Construction of banks in the heart of Addis Abeba dubbed as the future “financial district”
Ayele Gelan, (PhD), special to Addis Standard
Addis Abeba, October 29/2018 – It would prove useful to re-iterate the fundamental reasons that caused popular uprisings in Ethiopia during the last few years, forcing the ruling party EPRDF to crack open and eventually begin to unleash the on-going reform. The slogans held during those protests may vary but their root causes could be summed up under two deceptive ideologies of the EPRDF: democratic centralism and developmental state!
For the on-going reform to succeed, the two problematic ideological basis of the EPRDF governance must be simultaneously transformed. It seems this has not been happening. By now, we know what has been happening to democratic centralism. However, it is unclear to me what PM Abiy’s administration is intending to do with the developmental state model.
In this piece, I will begin by highlighting EPRDF’s haphazard attempts to dovetail the two ideological pillars during the pre-reform era. I will then proceed to discussing the necessity of synchronizing the processes of political and economic reforms. All along, the focus will be on options in designing and implementing a far-reaching economic reform to transform the lives and livelihoods of millions of Ethiopians.
Stick and carrot
EPRDF declared they have transformed Ethiopia into a federally constituted country. This essentially meant a decentralized and democratic system of governance. However, every right that came with federalism was snatched away through democratic centralism, which obviously was an antithesis of decentralized governance.
Even with good intentions, inevitably conflicts do arise in complex situations of governing a diverse and complex society like Ethiopia and these would lead to unintended and contradictory outcomes. However, one of the peculiarities of the EPRDF era was that the architects of democratic centralism were very well aware of the contradictions they were building into a federalist system.
It was precisely for this reason that the developmental state model was crafted and offered to the people of Ethiopian as a carrot to camouflage political control through democratic centralism. This was meant to divert attention away from the politics to the economy. Firm political control through democratic centralism as stick and dishonest promise of economic growth through developmental state.
The fact was the developmental state in economic strategy was no less dishonest and mischievous than the democratic centralism in political domain. Regardless, society was expected to tolerate the pain of democratic centralism in return for rewards that would come from developmental state’s “rapid economic growth”.
It should be noted that there was nothing inherently wrong with the developmental state. For anyone familiar with economic history, the developmental state has nothing to do with government using its long hands to own and run businesses in every sector. It has nothing to do with establishing complex network of domestic and international businesses to promote crony capitalism. Mega infrastructure projects have never been an exclusive feature of a developmental state. All governments do undertake large construction projects.
However, EPRDF applied it so irresponsibly that the developmental state model arrived in Ethiopia and lost its true meaning. Elsewhere, developmental state is essentially a feature of responsible economic governance. The state looking after and enabling economic functions of citizens, like parents nurturing and bringing up capabilities of family members to become independent and productive members in their family and ultimately their nation. It is all about supporting businesses, small or big, to create jobs and generate wealth. For instance, government protecting smallholder agriculture from exposure to the world market in input markets (e.g. offering fertilizer subsidy) and output markets (e.g. offering price supports, buying and storing, etc.) are supposed to be meaningful and appropriate features of the developmental state.
Democratic centralism, gone forever
In terms of reforming the EPRDF, the political liberalization has registered monumental achievements in less than six months through smart and farsighted leadership skills of Team Lemma and PM Abiy’s administration. For most Ethiopians it has been exciting to witness that the old EPRDF political ideology of democratic centralism has gone forever. Team Lemma and PM Abiy have obliterated that crippling ideology and opened the door for genuine federalist Ethiopia, sowing a seed of hope for democratic governance in Ethiopia.
In the political domain, the reform process has even gone beyond internal reform of the EPRDF itself. The sense of confidence and optimism that the architects of the reform have created have been so much so that they have even managed to persuade opposition parties from all corners of the world to return home to the extent that none left outside. Realignments of interest groups has been taking place, paving the way for the formation of strong opposition parties and healthy competitive political space.
