Under the calendar of public enterprises, the time of reporting has come. Along with an extended list of activities they have undertaken over the year, chiefs of the public enterprises, often appointed to their position for their loyalty to the political class, will be disclosing their books. So far, a couple of them, including ethio telecom, Ethiopian Airlines and Commercial Bank of Ethiopia (CBE) have disclosed the hefty profits they have made.
Many are in the pipeline to follow suit. The sectoral diversity will probably expand to shipping and logistics, power, wholesale trade, manufacturing and input supplies. There is no surprise with the mountainous profits these companies are making as this is a government that runs multiple enterprises in the name of Developmental State model. As much as the government, under the watchful eyes of the Revolutionary Democrats, shed many enterprises off its ownership list (under its much acclaimed privatisation scheme), it has created or restructured plenty of them into instruments of “statist policy guidance”.
Whatever profit the public enterprises are declaring, therefore, it is a direct result of the policy guidance the government provides. For many of these enterprises, the guidance is all about providing them with ultimate monopoly and protection from market competition. This involves not only protecting them from foreign rivals, but also discouraging local businesses to stand against them.
Of course, the concept and practice of state capitalism is not new to Ethiopia. It exists across the world, from the notorious Russia to the volatile China and from the aging Europe to the troubled Latin America. Africa, a region often identified for its patches of conflict, volatility and humanitarian crisis, also has states that seemingly, are following this trend. Ethiopia, Rwanda, South Africa, Morocco and Tanzania are some of the African countries that seem to adopt state capitalism as an economic model.
Even then, the Ethiopian version has its own peculiarities. For starters, Ethiopian leaders take their ideological affiliation from East Asian Tigers – Taiwan, Singapore, South Korea and Hong Kong. It seems that they found the miraculous stride of these countries as a cause worth following. Lately, though, they have expanded their modelling to China and Japan.
For the ruling Revolutionary Democrats, state capitalism is not just an economic model. It is also a political framework. That is why they merged developmentalism and democracy to create a blended framework called, Democratic Developmentalism. Essentially, this is a political economic framework that advances state capitalism, wherein the state gets its legitimacy through democratic practices. Hence, the policy guidance that comes out of such a state is said to represent the public interest.
It is this very reason that is presented on every occasion that the protection provided to state enterprises is raised. The full or partial monopoly the enterprises entertain, according to the official line, is one way for the state to optimise the rent from these sectors and use it to leverage growth in other areas of the economy. What is often not explained in such debates is at what cost all these protections are being porovided and how much is the optimal gross rent the government is expecting before it lets them thrive through competition.
Far from economic reasons, though, the ambition of the ruling Revolutionary Democrats is to create national champions that could serve as pullers to the whole economy. Not only would such enterprises serve as stirrers of the economy, with Ethiopian being a typical example, they would also serve as fulcrums of enhanced competition, such as Alle Bejimla.
It may be true that the public enterprises have been profitable. It may also be true that some of them have become shining stars at continental level. Yet, it does not mean that the whole trend is a sustainable one. Even worse, the cost being paid for the trend to happen is considerable for both the economy as well as the public.
In most areas of public enterprise operation, the cost of accessing services is considerably higher than the case would have been under competition. And service provision quality is disappointingly inferior.
Because of the ultimate monopoly extended to the lone shipping liner, for instance, importers and the national economy are forced to pay an average of 350 dollars more per 20ft container. This translates into millions of dollars in additional logistics costs to the economy. Average costs of having access to internet and telephone services in the country are, according to estimates, 300pc more than the case in comparable economies of Sub-Saharan Africa.
Regulatory restrictions, meant to protect Ethiopian, have suppressed the growth of the domestic airline industry. Many efforts of creating competitive domestic airlines have failed due to the protective seat limit regulation. Fuel subsidy, guarantees to access global capital markets and arrangements meant to create linkages, such as extension to inland transport of flowers, are some of the predilections the national carrier enjoys.
Things are no different with the public-owned banks. The three banks, Commercial Bank of Ethiopia (CBE), Development Bank of Ethiopia (DBE), and Construction & Business Bank (CBB), still have their own privileges in the market. Theirs is not an absolute protection, but a preferential treatment.
From directing government business to them, to putting them as bridges for linkages in public projects, a viable example being the public housing scheme, these enterprises enjoy preferential policy support. This is not to mention the occasional direct capital injection they get from the state.
All these protective actions may have resulted in the hefty profits. Yet, they all are happening at the expense of the economy and the public. Both the direct and indirect costs of the protection are huge and unsustainable.
Economic history, in countries as varying as China and the United States, shows that proficient national champions could only be created under competition. Competition not only infuses the inherent incentives for productive investment, but it also drives modernisation. Effective market positioning, innovation, optimal firm-level productivity, efficient human resource arrangements, and maximum multiplier effect are all possible only under competition.
With this, consumers could enjoy lower cost and quality service; entrepreneurs could unleash their potentials; new businesses would emerge; and the economy would have fundamental strengths. Therein lies the key for sustainable growth.
The government could also get the resources it needs to invest in other areas in the form of tax revenues. For instance, a study has shown that the Ethiopian government could obtain over 250pc in tax revenue than the profit it is getting from the telecom monopoly, had competition been the rule of the game. This has been the case with Nigeria, Zimbabwe, United Arab Emirates (UAE) and Argentina.
Similarly, much of the marginal costs could have been avoided in sectors, such as shipping, had the market been the guiding force. Public enterprises would have also been able to restructure their investments and operations in such a way that they could sustainably be profitable.
In view of all these, the protective policy the government practices is making money at the expense of an economic-level cost. It also is not helping protected enterprises position themselves advantageously at both strategic and operational levels.
If the whole goal is to create national champions that could pull the economy out of its low productivity supercycle, the best option is to let competition guide economic decisions. Letting the market forces pick the winners is the viable option to create champions with the structures, strategies, vision and capability to thrive under market dynamics. The alternative, which is both politically and economically costly in the long run, is building the economic house on shifting sand so that any unforeseen economic wind could blow it away.
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