- PM has not offered many ideas to tackle economic woes
- Abiy’s comments suggest maintaining statist status quo
- Structural issues need tackling to prevent more problems
Headlines about Ethiopia indicate a radical change of mood. While in the past three years they described protests, destruction, and ethnic conflict, now we are showered with sparks of hope ignited by new Prime Minister Abiy Ahmed.
The background to his rise is the economic, political and social problems that for years the EPRDF government failed to attend to. Politically, the superstructure remained monopolized by the ruling coalition. Not only did it control all legislatures, but also the discourse. Only suggestions submitting to its Democratic Developmental State model were given space, while alternative were denounced. No true market of ideas existed.
The ramifications of this were jailed journalists, tough conditions for opposition parties, and a civil society constrained by fear and bureaucracy. This narrowed the space for dialogue, fueling unrest, particularly from disgruntled youth. Exacerbating the problem was unlawful official action and so the perception that the ethnic federal structure created the privileged and marginalized, loyalist and detractor, and exploiter and exploited.
Yet none of the above reasons explain the discontent better than the economic reality, as the much-hyped growth failed to provide anything like enough jobs. The mismatch between opportunities created and the size of labor force joining the market is so huge that unemployment has become a standing problem.
Although growth remained strong, largely driven by public investment, the private sector stayed small. And the Government, the largest employer, is marred by inefficiency, wasteful patronage and deep-seated capability problems. Key macroeconomic indicators remain in the red. Goods’ exports are stuck at around $3 billion year, while imports grow fast. A large current account deficit has become a hallmark of the economy, leading to meager foreign exchange reserves. Public debt has hit almost 60 percent of gross domestic product, over half of which is in foreign currency. This relatively high ratio for a developing economy led the IMF to say Ethiopia was at a high risk of external debt distress.
Factors hindering the economy include inefficient government, excessive regulation, an unsophisticated financial sector, rural land shortages, inflexible labor markets, lackluster urban development strategies, and a largely stagnant industrial sector. The outcome is deepening poverty, growing inequality, eroded purchasing power, mass unemployment, and corruption. The picture, however, is not entirely bleak. Credit-driven investment has meant improved health, education, telecommunications, energy and transport infrastructure. But even here, demand outstripped supply, or the market did not meet the raised expectations of, say, new university graduates.
State is here to stay
Since his election, Abiy has taken a populist approach, preaching Ethiopian nationalism, freeing political prisoners and those held on corruption charges, and hosting reconciliation meetings in areas that endured unrest. But while his political stance has become clearer, his economic approach has not. There are, however, a few indications.
At his core, Abiy is not an economic liberal, as he does not seem to believe the market is able do its job. Like his idol, Meles Zenawi, he stands for an interventionist state with a considerable economic presence. As he said to business leaders: “Don’t expect that the state will be out of the economy soon. We are here to stay.”
Therefore, it may be wrong to assume that his administration will favor the private sector any more than previous ones did. And arguably, his government could turn out to be even more interventionist and suspicious of enterprise. The interference with mining concessions in Oromia, while Abiy was a regional vice president, in response to protests suggest that his administration could make the business environment increasingly unpredictable. Another example is the decision to suspend Midroc Gold’s operations after contested allegations by protesters about harmful pollution.
If one is to be led by the premier’s sweet talk, then you would expect policy changes. But the reality so far is different. Abiy indicated during his inauguration speech that the focus will be on a stable economy and he has retained key economic policy makers at the Prime Minister’s Office, finance ministry, planning commission, and central bank, although an influential vice-governor was removed. Words confuse, but actions don’t.
After Abiy met business leaders, he ordered the Chamber of Commerce to compile their requests so that he can follow them up. While that personal touch is exhilarating, so far the prime minister has not suggested reforms of policies on land, financing, taxation, or trade. That indicates that the era of the piecemeal approach is still here, although it is of course still early days for his tenure. His lack of focus on the economy was also apparent in comments about the perennial foreign exchange shortage when he said the black-market would not be tolerated and appealed for capital held in foreign accounts to be returned.
The first remark demonstrated that Abiy lacks insight into the issue. It should be clear to him that the parallel market is indicative of structural problems: it is the symptom of a fixed exchange rate and demand outstripping supply. And it is also about an economy whose financial sector is relatively disconnected from the international market, which increases the costs of transactions and disincentivizes capital inflows, such as remittances. But above all, it is the product of an economy that still exports the same few primary agricultural products, while importing thousands of commodities, from fuel to heavy machinery to chewing gum, leading to a gaping and growing trade deficit.
Abiy’s request for cash stashed in Dubai or Beijing to come home fails to recognize the fault lines of the economy and the responsibilities of the authorities. Funds leaving the country could be of two types. One is money from legal businesses activities repatriated legitimately. A large chunk, however, is illicit outflows using various means, mainly over-invoicing imports; and its prevalence means that the government is not doing its job correctly. Admitting that the money is not where it should be, but appealing to the very people that manipulated the system to get it back, signals a confused and weak government.
