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World Economic Forum comes to the World’s third fastest economy’

Can the host sustain it’s rank?

With a population estimated at 85 million Ethiopia is the second most populous in the continent next to Nigeria, and a recent forecast by the Economist Intelligence Unit declared its economy is the third fastest growing next only to that of India and China.  Ethiopia’s controversial annual GDP growth stands anywhere between 7% – 11%, (depending on which report is one reading) with forecasters of the later predicting it to continue for the next five years, in which case Ethiopia could even prevail over China and India to become the world’s number one fastest growing economy.

Its current GDP of $32.3bn enabled Ethiopia to rank Africa’s fourth-largest economy. The country has introduced a new Growth and Transformation Plan for the years 2011–2015, which predicts the annual GDP growing at 14.9%. According to Ernst and Young, the approximate size of the Ethiopian economy in PPP terms by the year 2023 will be a staggering $472 billion.

But critics say to sustain this economy Ethiopia needs to do more than counting the figures.

As part of its coverage on the upcoming World Economic Forum, which will take place in Addis Ababa, Ethiopia, from May 9-12, 2012, Addis Standard invited two panelists: Berihu Assefa Gebrehiwot, a PhD candidate in Development Economics from Tokyo, Japan, and Mesfin Tekle, a Senior Derivative Specialist from Toronto, Canada, to argue on a topic presented to both by the Editorial Board of this magazine.

We asked both the following two questions

  •  Is Ethiopia’s current economic policy on the right track?
  •  What are its challenges ahead?

 ‘The answer to the first question is a restrained ‘yes’.’

 Berihu Assefa Gebrehiwot

 Tokyo, Japan

While Ethiopia’s economic policies have steadily gotten better in terms of depth, breadth and articulation; policy twinning and policy coordination still remain sketchy. And, yet, Ethiopia is beset by imminent economic challenges that call for extraordinary policy expertise.

We need yardsticks to answer your questions rigorously. The following three yardsticks are helpful: policy expansion; institutional capacity to execute policies; and economic justice. Let’s see how Ethiopia’s economic policy fares in each of these three yardsticks.

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Policy expansion

Ethiopia’s economic policies have steadily mutated over time. Its main national policy framework is the Agricultural Development Led Industrialization (ADLI). ADLI guides and dictates resource allocation. The second major policy is the Industrial Policy (IP). Initially, ADLI narrowly promoted only smallholder farmers and the IP promoted only a few export industries – notably, leather, textile, metal, cut-flower and agro-industry. Both policies proved difficult to meet the required critical mass to pull Ethiopia out of poverty and set it on a development path. With the lapse of time, it dawned on Ethiopian policymakers that the policies were narrow. Consequently, in 2005, ADLI broadened its policy scope by adding large-scale commercial farming to its policy menu. And, later (in 2009), the IP expanded to include not only export-industries but also import-substituting industries. Now, both the ADLI and the IP are much better in terms of depth, breadth and articulation.

 Institutional capacity to execute its policies

 At national level, the ministries and agencies implement the policies and monitor their progress. In some cases, policies fail. The main reason is: either the policies couldn’t be translated into concrete actions or the implementing agencies are not competent, or both. In a bid to alleviate colossal policy failures and promote priority sectors, Ethiopia has set up specialized and technocratic institutes: the Leather and Leather Products Technology Institute, Metal Products Development Center, Ethiopian Textile Industry Development Institute, Agricultural Transformation Agency and Ethiopian Kaizen Institute. Though the institutional capacity of the policy-implementing agencies and the technocratic support of the Institutes are crucial, they corrosively lack policy twinning and policy coordination among themselves. For example, the Ministry of Industry renders policy support to the leather sector to produce quality leather products. But, producing quality leather products requires quality hides and skins, which is taken care of by the Ministry of Agriculture. For the leather sector to realize its potential, both ministries must coordinate and twin their policy actions.

Economic justice

We measure the economic justice of policies by how inclusive and pro-poor they are. Using these yardsticks, we can easily show that ADLI and Ethiopia’s SME policy are highly pro-poor and pro-equitable growth. Ethiopia’s increasing spending on education, health, housing and roads is unambiguously pro-poor. Plus, Ethiopia devotes 17% of its budget to smallholder (poor) farmers; well above the 10% commitment agreed by African countries. And, the SME policy supports the urban poor by providing them with skills training, credit and involving them in urban projects such as housing and cobble stoning. Likewise, Ethiopia’s economic policies favor equitable growth as is shown by its 0.29 official Gini-coefficient, which is one of the lowest in the world.

