The long-subscribed to economic model of the EPRDFites - developmentalism - seems to have fallen out of favour by the administration of Prime Minister Abiy Ahmed (PhD). But what is going to replace it remains vague, writes Fiseha Haile (email@example.com), an economist at the World Bank. The views and opinions expressed in this article are solely those of the author and do not necessarily reflect the views of the World Bank.
Shortly after it assumed state power ousting a military junta, the EPRDF adopted Agricultural Development-Led Industrialization (ADLI) as its development strategy in the mid-1990s.
ADLI aimed to promote initial industrialisation by way of fostering forward and backward linkages between agriculture and industry, with smallholder farming lying at the heart of the strategy.
Accelerated growth in agricultural production was expected to help stimulate industrial development, while the industrial sector would provide agricultural inputs and goods consumed by rural households. The Industrial Development Strategy in 2003 emphasised export orientation, strong state guidance, and the key role of the private sector.
In what appeared to be a paradigm shift in development strategy, manufacturing abruptly took centre stage post-2010 as a primary driver of structural transformation. Conscious and concerted efforts have been made to jumpstart industrialisation through an activist industrial policy executed by an activist state.
Light manufacturing featured prominently in the government’s two editions of the Growth & Transformation Plan. The source of inputs and financing, as well as the policy menu for industrialisation, have been largely decoupled from agriculture. Attempts at industrialisation have so far relied heavily on external financing, capital imports, and the development of industrial zones.
According to the Government, the aforesaid changes merely reflected a shift in emphasis and not a directional change. It was, however, nothing short of a U-turn in development policy. Turning smallholder subsistence peasants into commercialised and high productivity farmers turned out to be more elusive than the rebel-turned-leaders thought.
For almost a decade now, Ethiopia has been trying to emulate fast-growing Asian economies that achieved rapid industrialisation on the back of temporary protection and promotion of “infant industries” with limited agricultural inputs, save for the absorption of surplus agricultural labour.
Whether the policy change was directional or not, it was a change in the right direction. It is difficult, if not impossible, to find a country that has managed to industrialise solely based on scattered smallholder farming.
One of the time-tested recipes of economic development is that manufacturing-led structural change lies at the heart of catch-up growth. Manufacturing has the potential to absorb the bulk of an economy’s low-skilled workforce at a large productivity premium and is a powerful source of knowledge and technology transfer.
The late Cambridge economist Ajit Singh recounts three things he learned from Nicholas Kaldor: “First, the only way for a country to develop is to industrialise; second, the only way for a country to industrialise is to protect itself; and third, anyone who says otherwise is being dishonest!”
In his well-acclaimed book, “How Rich Countries Got Rich … and Why Poor Countries Stay Poor,” Erik Reinert (Prof.) also argues that “no country has ever become rich by exporting foodstuffs and raw materials without also having an industrial sector and, in modern times, an advanced service sector.”
Structural transformation has, however, progressed far slower than expected. Manufacturing’s share in the country’s gross domestic product (GDP) has stagnated at around five percent for more than two decades.
Nonetheless, there are good reasons to think that the country is at a critical juncture ushering in a new era where manufacturing makes increasingly significant contributions to the economy. The government has formulated clear, albeit ambitious, goals to make the country a light manufacturing hub and has put in place appropriate legal, regulatory, and institutional frameworks.
Substantial investments have also been channelled into developing industrial parks and relevant infrastructure. The sharp increase in FDI inflows is another reason to be optimistic about the future of Ethiopia’s nascent manufacturing sector.
However, since the new administration came to power in April 2018, the country’s economic policy direction has remained blurred. Prime Minister Abiy Ahmed (PhD) is articulate and well-versed in the political arena, but, when it comes to economic policy, he remains unclear and unforthcoming. It remains to be seen where the much-touted economic liberalisation will lead us.
What will be the role of the state in the economic sphere? Are we gravitating towards neo-liberal policies that were demonised and castigated by his predecessors, or Nordic-style social democracy or any other model?
If left unchecked, the policy uncertainty could put investors on a wait-and-see mode and hamper long-term investment.
Though one can only speculate about what kind of model Abiy has in mind, one thing is now crystal clear. The Asian-style developmental state that EPRDF has been trying to establish has started withering sooner than anticipated.
The state was supposed to control the commanding heights of the economy to be able to encourage and guide the private sector through the strategic allocation of rents. As such, the EPRDF’s recent plan to partially privatise major state-owned enterprises (SOEs) is antithetical to the foundational tenets of the model and puts the nail in the coffin of the developmental state.
Last month, Alex de Waal, on the sixth anniversary of Meles Zenawi’s passing, published conversations he had with the chief architect of Ethiopia’s developmental state model.
“We could privatise our key economic assets at any time. We would get some windfall financial gains from that, and those who bought up our assets would get even bigger windfall profits, but if we do that any time soon we will be the loser. Whoever buys up those assets, and without doubt they will be underpriced, will also buy a stake in our politics,” Meles had argued.
Ethiopia’s recent decision to join the African Continental Free Trade Area (AfCFTA) also runs counter to the former strategy of protecting key sectors and promoting infrastructure-driven integration. Further, it seems the country is turning its face away from the East to the West, perhaps a precursor to ideological shift.
Yet again, the government claims that it still adheres to the creeds of the developmental state model. However, the EPRDF’s departure from its long-held economic philosophy is glaringly visible for trained eyes. Many people agree that Abiy’s self-professed belief in the developmental state is a tactical move.
As succinctly put by René Lefort, “It is now clear that Abiy has decided – or had no choice – to rely on a renovated EPRDF to assert his position … to build a democratic political system and liberal economic structure.”
Despite impressive economic growth since the mid-2000s, recent years were marked by gross inefficiencies and corruption, rampant unemployment, and huge democratic deficit. Key state-led projects and enterprises, including sugar factories, housing projects, and the military-run Metal & Engineering Corporation (MetEC), were unproductive, led to a rapid debt build-up, and failed to produce a sufficient number of jobs.
An omnipresent state also meant that the private sector remained small, crowded-out from the credit and forex markets, and borne the brunt of regulatory burdens. Party loyalty took the driver’s seat replacing meritocracy, which led to flourishing patronage networks, with people in and around government offices syphoning off state resources into their own pockets.
But reformist EPRDFites should not throw away the baby with the bathwater, but rather carefully review the specific reasons for the failures. Moving from one extreme of the development paradigm to another would only engender economic malaise and social crisis.
Ethiopia would do well to learn from the failures of many African countries in the 1970s and 1980s when they tried, or were forced, to adopt foreign-made models that disregarded country-specific idiosyncrasies. Almost no developed country has gotten rich without the state playing a key role particularly in the early stages of development, including through selective industrial policies.
Furthermore, the choice set contains more than free market versus developmental state.
In the first place, there is no such thing as a free market as markets cannot be free from the influence of governments. State intervention has been behind America’s entrepreneurship and innovation.
Mariana Mazzucato (Prof) once quipped that “the development of the features that make your iPhone a smartphone instead of a stupid phone is publicly funded.” She went on to say, “Don’t do as the Americans and the British tell you to do, do as the Americans and the British did.”
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