OP:ED: Ethiopia’s reform fairy tale leaves its ailing economy behind. How it should transit

Getachew T. Alemu, For Addis Standard

 Addis Abeba, November 23/2018 – The new government of Ethiopia, although still from the ruling EPRDF, has stirred debates in spaces as varying as diplomacy and entertainment. Its economic policy-making, being one of the main tasks of a government, has similarly been a hotbed of debate. Unlike the old days where the debate in the economic space had to do with contemplation of what best statist model should the government adopt, the emerging debate has to do with whether the Ethiopian state has abandoned (or would soon abandon) its long standing Developmental State model. And the debate is happening despite an affirmation from no higher agency than the Prime Minister that no change in model is there.

Proponents of the Developmental State model remain firm and committed in saying that little of a change has been agreed upon at coalition level (it would help to remind that EPRDF is a coalition of four major regional parties). Except one of the coalition members, the Amhara Democratic Party (ADP) that touted to rule out the concept of Revolutionary Democracy, a political wrapping to the economics of Ethiopia’s Developmental State exercise, all the other members have not, at least until now, officially announced their departure from the model.

Supporters of the model go extra miles to show that the time is up for state capitalism all around the world, from Iran to Russia and onto China, that there is no justification for the Ethiopian state to abandon a model involving an interventionist state. Mention of Prime Minister Abiy’s parliamentary speech, wherein he proclaimed that the state is here to stay in the economy, and his repeated attempt to stand by the poor (and his sympathetic phrasings) are also used to argue that little would change in the form of the economic model.

When pushed to justify the sort pf unconventional economic policies that the new administration has taken, such as privatization of strategic state-owned enterprises (SoEs) and indications of opening the economy, the statists claim that it is just a balancing act. And they argue that the act is important to sustain the economic growth (specifically Gross Domestic Product (GDP) expansion) of the past 16 years.

On the other side of the spectrum sit those experts that argue that the change happening in the country involves policies that are none like a Developmental State would take. A decision to sell strategic assets, downsizing the role of SoEs, ongoing reform in investment and business registration systems, ongoing reforms in the finance sector, attempts to establish joint venture in logistic sector, among others, are indications to what could be said a wholesale liberalization of the economy, if not now, then, very soon. Complemented with reforms in the political, civil society, diplomacy and other spaces in the country, what seems to be happening is a rather textbook liberalization effort, this group claims. For them, the new government is departing from the statist inclination of the past decades. But their fear is that these same policies have been behind the Asian Crisis of 1990s.

In what seems to go in line with the later, the World Bank Group (WBG), a financial institution that has been ardently advocating for liberalization along with IMF, has last week affirmed to journalists that they had a discussion with the authorities that the economic reform that Ethiopia is to implement involves more than just privatization. Looking at the list of activities the Bank mentioned under its latest support of 1.2 billion dollars, one could easily notice that what is being cooked in the kitchen is indeed more that just a single dish. And the money seems to be the carrot to induce dishing out a wholesome liberal economic buffet.

The debate being as it is, it is certain that Ethiopia is witnessing a transition. Although there is a wide difference of perception to what the transition involves, with some calling it as “a going to uncertainty”, while others name it as “another turn in the arduous journey of nation building”, the Ethiopia of today is not like the one that was a year or so back.

As result of EPRDF’s dynamic disequilibrium, caused largely by popular protest and a widening trust arbitrage, the political space is witnessing sea change. Long held political prisoners have been released, dissenters living in exile have been welcomed, political forces once named terrorists by the upper house are allowed to operate, media outlets once blocked from visibility in the country are allowed to have branches and operate freely, efforts to reform suppressive laws are initiated, human right abuses by the security apparatus have been officially admitted, investigations over corruption and human rights abuse allegations have been initiated and many more. If it had been last year, all these would have been considered dreams in a country run by a ruling party that distasted dissent, monopolized political narrative and controlled almost every possible channel of self-expression.

