There seems to be nothing officials of the Ethiopian government are more proud about than their achievement in the economic sphere. They often mention it as a historic achievement for a nation that has long been besieged by conflict and poverty. Their affection for the gross domestic product (GDP) expansion over the past 12 years has gone so far that it has now become a line of humour employed in popular comic stories.
But theirs is not just empty rhetoric; it has concrete facts to underpin it. The Ethiopian economy has witnessed an annual average growth rate of 10.5pc over the past decade, according to the World Bank. This makes the nation one of the highest achievers worldwide.
There surely is much to be said about taking a war torn economy out of its long overdue recession and helping it to sail through the waters of consolidation and growth. It entails so much of an engagement in both policymaking and leadership. Thus, it may be right for the ruling Revolutionary Democrats to be proud of their long list of economic achievements.
During the early days of the ruling EPRDFites, there had been so much suspicion about the potential of the government to lead the economy along the rightful track. The international financial institutions, including the World Bank and the International Monetary Fund (IMF), were so doubtful of the policymaking potential of the Revolutionary Democrats that they preferred to dispatch policy dictations. Yet, resistance was what they used to face, especially when it comes to essential issues, such as privatisation.
In his popular book entitled, “The Discontents of Globalisation”, for instance, the close friend of the late Meles Zenawi, an important mind behind the policy choices of the ruling EPRDF, Joseph Stiglitz (Prof), elucidates the impact that resistance to the prescriptions of the IMF and the World Bank caused to the government, under the leadership of the ruling coalition, in terms of accessing crucial funds that would have helped to stabilise the volatile post-war economy. Hard-pressed to liberalise the banking and telecommunications sectors, the ruling Revolutionary Democrats rather opted to maintain their stance of keeping the sectors under the guardian of the state.
Of course, times have changed so much since then. Disgraced for their top-down approach in the Structural Adjustment Programs (SAPs) of the 1980s and 1990s, the IMF and World Bank no longer attach policy conditions to their funding – at least not openly. They rather prefer to give governments enough policy space. Their role, according to the contemporary phraseology, is limited to consulting.
Of course, this does not mean that the relationship between the international financial institutions and the Revolutionary Democrats is only about policy skirmishes. There has been much cooperation between them in both policy designing and implementation. From the rapid infrastructure development that the nation has witnessed over the past two decades to the relative macroeconomic prudence, the economy under the leadership of the EPRDFites has benefited a lot from the financing of these institutions.
Things, however, are returning back to square one, as the divergence in policy pronunciation between the government and the institutions widens with each day. At the core of the difference lies the role the private sector is being given in the economy. Surely, this also relates to the roles the state assumes.
Predicated on the theories of the Developmental State, the Revolutionary Democrats are putting the state at the centre of the national economy. Instead of making the private sector the engine of the growth, they seem to prefer to make state enterprises the key vehicles in the economy.
As if to reverse their well recognised act of giving away enterprises once owned by the state, via the privatisation endeavour, they are now busy creating new breeds of enterprises. The pretext is correcting market failures and filling the investment gaps in the economy.
For the international financial institutions and proponents of the private sector, however, this act is faulty. If anything, it fails to recognise the limits of the state. By virtue of promoting a state-driven economy, critics argue, the developmentalists constrict the private sector and drain the economy of an essential inertia for sustainable economic growth.
If one is to go by the latest acts of the Revolutionary Democrats, the policy mantra seems to be breeding as many public enterprises as possible. From a commodity warehouse operation to manufacturing chemicals and consumables wholesaling, many new public enterprises are coming onto the scene, with the ultimate objective of correcting market failures.
For an economy that is already burdened with heavy public sector investment, such a trend means further contraction of the private sector. The ultimate endpoint, therefore, is an economy fully controlled by the state.
Even then, one would listen to government officials speaking loudly that they would rather see the private sector assuming an important position within the economy. But the question is – how could the private sector assume its rightful place within the economy, if the state is taking over all the sectors with essential economic incentives?
Be it on purely theoretical terms or practical sense, there cannot be sustainable economic development in an economy driven by the state. This is especially so when the state gets involved in every economic activity with real time economic incentives.
The sustainable growth of economies demands a rightful balance of markets and states. Whereas markets determine the production process, by way of defining the interplay between the demand and supply of goods, states play the role of effectively regulating the marketplace. It ought to only be when the markets fail to play their role effectively that states intervene. Even then, their intention ought to be correcting the market, rather than maximising their benefits.
Contrary to this conventional wisdom, however, the ruling EPRDFites are trying to correct market failures using public enterprises, which bring inherent inefficiencies to the rather chaotic market and investment regime. They seem to be convinced that states are able to run as many profit-oriented enterprises as possible.
Some countries, such as China, have tried this same path once in their economic history. But what they came to understand later along their economic development path was that the state is incapable of doing it all on its own. Their utmost lesson, therefore, had been that sustainable development can only be achieved by giving the entrepreneurial spirit of individuals and businesses enough space to operate. It is there that the miraculous growth of China, South Korea, Taiwan and Singapore lies.
For the benefit of the national economy, therefore, it is better if the Revolutionary Democrats revisit their approach to correcting market failures and filling investment gaps. There is so much truth in the arguments of the international financial institutions and proponents of the private sector. Helping the private sector assume its rightful place in the economy is the best approach to sustaining economic growth.
Breeding public enterprises cannot help to realise the envisioned growth, as the state has its own limitations. Besides, public ownership of profitable enterprises entails so much inefficiency and hence sets the economy to settle for lower productivity levels.
In contrast, letting the private sector be the engine of growth entails utilising the productive capacity of the economy to the fullest possible level. This, certainly, means more profit, more jobs, more investment and more economic growth.
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