Economic reform – a nonstarter?
In sharp contrast to my delights with PM Abiy’s achievements in reforming the Ethiopia’s politics, I have to admit I am frustrated with what has been happening with regard to reforms in the economic domain. It is appropriate to ask, “what happened to EPRDF’s developmental state?”
It is possible that PM Abiy and Team Lemma have thought of sequencing the reform process: to deal with the political reform first and proceed to economic reform. I would go along that logic some distance but I think there is already a substantial delay in activating the process of economic reform. It would prove fatal to delay it any further. Let me explain why it is extremely important for PM Abiy to shift emphasis to economic reform without any further delay.
It is “the economy, stupid!”
The economy is too important to keep on hold. In the current Ethiopian context, economic reform is no less urgent than political reform. Here is some logic from across the Atlantic: “In the 1992 U.S. presidential campaign between incumbent President George H.W. Bush and challenger Bill Clinton, the Clinton campaign hung a sign at campaign headquarters that was to become very famous. It simply said: “The Economy, Stupid.” The message it [was] sending with this simple phrase was basically the economy was something that affects every American and needed to be at the forefront of the campaign.”
If jobs, growth and trade mattered so much in rich America, then it would matter thousand times more in poor Ethiopia. The bulk of Ethiopians who live close to or below the poverty line is simply daunting. If decisive economic policy action has not taken place to improve the lives and livelihoods of ordinary citizens, then I fear that the delay would inevitably endanger popular support for PM Abiy’s Administration. There is no justification to take such an excessive risk.
Excuses such as “the government does not have money so it would take time to improve lives and livelihoods” should not have any place. There are plenty of options available to the authorities, as illustrated towards the end of this piece.
The double-digit growth illusion
I wonder if the myth built around Ethiopia’s miraculous double-digit growth has been so powerful that even our pioneering reformers have subscribed to it. Can the silence about economic reform be explained by such logic that: “well, it was just our politics that went so bad and needed radical revamping, otherwise miracles have already been happening in the economic sphere”?
If that is the case, then I strongly urge PM Abiy to rethink and accept the fact that it was just an illusion; such a miracle has never happened in the Ethiopian economy. If he needs evidence, I urge him to get clues from ordinary citizens, not from official publications (the Central Statistical Authority, the World Bank or IMF).
I vividly recall a speech made by an elderly man at a public gathering in Bale. The meeting was called by Aba Duula Gamada in the middle of the Oromo Protest. This is what the wise elderly man said (in Afaan Oromo): “itto qulla deemnuu uuffattan jedhamna, itto beelofnuu quuftan jedhamna”, roughly translated, our body is naked and our stomach empty, but the authorities keep telling us as that we are well dressed, we are well fed!”
This speaks the truth more emphatically than thousands of pages of those rosy economic reports that the Ethiopian government, the World Bank and the IMF have regularly been churning out on the Ethiopian economy during the last two decades.
Delaying the economic reform agenda is counter-intuitive, actually paradoxical. I cannot comprehend why brave reformers who dared to confront political reforms would delay economic reform. Political reforms, although must be done, would inevitably generate enemies. On the contrary, in the Ethiopian context, economic reform would certainly generate millions of friends for the reformers. It would enhance their already strong popular support. Above all, it is much easier and straightforward to undertake economic reform. It is not as if there are not burning issues regarding economic governance. The Ethiopian economy has been riddled with policy blunders. These have been accumulated over many years, sprinkled in all sectors. All are waiting to be resolved.
To mention just a few, fertilizer supply and distribution has been a monopoly of a handful of interest groups. This has been adversely affecting the lives and livelihoods of millions of farmers in all parts of Ethiopia. There are a handful of exporters, monopolizing all sectors, paying farmers and small producers unreasonably low prices. Ethiopia’s natural resources have been depleting at alarming rates, and they urgently require regeneration.