Back to square one?
More encouraging were Abiy’s assertive steps to boost Ethiopia’s regional port access. This shows his administration recognizes the burden that high logistic costs impose on export competitiveness. But the rushed approach means that key issues were overlooked. The main one is the inefficient inland logistics in a system dominated by a state-owned enterprise that manages both shipping and customs clearance.
Abiy took the right step by appointing a new Public Enterprises Minister, but putting in charge Teshome Toga, a former speaker of the upper house with little technocratic clout, suggests he is not seeking systemic reform. And his appointment of Azeb Mesfin to the board of the Metals and Engineering Corporation (MetEC) speaks to political appeasement rather than institutional rebirth. One report even suggested MetEC may continue working on one of the sugar projects it mismanaged.
By and large, it is public knowledge that state-owned enterprises are problematic. Not only are they a large liability for the economy, but they sit in the middle of bureaucratic inefficiency and misappropriation of public funds. Instead of serving as agents of industrial transformation, they function more like brokers, gaining government contracts through their privileged position and then subcontracting profitably to well-connected firms. Rather than crowding in investment, they are crowding out the private sector by stifling competition. Their operations are opaque because there is no culture of accountability. One thing is certain—cosmetic change could not fix the public enterprise problem. Unfortunately, Abiy seems to be going for it.
No line better indicates Abiy’s economic stance than one he used in his inaugural speech: “Economic activities will be guided by the plans defined under the Growth and Transformation Plan II”. Coming to power amid disappointment with the status quo, which was outlined by that five-year blueprint, this shows limited ambition. Failing export plans, a dismally performing public housing scheme, and overambitious infrastructure targets were all part of GTP II. As the public is unhappy about the status quo, Abiy surely should have at least promised to review the strategy.
So, does Abiy stand for change? The evidence so far suggests that he stands by the bulk of the old economic game. This is not to say that there won’t be shifts in the patronage networks, but it is unlikely to go beyond that. For a structurally imbalanced economy, the signals from the new administration are not encouraging. By kicking the systemic reform can down the road, Abiy has settled for short-term fixes. But that well-worn road only takes us back to square one.
(Main photo: Abiy Ahmed meeting Djibouti’s President Ismail Omar Guelleh on May 12, 2018.)
The opinions in Ethiopia Observer’s comment section are those of the author and are no reflection of the views of the website or its owners. However, Ethiopia Observer is responsible for any factual errors.
There is a naive assumption that Dr. Abiy Ahmed will be able to transform the Ethiopian economy in just two months. Worse yet, there is an assumption that the EPRDF has total consensus and that Abiye will just be able to implement his reforms without any political give and take within the EPRDF. The EPRDF is made up of four parties and the parties disagree on policy matters on a regular basis. Hence, it is not a surprise to see, for instance, a cabinet that is filled with familiar faces or new appointees to the board of METEC made of the old guard. This is part of the political process and consensus building is a messy but important process.
Interesting article. But also symptomatic of the standard political-economic analysis of the current Ethiopian social-formation/ the Ethiopian economy, which never departs from implicit and explicit Neo-Liberal premises, which are taken as common-sense propositions and therefore foreclose the terms of both the analysis and the conclusions.
While it would be difficult to take issue with the description of the macro-economic woes (long term expanding public debt, trade and balance of payments deficit) and some of the more visible consequences such as poverty, inequality etc, the problem arises when ideological biases start colouring analysis and recommendations. In the article, the central problem defining the socio-economic crisis is the state and its involvement in the economy. At the same time, much of the discussion on the negative/deleterious effects of the Ethiopian ‘statist’ developmental model are impressionistic, i.e. not based on studies or assessments (at the very least there are no references to such studies or the authors who have done such work in the past). One can’t help but wonder if all state owned enterprises (SOEs) in Ethiopia are condemned to be ‘a liability’, characterized by ‘bureaucratic inefficiency’ and ‘misappropriation of funds’, but the author believes ‘public knowledge’ is enough of an evidence base to condemn apparently all SOEs. The author would have been better served if he had qualified his points and maybe referred to comprehensive surveys/studies (they must exist somewhere?) assessing the operations and productive capacity of SOEs. The author argues that based on the statements and actions of the new Ethiopian PM what can be expected at-least in the immediate to the medium term is more of the same i.e. continuity, which to be honest seems like a very likely outcome.
The problem here is the implicit and not-to-be questioned mantra that everything and anything that the state does in the economic realm especially in the case of an ‘interventionist’ state such as the Ethiopian one, is by definition bad, inefficient, creates incentives for corruption and embezzlement and a whole litany of other dangers and mistakes. For the author (and those who think like him) the answer is simple-liberalization and the withdrawal of the state is the ultimate panacea.
