The world Economic Outlook update January 2015 published by the International Monetary Fund (IMF) has raised a number of eye brows rather than soothing souls. It says that India will grow at 6.3pc in 2015 and 6.5pc in 2016. Moreover, in 2016, Indian growth rate will cross that of China’s projected growth rate.
While the planners in China have taken the Report with a pinch of salt, leading European and African economies are staring at a simple reality: how can a country named India with poverty levels above 20pc, literacy levels below 65pc and ranked 142nd in ease of Doing Business clock a growth rate of over five percent consistently and dream to surpass Chinese economic rates in 2016?
The answer perhaps lies in converting weaknesses into opportunities. An ordinary Indian sees opportunities in feeding, managing and alleviating poverty and literacy to next level. No wonder we see valuable multinational companies being headed by Indians.
Talking about bureaucratic rate tape and difficulty in doing business in India, well, these factors can at best be said to be red herrings to dissuade prospective investors. Else, why would India attract the likes of Vodafone, BP, the Silicon Valley crowd and Korean Cheabols?
Over a period of time, India has been able to build a strong, thinking and efficient middleclass. Successive governments focussed on financial inclusion by granting tax breaks and investment opportunities to the salaried class.
Huge jobs have and are being created in domestic education, food, media, finance and entertainment sectors alone, leading to the rise of transient class from lower to middle and upper middleclass. Inequalities still persists. However, the gap within the class is narrowing.
Favouritism and crony capitalism is still order of the day. Yet, equality is being streamlined with employment of information technology (IT) methods. Slow but steady infrastructure development has created newer cities and opened up new vistas for development.
On the other hand, China embarked on being the world factory to produce low cost products with export orientation. Low wage payment has created a disoriented lower middleclass that continued to languish in lower standard of living and constantly seeking better opportunities outside the mainland China (in Middle East and Vietnam and Hong Kong).
Lack of civil liberties is another reason for stalling growth of the masses. During 2000-2005, to fuel growth, China invested heavily in infrastructure. Today, this world class infrastructure is just not paying!
Therefore, China is slowing, whereas India is growing. Indian growth now appears to be less policy dependent, while it is otherwise for China.
What can Ethiopia learn from these diverse growth stories?
Ethiopia so far has had some fair amount of success growing over 10pc annually since 2004. However, average year on year (YoY) inflation since then has been more than the annual growth rates thereby erasing all gains!
How different will years 2015 and 2016 be for Ethiopia and how?
Ethiopia needs to build a “thinking and contributing” middleclass population. To do so, tax rates and tax administration needs to be rationalised with a view to leave a surplus in the hands of the working class.
Remember China, low wage workers and subsistence earning labourers are short term contributors. To channelize surplus in hand, the government needs to provide fail safe investment opportunities.
One does not need to be an economist to conclude that antiquated and restrictive domestic banking laws have effectively curtailed credit availability and expansion, thereby, retarding the small enterprises and proprietary start-ups. Like India, there is a huge scope in Ethiopia to create opportunities in financial services, media, education and health sectors.
The ever-growing Ethiopian population are throwing up a host of possibilities. Banks should not be afraid of NPL’s. Instead they have to have a robust recovery policy.
The rulers in Ethiopia have to realise that financial inclusion is not a peripheral subject anymore, but an inseparable part of economic development. Recently, India has created a world record by taking banking services to 90pc of the population. This will enable huge savings in subsidy administration, track every payment for tax purpose and reduce cash business.
While Ethiopia has targeted manufacturing sector in successive medium-term plans, including the latest Growth & Transformation Plan (GTP), it has done little to ease import restrictions, opening basic businesses like mining, energy and telecom for foreign investment. Consequently, we see Ethiopian public sector spearheading this sector albeit with little or no success.
For manufacturing to be successful, an entrepreneur needs cheap and reliable transport and telecom facilities, steady supply of raw material and technology and free movement of services. Unlike China, for landlocked Ethiopia, growth in manufacturing sector sans the above factors is a herculean task.
Instead, service sector expansion is a better alternative. In a haste of earning foreign exchange, Ethiopia should not create export oriented manufacturing but a manufacturing focussed on domestic requirement. This will also bring down supply side domestic inflation.
Lastly, one hopes that Ethiopia’s infrastructure expansion does not follow the China story. Investment of borrowed funds in huge railway, power and road projects has already impacted Ethiopia’s debt-GDP ratio and worse may follow if these projects do not earn their money due to inflation and low disposable income of the users. The rulers need to find the “sustainable infrastructure investment level” before embarking on infrastructure expansion to avoid China like trap.
To its credit, Ethiopia is comparatively free from the course of red tape and corruption. However, the complicated and ambiguous procedures are killing!
These can be revamped at a stroke! Therefore large scale structural reforms are not required. What is needed is twicking the administrative rules in favour of a transparency and speed.
This exactly what the new government in India is embarked upon. Ethiopia may follow!
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