Abiy’s Men in Economic Policy Dilemma

For Yohannes Ayalew (PhD), the new boss of the Ethiopian Development Research Institute, Ethiopia’s macroeconomic prospects are bound to continue on the same growth trajectory as the past decade. The only limitation he puts forward are constraints on the competitive front arising from failures in value addition. A former chief economist at the central bank, he argues that finance, labour and adaptation of technologies should be the least of the worries to meet the kind of growth he modeled for the years to come.

It was ironic then to see him at Hilton Addis earlier last week challenged by technology as he presented his projections on economic growth. His laptop froze in the middle of his slide presentation, which caused his co-presenter, Eyob Tekalegn, head of the National Planning Commission, to break for coffee.

It was a rare but revealing forum discussing the prospects of Ethiopia’s macroeconomic fate. Jointly organized by the Commission and the Research Institute, the panel was anything but a deliberation on grand strategies, barring interventions from Ermias T. Amelga, founder and former CEO of Access Real Estate.

Yohannes’s recommendations were for the administration of Prime Minister Abiy Ahmed (PhD) to “enhance current measures” to beef up competitiveness and to realise a structural transformation. Addressing gaps in finance, he suggested a policy of private-public partnerships be pursued, a “response to short and long-term challenges.”

A typical product from a technocrat, it was a presentation devoid of imagination, if not suffering from omissions of current economic predicament. Overlooking the place agriculture commands in the GDP, and mute on binding constraints in the supply side to improve manufacturing exports, Yohannes produced hardly any excitement among the participants, a collection from academia and the private sector.

The forum could have been used to set the agenda to redraw macroeconomic policies but was used primarily to vent out the frustrations of many disgruntled voices. Many zoomed in on Yohannes’s former employer, the National Bank of Ethiopia, as the main culprit for the economic woes the country faces. At its best, the forum is a platform to toy with ideas on what to do to alleviate the perennial foreign exchange crunch. Regrettably, it was a missed opportunity to influence policy.

The economic growth model of the ruling EPRDF, followed over the past two decades or so, has registered impressive feats. It is informed by a worldview that Ethiopia’s economy is too small, has a weak private sector and cannot compete in the global market. Leaving the economy to market forces at this stage leaves the country with a predatory state that works for the interests of a few powerful and connected elites.

The EPRDF believed the state needs to carefully and strategically guide the trajectory of economic growth as a parent with an underage child. The architect of Ethiopia’s developmental state model, the late Meles Zenawi, believed the state should be an “activist and developmental rent-allocator.”

Not surprisingly, this model appears to have reached its limits. The state, the driving force of the growth, grew to be too demanding and wasteful, effectively crowding out the private sector. The model has brought with it structural imbalances, including a negative balance of payments, a severe forex crunch and inflation, not to mention a growing income inequality and an increase in unemployment.

The proverbial parents, the political and economic institutions, grew to become the very influences that deprived the economy of its vigor, instead of the globalised market forces that Meles had feared. Even worse, the child, having grown under the strict patronage of the parents, remained weak as a result of shortage of skilled human resources, capital, technology, backward linkages and financial intermediation.

There are signs that the developmental state model is unravelling.

An economic policy of liberalisation seems to be on the horizon, with Abiy`s administration signalling its openness to new ideas. It is up to others with a keen interest in macroeconomics to generate forceful policy recommendations that can be game changers.

There is the decsion for partial or full privatizations of major state enterprises. A great deal of the decision-making ability of the state has risen out of its ownership of these massively profitable state enterprises, such as Ethiopian Airlines, Ethio telecom and the Ethiopian Electric Power Corporation.

Their monopolistic position in the market has allowed the state to weaken consumer sovereignty, giving way to declines in service quality and the scale of products and services necessary for the proper functioning of almost all business in the country. And the enterprises’ profitability has made the state allocate rent to other sectors of the economy. There should be little qualm if the administration cashes out from their divestment to fill a 13-billion-dollar gap in public infrastructure financing.

It should allow the administration to breath and reorient its growth strategy to revitalize the national economy. Nonetheless, tinkering with existing growth models, in the manner Yohannes tried last week, would only produce marginal results without necessarily changing the fundamentals.

The reluctance not to take the great leap is understandable. Ethiopia under the EPRDF has created wealth. A popular view is for the government to be careful not to throw the baby out with the bathwater. The short-term effects of opening up to the global market with weak regulatory capacity and a small private sector in tow – that Meles was worried about – have overshadowed the long-term benefits that can be had if the administration succeeds in creating autonomous political and economic institutions.

The pace of reforms introduced by the macroeconomic committee is sufficient enough to give the impression that there is a move away from the developmental model but no definitive evidence to conclude economic liberalisation is the end game.

It has to be. Economic policy liberalisation will bring much-needed competition, capital, technology and skill to Ethiopia’s economy, which would in the long-term usher in the type of competitiveness Yohannes was eager to see. Of course, the manner of application of these policies varies between countries and has marked the success of India as it eluded many African nations.

The initiative needs to be complemented by a long-term strategic roadmap. The economic reforms that are to come, the part the private sector is expected to play, and the role the state assumes should be rexamined and articulated. Prospective investors, the private sector and the bureaucracy need to have a clear idea on what the reforms entail and the targets, the gaps and priorities would be.

Economic policy liberalisation involves the opening up of the capital account, moving to floated foreign exchange market, allow foreign capital to have access to the domestic financial market, remove barriers to foreign direct investments, and lift series of restrictions imposed on the local banking industry.

However, the pace of implementation and sequences, and a thorough understanding of which industries require continued policy support need to be designed and coherently communicated lest there is waste or stagnation as a result of lack of policy clarity. Formalizing this process would spur public discussion, instead of hearsay, and allow leaders of the private sector to develop long-term plans and make such positive reforms harder to reverse.

Published on Sep 08,2018 [ Vol 19 ,No 958]



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