I think the gaps in the author’s analysis and the resulting misconceptions that arise have their root not only in the realm of ideology (neo-liberal political and economic ‘thought’ whose hegemony is only recently being eroded) but also in the mistaken and unhistorical appraisal of the ruling party, its economic policies and the changes and transformations that it has brought about in Ethiopia.
An objective appraisal of the party, its socio-economic policies and their effects, will make clear that the party has long ago moved away from its ersatz and lightly digested Marxism-Leninism and come to terms with the neo-liberal order. The process was not linear and proceeded by fits and starts but it is difficult to deny that when and if one pays attention to the party’s/governments’ actual policies (their content) and more to the point their impact over time, the project has focused on creating the basis for a capitalist economy, facilitating the penetration of capitalist relations of production and ensuring that the Ethiopian social-formation is closely integrated into the int’l economic system (http://www.aigaforum.com/amharic-article-2018/lack-of-clear-ideology-and-eprdf.pdf ‘በግልፅ መቀመጥ ያለበት፡-
1. አብዮታዊ ዲሞክሲዊ ስርዓት የሚገነባው መደረሻ ዓላማው የዳበረ የከበርቴው ስርዓት ነው፡፡’
). One of the distinctive traits has been the role assigned to the state and its agencies or if one likes the adoption of a statist-capitalist model of development. There are very few authors who utilize such a perspective and analytical model but their work makes for some very interesting and educational reads. Authors like Fouad Makki (I would definitely recommend ‘Power and property: commercialization, enclosures, and the transformation of agrarian relations in Ethiopia’ ), some of the works by Rene Lefort and Jean Nicholas Bach etc also fit in this category.
The party-government have credible achievements in this regard such as the expansion of physical infrastructure-roads, railways, hydro-electric power dams; investment in the education sector; slow and incremental liberalization of sectors (backed by legislation) within the economy leading to greater role for domestic and foreign capital; the expansion of commercialized agriculture; creation of an incentive system to attract domestic and foreign capital; labour legislation that is explicitly framed in favour of capital (so much for inflexible labour markets, https://addisfortune.net/addisfortunefeature/labours-representative-weighs-up-new-bill/). The successive years of high economic growth testify to the ‘success’ of the model, but it is also increasingly apparent that the model has failed to transcend the structural contradictions/features characteristic of an under-developed economy (e.g. the size of wage labour has almost doubled or tripled in the last 15 (?) years in size but industry still contributes only a tiny amount to the GDP).
The close relations/alliance between the party-government and the interests of capital is exemplified even in the author’s article. As mentioned in the article, the new PM has met representatives of business and even asked them to put their requests in writing, continuing a fine tradition initiated by his predecessors, but I think both the author and I would agree, that there is negligible chance that this or any other PM would deign to meet the representatives of workers in the new industrial parks (whose pay is months in arrears or are paid starvation wages according to media reports) or the representatives of peasants who have been dispossessed of their lands.
I would disagree with the author regarding his interpretation and analysis of Ethiopian political economy. I also think that the party-government has been affected (for a long time now) by a schizophrenic condition characterized by pseudo-Leftist/populist rhetoric in party publications co-existing (sometimes uneasily) with very pro-capital and pro free market policies in the economic realm. I believe that the current conjuncture increases the probability (raises the incentives) for the party-government to resolve this dilemma conclusively. Either the ruling party and the new PM would conclusively adopt neo-liberal policies and liberalize the economy wholesale or alternatively choose the safer path characterized by sticking to the broad socio-economic directions defined in the past, accompanied by incremental reforms and tweaks. But I also think that it can be safely assumed in the near future (everything else being constant) that even if the second path is adopted, the pace of the reforms/tweaks would be quicker and their impact/scope broader and deeper.
Finally I would like to conclude my long comment by pointing to a missing link in the author’s piece. The author suggests/implies certain socio-economic reforms or policy shifts in the direction of greater liberalization (space for the private sector) and contraction of the state (with all its implications) would provide a panacea. The author forgets that economic liberalization policies can be painful to certain classes/sectors and inadvertently lead to greater instability. Not something that someone in government would necessarily look forward to.
Too early and too unfair to give judgement on Abiy’s economic revolution. Nevertheless, I have no doubt that these God sent young generation of leadership led by people such as Abiy and Lema will deliver an ideal economic policy that fits the needs of Ethiopia. Done deal.
Yes, like Abraham said, it is too early to provide such a observation on the economic restructuring. I am confident enough that the new younger leadership group will bring our country out of the grave we will see the actual renascence of Ethiopia.
Dr abiy is taking one of the leadership theory into action which is a man’s mind should be in the cloud but he has to touch the ground. As the article say for sure he is not taking any big deal of economic growth steps. He came at the right time to the Ethiopian people’s question. There was no peace through the country for 3 years which resulted destruction all over place. So in my opinion there is no need of economic growth strategy now as a primary issue to silent the riots or other protesting with the action of political issue. So this is why he is working on peace first and next to it he considered it too and making agreement.