Ethiopia’s rural extension staff are literally unemployed labor force, actually doing nothing. Not that they did not want to help the farmers but there is no policy framework to activate their engagements. Farmers have acres of land (marginal and productive) but they do not have credit facilities to invest and undertake essential land improvements, without which increase in agricultural productivity is unthinkable.
Farmers cannot use their land as collateral to borrow from the banks. However, if a city slicker, who calls himself an “investor”, arrived in the village and evicted that same farmer, he would be entitled to borrow using that same plot of land as collateral.
Costly loyalty cards
Now about more subtle issues related to commitment to a successful economic reform. Successful economic policy design and implementation require highly technical skills. This is not to say that economic matters are more important than other aspects in which a society functions but just that it requires a very specific and abstract set of skills.
In this regard, I am not sure the extent to which our pioneering reformers have recognized this fact and surrounded themselves with capable advisors and technocrats. In my view, Economy and Finance should not be subjected to party loyalty or quota based allocations of ministerial portfolios.
For instance, when he was choosing Ethiopia’s Army Chief of Staff, PM Abiy had to think very seriously. His choice was not largely subjected to party loyalty criteria, although there could be some element of that in that decision. He did not pick a middle or low ranking army officer. PM Abiy knew very well he had to pick from among the most senior generals, knowledgeable in military affairs.
Similarly, Ethiopia’s team of technocrats running the economy and finance portifolio should be based on merit, coming from among the most senior and highly experienced Ethiopian economists and bankers. There is no scarcity for that kind of expertise; Ethiopia is blessed with lots of highly skilled professionals working all over the world.
There is a trade-off between sticking to party loyalty and merit based assignments. The former is inevitable, but it is necessary to go for merit-based assignments in some cases. This can be a tough choice but it is good to be aware that the choices being made in allocations of human resources to ministerial portfolios are not cost free and some choices are more costly than others!
Still white elephants?
It is unclear what economic development strategy PM Abiy has in mind for Ethiopia. There is no clue whether the old style developmental state will be retained or it would be reshaped to become the kind of citizen friendly developmental state that I have briefly discussed earlier. In this regard, I have to confess I have some worries that perhaps the old style may be allowed to persist, perhaps inadvertently.
I can adduce a few evidences as sources of my concerns. There were very few times that PM Abiy has had time to engage in economic matters, and all of them without exception were either visits to or opening up of Industrial Parks (IPs), EPRDF’s latest brand of white elephants. IPs have been favorite destinations of dignitaries of high profile visitors, including heads of states. In a few occasions, there were times I have observed other engagements but still about big projects.
This indicates that the EPRDF may have steadfastly committed to mega infrastructures, destined to serve big businesses of both domestic and foreign origin. The trouble with mega infrastructure projects and big business-based development models is that they are not only extremely expensive to set up and run, but more worryingly, their rationales hinge on some hope that benefits would begin to be generated from them at some distant future, and then hopefully the benefits would trickle down to the poor.
This is a matter of faith though; no guarantee that benefits would be materialized, and, if they ever do, they may not necessarily trickle down to reach the poor. If the benefit would not accrue then the huge investment incurred to build them would become a sunk cost to society.
The fact is that the people of Ethiopia do not have the luxury of sitting and waiting for such benefits to reach them in some distant future. What is required is to undertake innovative interventions that would yield quick returns, small returns that add up to a large sum in terms of wealth creation.
There is a disease inherited from the old EPRDF style that economic policies are pursued only if they have propaganda value. This inevitably necessitated a focus on large and visible projects. PM Abiy need to make a clear departure from that sentiment. There is a desperate need to shift to low cost investment activities whose returns are certain to happen.
For instance, improvements of agricultural lands and natural resource regenerations (such as afforestation) would certainly yield returns in not so distant future. Promotions of small businesses in cities and towns through facilitation of credits and training would immediately create hundreds of thousands of more jobs, dwarfing jobs that might be created at the mushrooming IPs.
