Costly Shocks as State Sidelines Learning

Much of the form, structure and operations of the state under the command of Prime Minister Hailemariam Desalegn – who seems to be consolidating power by standing firm against opportunists within the ruling coalition – have been crafted under the leadership of the late Meles Zenawi. A seasoned politician-cum-leader, Meles had the vision to transform the state from what he used to call “a night watchman state” to an “active facilitative state”. By this, Meles meant that the state would be the major driving force not only in the economic sphere, but also in nation’s social and political realms.

Essentially, Melesism emanated from the deficiencies of the small and limited state pronounced under liberalism. Essential policy prerogatives, such as reducing inequality and expanding access to key services, could not be easily realised under a dwarfed and bounded state. Varying interests ought to be balanced before any policy action is taken. In a developing country like Ethiopia, such a balancing act could not be made without compromising development. Thus, in the eyes of Meles, compromising development for such a balancing act is a dead end.

What might have started as Meles’ personal reflection eventually ended up as a guiding principle and ideological ground for the ruling party. There is no one emblematic idea that describes the EPRDF better than its commitment to an active role of the state in the political-economy. The association between the principle and the party is so strong that sometimes it appears the party cannot live without it. It is common to see ruling party officials appearing to be confused whenever they are pushed to think of a competitive environment with the state having less leverage.

Regardless of the theoretical ground, the practical reality within the state has changed little over the past 24 years of EPRDF rule. Like the early days of the 1990s, the current Ethiopian state is seen grappling with supply shortage. This problem ranges from commodities to foreign exchange. Other areas affected by the trend are skills base, infrastructure and services.

The economy, for instance, is sandwiched between the two overlapping cycles of commodity and foreign exchange shortage. On the commodity front, the market does not have an adequate supply of key consumables, such as edible oil, sugar and flour. Access has reached such a low point that consumers have to travel between associations’ shops to obtain the goods they need.

On the foreign exchange front, the economy is facing a considerable shortage. Lately, growing imports dominated by capital goods, coupled with lagging exports, have made the problem all the more severe. Even ambitious export plans included under the first generation of the Growth & Transformation Plan (GTP I), could not resolve the problem. Worsening the situation are a closed financial sector, closed capital account, high cost of remittance transaction, non-diversified export base and limited export destinations. Latest figures, from the International Monetary Fund (IMF), show that the national foreign exchange reserve stands at its lowest level in five years, at a total value of less than two months of imports (about two billion dollars).

The ongoing drought is adding its own hit to both cycles. Not only is the drought increasing the import bill of the state, but it is also affecting the export regime. With agricultural produce serving as the export mainstay of the nation, it is obvious how much the drought would cost in export revenue.

Shortage is not unique to the Ethiopian economy. It happens in every economy. It is even the lifeblood of economic transactions as the forces of demand and supply operate using scarcity as electrons. The magnitude of scarcity felt within an economy or a section of an economy is definitive to the way the demand and supply forces react to strike a moving equilibrium.

But this does not mean that every instance of scarcity is similar. Much of how scarcity is felt will depend on market structure, the type of market participants and the nature of the policy space. Hence, a supply shortage in different environments has different impacts.

In view of actions of the state, though, the magnitude of the impact caused by shortages depends on the learning culture. A state with an established culture of learning will be able to withstand supply shocks with less cost than one without such a culture. In the words of contemporary institutional economics, the shock absorption capacity of the state is defined by its “learning performance” as indicated in its “performance latitudes”.

The state, as led by the EPRDFites, seems to lack such a culture. Indicative of this is the fact that each supply shock is treated as a new event, without precedent in the economy. The level of confusion, uncertainty and disorganisation observed between shocks is similar. Each supply shock is fought using temporary leverages. There is almost no systemic response to shocks.

As much as the ruling Revolutionary Democrats have spent the last two decades fighting supply problems, one might expect them to be experts as such. Yet, looking at how they handle ongoing shocks, be it the foreign exchange shortage or commodity supply problem, it becomes obvious how low their learning curve remains. No systemic threads are in place to absorb the shocks and reduce the impacts. Everything is starting from scratch, often characterized by a knee-jerk approach.

It may be true that the Ethiopian economy is inherently supply constrained. This has largely to do with the structural fundamentals. Rain-fed and largely subsistence agriculture, undeveloped manufacturing sector and volatile service sector means that the economic equilibrium is often defined by what happens in the supply side. More often than not, the supply factor lags behind the demand factor. Hence, supply plays a dragging role in the macroeconomy.

Even then, the impact would have been reduced had the state established a learning culture. This entails an institutional mechanism and attitude to consider each shock as a learning platform. Constraints, be they in the tradable or non-tradable sectors, could be used as symptoms to institute preventive or absorptive measures. And it takes nothing more than essential sensitivity to the inherent constraints of the economy.

Politically speaking, this might demand the ruling EPRDFites take a rather different path of thinking, reasoning, evidencing and acting. And the challenge would certainly come not from their disinterest in travelling the new path, but, as the saying, “old habits die hard” goes, from the dragging impact of their old way of doing business.

One thing is true, however. As the economy grows in size, the magnitude of the impact of a given shock is certain to increase. This is exactly what is seen from the ongoing drought. Over 10 million people are in need of emergency food assistance. In absolute terms, this is one of the worst droughts the nation has ever faced.

But there is much in the form of drought response, the state can learn from previous occurrence. This, however, can happen only if the state gathers the momentum of learning to take stock of past experiences and reflects on the weaknesses.

This, however, should not be limited to the drought response. It ought to be an essential culture within the state. A true “active” state, as Meles used to proclaim, could not happen without an established learning culture.


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