Impressive, Prime Minister Abiy. But Caution

The Revolutionary Democrats have finally mustered the courage to swallow the inevitable bitter pill under the leadership of a young man, Abiy Ahmed (PhD). Last week, the highest decision-making body of the party agreed, rather unanimously, to open up state-owned enterprises in key economic sectors to private capital. It is a decision that heralded a second-generation leadership of the incumbent has a test for meaningful reforms both on the political and economic fronts.

Large and monopolistic public enterprises are the hallmarks of a developmental state. The assumption goes that since developing countries cannot afford to wait for the slow economic transformation that has been evident in the developed nations, long-term central planning is the best way forward. State-owned enterprises in strategic sectors, such as infrastructure, transport, telecommunications and finance can help government direct the economy in manners it sees fit.

Ethiopia has followed this model since the ruling EPRDFites have taken office, and more robustly over the past 15 years. They have evolved to become moderate leftists, having privatised 377 public enterprises worth 47 billion Br.

The fate of the “Big 5”, situated in the commanding heights of the economy, often as monopolies, has never been put up for negotiations though. Access Capital Services, a private equity firm with a research offshoot, identified them as the Ethiopian Airlines, Ethio-telecom, the Commercial Bank of Ethiopia (CBE), the Ethiopian Shipping & Logistics Services Enterprise (ESLSE) and the Ethiopian Insurance Corporation (EIC). They have been the darlings that until recently the government has given no clue of an intent to privatise.

It seems now things changed after the EPRDF endorsed the partial privatisation of Ethiopian, Ethio-telecom, Ethiopian Power Corporation, and ESLSE. Railways, sugar factories, industrial parks, hotels and manufacturing companies are also included, with the prospect of full privatisation.

It was a significant, impressive and positive departure from the past that signals more is yet to come.

In hindsight, there were indications that such a move by the ruling party would be inevitable. There are headaches partial privatisation could address, such as the severe forex crunch, an external debt crisis and a cash-strapped economy. If the past three years have thought the Revolutionary Democrats anything, it is that export diversification and expansion take longer than anticipated, given the structural limitations on the supply side, hence the stagnant growth of under three billion dollars.

Selling assets, preferably to buyers that can bring dollars, will inject the economy with foreign currency to halt the business slowdown and finance more of the state’s infrastructure programs. It also means that the government can slow down borrowing from creditors to reduce the public debt that stands at over half of the growth domestic product (GDP). State enterprises owe close to half of this debt.

For a country with an inherent deficit in its balance of trade, there is an advantage to privatising beyond calming the macroeconomic uneasiness. The injection of fresh capital may be immediate. But the transfer of technology and know-how to these enterprises, through new management, brings efficiency, and positively affect the economy. It is unwise to underestimate the power of profit to incentivise people.

But this is unlikely to happen if the reform remains tame as the statement by the Executive Committee suggests, however much of a milestone it maybe for the party. The enterprises will continue as monopolies, just with multiple shareholders. As it stands, the move does little good beyond securing cash for the state; it will not serve as an investment for the future.

As political reforms are meant to usher democratic order, so is privatisation and economic reforms if only they are made part of an integral and coherent policy of liberalisation. Without the necessary measures to liberalise critical sectors of the economy such as finance and telecommunications, it borders on naïvity to expect merely allowing private players a piece of the pie will suffice.

Unless the commanding heights of the economy are made to be an equal level playing field for anyone that can legitimately engage in them, all privatisation will achieve is a de jure monopoly – the sort where the government protects firms from competition.

What was wrong with Ethiopia’s state enterprises has not been that they belonged to the state per se. Although government should have no business running an airline or a commercial bank, there is a reasonable need for it to be able to provide power or telecommunication services. It is often the case that there are sections of the public that cannot afford these essential services thus need to have them provided at lower prices. If markets are left to sort themselves out, there is a significant chance that lower-income groups can be hard-pressed to be privy to the provisions of education, health, electricity and water.

But a government providing such services ought not deprive private players engaging in the same sectors. The same rules should apply to all players, and a competitive playing field has to exist. The best example of this is public transportation, where the state, as well as private citizens, can provide the service, often at varying levels of costs and quality. The choice lies with users, the power of which incentivises firms to compete and deliver better services.

An overdue measure on the side of the EPRDFites, privatisation of these key enterprises is under consideration at a time of deep polarisation in society, ethnic tensions, and growing inequality. The Gini coefficient, a measure of income distribution, has shown that inequality increased to 0.33 in 2016, compared to its 0.29 level of a couple of decades ago.

Given the weakness of Ethiopia’s institutions to ascertain the rule of law, where policies and regulations are too burdensome to reward merit, wealth is generated from resources such as land, tax, and government contracts. Shares in state enterprises will be an addition to this list.

In an environment where enterprises continue to monopolise the sectors, they operate in, and the government fail to institute a working system of checks and balances, privatisation could be fodder for state capture to arise in Ethiopia. That system of political corruption has been evident in Latin America and, most recently, South Africa.

Russia can serve as a better example. In the aftermath of the break up of the Soviet Union, mass-privatisation of the tens of thousands of the state-enterprises in Russia followed large-scale economic reforms. It did not lead to the more efficient provisions of services or better opportunities for wealth creation. The opposite happened.

The over half a billion dollar annual GDP at the start of the 1990s had shrunk to close to a third of its size by the turn of the century. A chaotic transition to a market economy, where institutions cannot arbiter fairly, few were rapidly enriched as the economy became stagnant. It gave rise to deep public resentment that would soon endorse nationalism and autocracy in the form of President Vladimir Putin.

Ethiopia should be cautious and take a cue from these. Partial privatisation of the enterprises should take place within the context of institutional oversight to ensure transparency; intermediate between parties and account for those that attempt to seek rent through political means and the rule of law needed to enforce contracts. One such institution would be the formation of the Addis Abeba Stock Market, which will not only institutionalise share transactions of these enterprises and others but also will help in the democratisation of capital.

The statement by the EPRDF is commendable; but, it alone will not address the issue of inequality. Worse, it can serve as an instrument of personal enrichment for the few and connected. It should be understood that market capitalism is proven to be better than any system, but it is not a cure onto itself, much like parliaments, elections and laws do not in themselves democratise a country.

The focus should instead be the building of democratic order where institutions are allowed to discharge their mandate competently and autonomously.


Published on Jun 14,2018 [ Vol 19 ,No 946]



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