, alternative policies and positions on various issues of public importance. Land should be considered as one subject that will help the country unlock the full potentials of the private sector in a manner that not only improve equitable access, but also address the artificially inflated prices of land and landed property that we observe.

Access to finance

While the traditional role of government in financial sector is largely regulatory, the private agency sits at the front distributing finance to most productive users through lending, guarantee, co-investing and other forms of financial instruments. Particularly the banking system led by the private sector, as Joseph Stiglitz had articulated in his seminal book, FREEFALL, plays two vital functions: establishing efficient payment mechanisms thereby contributing for smooth transaction (buying and selling) processes on the one hand, and on the other hand, ‘assisting and managing risk and making loans.’ For efficiency of services to improve and innovative ways of risk assessment to thrive, regulated competition as well as learning from global players of the trade is vital. Ethiopia’s banking history has for long been dominated by state owned giant players and the recently sprouting domestically owned private banks with full closure to international competition. The system’s ability to innovate and improve the service delivery has therefore been limited to what exists at home in a manner that we could call ‘settling for less.’

Among many of the challenges that Ethiopia’s private sector faces, lack of finance and efficient banking services are the primary constraints. For entrepreneurship to be translated into concrete idea, leading to job creation and economic growth dividend, it no doubt requires financial resource that converts the entrepreneurial idea into implementable project. The world has developed various innovative ways of availing finance and has outgrown our conservative lending system that more or less exclusively finances wealth, and not innovative ideas. Moreover, attracting Foreign Direct Investment without the availability of internationally competitive financial services undermines the whole enterprise of investment promotion. This is therefore another area for consideration by the government. Of paramount importance with this respect is designing a regulatory system that pushes existing domestic banks to deliver efficient and internationally competitive banking service while at the same time examining the ways in which the sector can be opened for global competition. Short than total closure, there should be ways by which the sector can stage by stage benefit from the technological and innovative advances that comes with global players in the financial sector without totally dropping the government’s cautious approach of nurturing homegrown finance sector.

Communication

Yet another subject which is at the moment being considered for possible liberalization is communication. Here our understanding must expand beyond the virtual mode of communication as in telecom, and look at in-land, air and sea-based communication. Though the latter are usually termed as ‘transportation’, for purposes of this discussion, they are regarded as enablers of communication through time and cost-efficient movement of people, goods and services.

Private involvement in all these modes of communications must be considered as a virtue and not a vice if we are to achieve an accelerated growth and our massive job creation goals. Enabling policy directions should be drawn that not only encourage but also incentivize privately owned and/or operated toll roads, railways and airlines with clear institutional mandates to promote and regulate each. Government should come in by way of de-risking those highly capital-intensive investments through co-ownership, provision of disaggregated incentives and regulatory frameworks that provide strong guarantee against arbitrary takings.

Telecom in this context is an easy pick when it comes to highlighting the importance of private sector’s involvement for the provision of improved services. Both accessibility and affordability of telecom services are highly constrained because of the state monopoly which lacks the capacity and the incentive to upscale its services as it continues to enjoy a captive market without any competitor. Even with the best of intentions, Ethio-telecom may not be able to cater for the demands of over 100 million (and growing) population as it struggles to manage multi-billion-dollar network that it owns at the moment throughout the country and at the same time provide the various services which, as expected, is deteriorating by the day. When one looks at this from a purely financial point of view, the Corporation stands to benefit from a situation where multiple providers and/or network owners were to be allowed to function in the country. But the primary beneficiary still remains to be the private sector, the ‘sleeping giant’ in the country that has for long been side-lined, and mostly engaged in the non-productive trading sector.

These three indicative topics must be taken seriously together with other burning issues that the government is handling at the moment. Ultimately, the critical path for the country is the creation of massive jobs, intergenerational wealth and innovation through the instrumentality of private talent and enterprise. AS

Editor’s Note: Belachew Mekuria (PhD), was former commissioner of the Ethiopian Investment Commission. He can be reached at belachewmekuria@gmail.com