Job creation schemes
On a few occasions, I have heard PM Abiy mentioning scarcity of funds as constraints to getting things done. If this is really the case, then it is highly likely that he was not presented with the full options available to him, particularly untapped domestic investment resources. Here again we observe a paradox in that persisting with extremely costly and adventurous mega projects such as commitments to IPs is not consistent with prudent ways of managing scarce investment resources.
PM Abiy and his team have plenty of investment options to energize and vitalizing the Ethiopian economy. The importance of job creation for the unemployed urban labor forces and the excessively underemployed rural labor force can by no means be overemphasized. The urban labor force can be supported through credit facilitation and training to start small businesses.
Similarly, the disguisedly unemployed rural labor force can be employed in large public schemes, engagement in nationwide natural resource regenerations, terracing and afforestation. As stated earlier, smallholder rural agricultural producers should be linked to the banking sector, so that they engage in extensive investments to improve their agricultural lands.
Inflation, the bogeyman
All of the above require mobilization of domestic credit facilities. If banks have to provide so much credit, then it would inevitably follow that money supply has to be increased and perhaps increased substantially. Some would begin to worry about catastrophic inflation. The excessive concerns regarding inflation as a bogeyman of economic ills emanates only from figments of imaginations by experts of the multilateral agencies – the World Bank and the IMF, whose primary preoccupation is to safeguard the interest of lenders in rich countries, not job creation particularly in poor economies like ours.
The misconceptions about inflation have been told so much that even serious economists would not think twice to pass judgments on the “dangers” of inflation, without even thinking about the economic contexts. I would illustrate this point by referring to three cases, one theoretical and the other two empirical.
In principle, one should begin to worry about expansion in money supply leading to inflation only if that economy has reached full employment, that is to say, unemployment is down to near its natural rate (somewhere between 3% to 5%) and also other man-made and natural capital operating at their full capacity.
In an economy like Ethiopia where national unemployment rate is somewhere around 30% and large chunks of marginal and productive agricultural lands still lying idle, there should not be excessive concerns about inflation. That was why development economists have always found it prudent to use “inflationary financing” as a legitimate means of fostering economic development.
Ethiopia recent experience
For the last two and a half decades, the Ethiopian government was pouring billions of birr into the economy. The mega projects were not producing “teff”, but only using cements and producing concrete slabs, none of which entered supermarkets for consumers to buy.
Most importantly, Ethiopia’s banks were encouraged (rather arm-twisted) to lend hundreds of billions to METEC and perhaps more hundreds of billions to adventurous cowboy investors. None of them used those investment resources to produce a single blade of grass. That is why they all got their debts written off.
These reckless credit expansions did not cause horrors. Of course, inflation happened in Ethiopia but for completely different reasons – supply side constraints. For instance, farmers were not supported to produce food and supply to the market. One can imagine if all those several hundreds of billions were lent to Ethiopia’s smallholder farmers and small-scale industry producers. There would be no chance for inflation to enter double digits at any time.
The multilateral agencies, IMF and the World Bank, have been quiet regarding the so-called “quantitative easing” in Europe and USA. Quantitative easing was coined to hide the obvious fact that governments in the developed world were desperate to save their banks.
They have done so by encouraging the banks to lending at massive scales so that their economies would emerge economies from recessions. Governments in developed countries had to print trillions of euros or dollars and poured onto their economies. In other words, they had to create trillions of more money, that is to say increase the quantity of money in circulation (hence quantitative easing). Money was pumped into their economies but we have not heard about catastrophic inflation happening over there either.
In other words, it is perfectly reasonable, legitimate, and logical for PM Abiy to make extensive use of domestic credit facilities and mobilize domestic investment resources. This is the only way the economy can be vitalized by using domestic money, with no or little need for hard currency. For instance, natural resource regeneration through seedling propagation and tree plantation requires labor and birr, zero dollar.
If the IMF raised questions about Ethiopia’s money supply, then PM Abiy, in his typical polite manner, would respond: “I am just doing quantitative easing”. AS