As the political space is witnessing changes, decorated with breaking news, the economy is still living under what could be said a challenging time. A summary of where the challenges are coming could be seen from the graphs below (data from Trading Economics):

  • Ethiopia’s population is growing fast, with latest figures showing that total population size has reached 108 million.

Growing population means there are more mouths to feed, more souls to shelter, more bodies to move around and more hands to provide jobs for. With delivery of all these lagging behind demand, then, it is obvious to see how much of a burden growing population is putting on the economy.

  • A large chunk of the population of the country lives under poverty. Measures differ, but according to the Multidimensional Poverty Index (MPI), one of the indices for poverty prevalence, about 83% of Ethiopians are MPI poor.

Such a huge poor population entails the level of investment that is needed to enhance the livelihood of the people of the nation. Regardless of where the investment is to come, the magnitude of the task at hand, both for the economy and its guardians, is indeed huge.

  • Unemployment remains high. Although figures vary as to the exact amount of unemployment in the country, with a sizeable portion of the population remaining in agriculture, it is easy to see that the unemployment burden in the economy is considerable. For lack of better descriptive statistics, the following could be used.


Latest figures show that about half of the employed population of urban Ethiopia works in the informal sector. Hence, the level of unemployment and underemployment the economy is sitting on is easy to observe.

  • What used to be a lower end inequality in the country has started to see shifts towards a medium and high end inequality. If the trend continues, Ethiopia would be one of the unequal nations of Africa.

  • The Ethiopian state is sitting on huge burden of debt, both external and internal. As such, the IMF has recently put the nation under moderate debt distress risk.

  • Repayment of the debt has been complicated as the export sector has remained stagnant for almost a decade now. It seems that there is no sector that continue to dismay the government by living short of target as the export sector.

It is upon these rather structural challenges that the economy is witnessing new shocks such as high number of internally displaced people (IDPs), waves of protests and conflicts (hindering vital economic activities), drought in some areas of the country, increasing global oil price, declining global commodity price, paralysis at local government structure and more. It is easily discernible that the times are not ordinary and need extraordinary policy-making effort. Hence, the right question would be – where should the focus be?

It is obvious that prioritization is the wisdom of the time. There are long lists of demand for the government to meet, but there is just not enough time and resource to do all of them at the same time. Political transition also means that the list is tainted with conflict of interests, lobbying and even dirty money. Thus, no prioritization would be easy to do that pleases everyone. Rather, each attempt will raise eyebrows, unravel new rifts, uncover new interests and disappoint some. Regardless, if we are to move forward as a country, that difficult job has to be done, one way or the other.

Creating new opportunities as a way out

As a government that promises to take the country out of decades old political conundrum, serious societal rifts and years of mismanagement, the administration of Abiy Ahmed ought to focus on areas that create new opportunities, seal systemic gaps of mismanagement (embezzlement) and improve the purchasing power (and hence livelihood) of the populace.

Creating new opportunities entails tailoring policy towards areas that would infuse new innovation, incentivize entrepreneurship, attract investments and avoid roadblocks.

A brief analysis of the trends of innovation in the world shows that it is happening in areas of medicine, biotechnology, artificial intelligence, machine learning, renewable energy, transportation, smart city, aquaculture, 3D printing, and digital entertainment to name few. Thus, if Ethiopia has to be competitive in today’s economy (if not tomorrow’s), it has to prepare its huge youth population for the challenge. And this entails educating them, skilling and reskilling them, helping them network, making it conducive for starting up a business, availing finance to support them, making the rules clear and easy enough, and making the prohibitive bureaucracy lean enough.

No doubt that this task is complicated enough. If there is anything significant that happened in the past decade in Ethiopia, it is the revolution in mindset and attitude of the young population to start a business. Capitalizing on this rather unique shift the country has witnessed will be the task of the time. As such, creating the system to tap this new wave of interest and enabling it with proper systemic responses, such as flexible registration and financing schemes, will be important. With all honestly, there cannot be any urgent task than this if the economy of the country is to see the necessary boost that could sustain its growth and bring about a balance in what has been a distorted investment matrix (with the public sector dominating the investment matrix).

