Developing a culture of open dialogue in Ethiopia to entertain different views is paramount in our quest for individual and collective economic transformation. I have a great deal of interest in the subject of international political economy, especially when it comes to Ethiopia. I have thought a lot about the impact that liberalising the country’s financial sector would have on the wellbeing of its people.
In an era of internet-driven globalisation, market exchange is now at our fingertips. The benefits of globalisation are irrefutable. But we must be cautious before rushing to liberalise Ethiopia’s financial sector.
As David Ricardo, in his book On the Principles of Political Economy and Taxation, ascertains, people are better off with the free movement of trade. Free trade allows people to specialise in specific areas so they can develop a competitive advantage and thereby raise their living standards.
Indeed, I was once an advocate of loosening the policies in the financial industry and for allowing outside competition to enter the market. However, the more time I spend in Ethiopia, the more I am concerned with the potential consequences of a liberalised financial sector that I once hoped for.
Protectionist policies hide the weaknesses of domestic industries by shielding them from outside competition. Protectionist policies also hold back the rate of short-term economic growth. Because when there is a lack of competition there is no pressure on businesses to be innovative and perform well.
Economists overwhelmingly disapprove of protectionist policies. Nonetheless, in order to remain in power, political elites tend to prioritise their constituents’ interests overt the long-term interests of their country. As a result, protectionist policies are instituted over data-supported economic policies. It is a symptom of a democratic system.
The longer Ethiopia’s financial sector remains sheltered from outside competition, the harder it is for the private sector to grow. Because lack of credit limits opportunities to borrow, by extension it limits economic activities. The contribution of Small and Medium Enterprises to an economy has a direct correlation with their ability to access credit. The solution to increase access to credit surely is liberalizing the financial sector.
In the West, where mature financial institutions are abundant, the way most businesses gain profit is by focusing on three areas: service, regulation and finance. Businesses seek to outperform competitors by providing exceptional customer service; often creating financial tools to make customers’ lives cost effective and efficient. They also spend a lot of money on lobbyists to protect their industry’s interests. Lastly, they master accounting laws in order to capitalise on regulation loopholes and benefit from tax avoidance. Indeed, at times, companies engage in illegitimate business practices that are not easily detectable, even by the West’s sophisticated financial regulations.
These are areas for exploitation and corruption; that I don’t believe Ethiopia is currently well prepared to manage. In the absence of sound regulation and sufficient numbers of well trained regulators, I am afraid opening up Ethiopia’s financial industry is a recipe for failure.
The industry should not remain protected for far too long from foreign capital; however, at this early stage of an economic growth, Ethiopia cannot afford to have a single mishap. The 2008 global financial crisis is a reminder of the danger posed by a deregulated financial market. We should not underestimate the ingenuity of people who, if given the opportunity, will use their financial creativity to manipulate the market.
I concede that, at present domestic financial firms are ill-prepared and unable to provide decent customer service. Our working culture is not yet fit to compete with the seamless business services of foreign firms. I believe that if foreign financial institutions were welcomed into the domestic market, the flow of customers to local banks for instance would dry up immediately.
The greater foreign economic ownership is in Ethiopia, the more political influence foreigners will hold. Gains from profit could flow out of the country and capital flight would increase in times of economic and political uncertainty. Companies could also shut down their operations altogether.
Ethiopian ownership on the other hand, has a reduced risk of flight and is also likely to expand Ethiopian investment in the country as entrepreneurs and businesses of all sizes prosper.
An open financial sector would give the private sector increased access to capital and spur growth. After all, economic growth is directly linked to the availability of capital and the frequency of monetary transactions. However, if the domestic financial sector is not on par with transnational financial institutions, the local businesses will be forced to close and foreign owners would take their place.
It is imperative that we approach opening up the financial sector with caution. The Nobel prizewinning economist, Joseph Stiglitz (PhD) found that, when Russia underwent ‘Shock Therapy’, a rapid economic change in the 1990s by ending state subsidies, implementation of immediate trade liberalisation and privatisation of publicly held assets, the impact was too much of unnecessary pain. Lacking gradual ease to liberalisation, further degraded Russia’s economy.
Liberal market economies are dependent on a system that has solid institutional foundation, strong regulations and established practices, which Russia at the time did not have. Neither does Ethiopia now. Rush to financial liberalisation before these foundations are firmly established is simply ‘putting the cart before the horse’ and marching into uncertain future. Ethiopia must avoid from falling into a similar situation.
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