 The challenges facing Ethiopia

As Ethiopia struggles to pull itself out of poverty many remain hopeful about its prospects. However, Ethiopia is not yet on an irreversible development path. The likelihood of reversal is not trivially negligible unless it sternly embarks on its imminent economic challenges. Notable among the economic challenges are macroeconomic woes and weak private sector, both of which negatively impact growth sustainability and job creation. When it comes to the macroeconomic woes, a scorching inflation stands out. Unsolved, inflation alone can kill the Ethiopian economy. Ethiopia needs to tighten its money supply and credit; restore sanity to its budget-deficit financing (or stop inflationary financing); and above all, it must embark on a long term solution of nurturing the private sector so that it can produce more agricultural and industrial goods that can match the rising domestic demand. The government believes it is torn between fighting inflation and fanning growth. But I would argue that a steady 7 or 8% economic growth with sound macroeconomic management is much better than a 14.9% growth target that possibly fuels macroeconomic woes.

It goes without saying that people’s standard of living improves when a country grows sustainably. Hence, growth sustainability is another policy challenge Ethiopia needs to grapple with. This constitutes identifying and nurturing the next sources of growth: productivity and skill and technology transfer. In what seems to be a solution to this, Ethiopia, recently, set up the Ethiopian Kaizen Institute (EKI), an institute that stirs the national productivity and quality movement. This is a good start; but such efforts bear fruit when they attain the critical mass.

In conclusion, I would like to make two last remarks: first, governments formulate and implement policies. But governments, like markets, are prone to failures. We say government policies are effective when successes significantly outweigh failures. So, when I argue Ethiopia’s economic policies are on the right track, I mean Ethiopia does more successes than it does failures. Second, addressing the macroeconomic woes (especially inflation), nurturing the private sector to assume an engine of growth and sustaining the growth momentum are the main policy challenges Ethiopia must diligently deal with.

Ethiopian economy – a fork in the road

 Mesfin Tekle

Toronto, Canada

 Ethiopia has embarked upon a developmental state paradigm that has excited the   ruling party and those who accept the effectiveness of a developmental state policy. Nonetheless, whether this new economic paradigm can transform the country in the long term is yet to be seen. However, the East Asian example as a copy and paste policy miracle should be looked at with skepticism. In the contemporary international economic system developmental state policy has to be looked at with a set of critical eyes that are less hype and more realistic. The challenge of what is called “late-late” development in which a country has to break in to an established global economic system is not a panacea.

Policy makers must assess not only the theoretical underpinnings of developmental state policies but also the capacity of states with differing developmental challenges to implement these policies. In the Ethiopian context with the absence of competent and effective bureaucracy, professionalism can easily be subverted by political interference. Moreover the lack of autonomous civic institutions that could not be influenced by the political class should not be taken lightly.

It is also important to remember that the successful developmental states in Japan, Korea and Taiwan were helped by favorable and tolerant trade policies in the west that allowed them to flourish. The competition between the U.S led forces of market capitalism and the Soviet Union’s communism in geopolitics were some of the factors that allowed state led developmental capitalism to sustain itself uninterrupted.

The challenges ahead

Before declaring developmental state policy as a miracle pill that can cure the country from its continuous economic stagnation policymakers should demand answers to critical questions such as: can the Ethiopian state and the governing party convince the public at large that it has the capability and capacity to optimally allocate resources than market forces? How would the state avoid crony capitalism from taking hold and creating corruptive influences? How does the country avoid the predatory nature of state intervention in markets? Early indications are not encouraging. The failure of price control policy of the last year is one good example. The abhorrent corruption both in the public bureaucracy, as admitted by Prime Minister Meles Zenawi, and the influence peddling by the robber barons in the private sector is another factor that has become a sore point in the eye of the public.

The most perplexing challenge the administration is facing today is the inflation conundrum. It has become a serious problem especially to the urbanite whose earning has been buying less with every tic of inflationary pressure. With an economic principle where monetary policy has become an appendage to fiscal policy, the contradicting demands of policy makers makes it essential to have a monetary policy that is more independent so that evidence based rational decisions can be made to arrest inflation and give the public a breathing room.

Most of us want to see continuous double digit growth in Ethiopia to lift the people out of poverty but recently that growth has been accompanied by 30-40% annualized inflation rate and the cost of growth has become too high for the average consumer. It will also be irrational to ask people to save at a miserly return rate of 5% in a country where inflation has risen to 40%. A rational consumer would prefer anything durable than save it in the bank and that in return creates a supply squeeze in the market place.

All the spending on infrastructure build up and the easy money policy can only be tolerated by the public if they can save a little and afford the daily necessities of life. A decade from now all the spending on public infrastructure may be worth the cost today but the public has to eat first. It is true all the BRIC countries (Brazil, Russia, India, and China) have become huge consumers of commodity and contributed to the unbearable rise in inflation in poorer nations. That is even the more reason for countries like Ethiopia to control inflation using monetary policy so it doesn’t get hit by a double edge sword of easy money at home combined with intolerable global price pressure. We may not have to cut our feet if we can avoid putting on an oversized shoe that won’t fit.

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