Agriculture and related areas should not also be disregarded in the identification process. If better intensification and mechanization are to happen, then, enterprises supporting these activities, such as machinery leasing, provision of inputs, marketing, packaging and so on need to get the necessary boost. Irrigation, fishery, agroforestry and aquaculture ought to also be given the weight they deserve.

Sealing the gaps in the system that were contributing to the growing inequality the country has been witnessing is another areas where the administration ought to focus on. And this means reforming the public procurement, land lease, revenue collection and financing (particularly the foreign exchange allocation) systems. It has always been the case that decision making in these sectors is left to individual discretion, with little systemic tools of checking and accountability. This has to change. Work has to be initiated to disentangle as much of the decision process from personal discretion as possible. New tools, including digital ones, of tracking, checking and accounting decisions should be instituted. All the more, regulation of the system should be done in a way that takes the 99% of rightful players as the center than the usual that take the 1% offenders as curriculum.

Ending the era of excessive political patrimony is important. As such, the role of the state and the party ought to be distinguished. An act of subsidizing the rich, directly and indirectly, in the name of creating developmental capitalists ought to be revised. Distribution of rent in the economy should also be done in a way that calculates the Return on Investment (RoI) on the basis of the demands of the poor people. What is even more pressing is the job of disentangling party politics from economic monetization. So also goes the job of constraining the manipulative role of dirty money in policy-making.

Attracting investment is another crucial job at hand for the administration. And this needs not only of persuading the investors, but also making the host economy conducive to the investors. Much as the contribution of the act of instilling peace in the country is, this takes more than that. In economic terms, this entails revising the investment incentive structure, cutting bureaucracy short, integrating public services and making them easily accessible, decentralizing decision making, clarifying institutional mandate, creating clarity of vision along all tiers of government, enhancing central-local government nexus and improving the workings of the market.

Avoiding economic roadblocks, an important strand of the equation, entails the smart regulation of the economy. And the focus should be on business registration and licensing, tax compliance, import and export policies, logistics, transportation, SME development and education. All these areas see considerable challenges for smooth operation of private enterprise, individual development and self-employment. And much of it has to do with unnecessary and improper regulatory burden. Sadly, considerable time, energy and resources is being spent to comply for regulations that do not serve any purpose, from the point of view of public benefit. It is obvious that avoiding such roadblocks will unleash huge resource and energy that could positively contribute to the economy.

Whatever gain is made through the above mentioned reforms could be eaten up unless monetary policy is adjusted towards low inflation and better purchasing power. Inflation remained above 10% for the last 2 years. Key lines of household expenditure, such as food, rent, transportation and construction have been areas that have significantly been affected by inflationary pressure. Since global commodity price remained in the lower cycle in the past year, it could be said that the inflationary pressure has largely to do with the local economy. And there is nowhere to look for the cause than the monetary space. It is in the growing deficit financing and expansionary monetary stance that one could find the root of the inflation. And attending that by way of managing the deficit and restraining the monetary policy is the only way to contain the inflation. In that lays the solution to enhance purchasing power.

To conclude, it is true that we are living at a time that radiating positive energy is vital, to use the words of the Premier. In policy terms, such a radiation ought to be enabled and incentivized by decisions. That is why reorienting economic policy towards areas that enhance innovation, attract investment and avoid hindrances will be vital. It is through such an act that the new administration could address the structural challenges of the economy and meet the rather growing demands of the public. As the intention and the commitment are there, it is time for thoughtful action. But one thing is true. The task of changing the reality could not be left to the government only. Everyone has to contribute towards it. AS

Editor’s Note: Getachew T. Alemu is an investment and public policy consultant, with over 14 years of experience in public and private sectors. He can be reached at getupfront@gmail.com.

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