Making Private Credit a Policy Target Imperative

Living under contradicting narratives is nothing new to the ruling Developmental Democrats – not least when it comes to macroeconomy. Their very ascendance to power, after defeating the socialist military junta after over 17 years of war, was received with a confusion of narratives.

All throughout their guerrilla years, they advocated socialism as a guiding ideology of their policy arguments. As soon as they came to power, however, they shifted slightly to the right of the political spectrum, eventually adopting a free market economic system. Until 2001, ideological confusion was their typical characteristic.

Progressively, however, they found comfort in blending certain characteristics of liberalism with socialism, in a way that fits the long overdue problem tree of the nation. With the changing global politics, the blending of elements from the right and the left to create a system – known as anything from centralised democracy to developmentalism – becomes the mantra. Surely, the time becomes ripe for the EPRDFites to settle for their version of developmentalism.

As they have seen the importance of embracing democratic elements in leading the multiethnic nation, regardless of their utilisation, they have termed their approach Democratic Developmentalism. A political philosophy meant to manage the inherent fractures of the very system they inherited, Democratic Developmentalism has far-reaching economic implications, both at a macro and micro level.

Many critics of developmentalism – which gained its traction in the economic experiences of Singapore, Thailand, South Korea, and China – argue that the philosophy has no pillars of its own. Its existence is largely dependent on criticising Western liberalism, even when it borrows so much from it, their argument goes. It is largely short-termist, populist and structurally weak.

For advocates of the system, such as the EPRDFites, however, these critics are inherently biased. They are often seen bashing them as essentially neoliberal, relating them to the self-denial that advocates of Western liberalism live in.

As far as the past two decades of ruling go, however, the EPRDFites have achieved enough to disprove their critics and put their philosophy at the forefront of the ideological debate. Their developmental achievements, from expansion of roads to improving access to education; universalising access to health care services to scaling up the electricity generation capacity of the nation, tells its own history.

What has been achieved over the past ten years, specifically, has started to change the image of the nation that was once seen as a symbol of destitution, famine and conflict. It has lifted millions out of poverty and sparked hope in the hearts of many others. Consequently, foreign capital has started to flow into the nation and the international rhetoric has begun to treat the nation as a hallmark of development.

If one is to go by the face value of these changes, then, it would be obvious that Prime Minister Hailemariam has less to worry about in the very system he oversees. But that is far from the reality on the ground. Instead, the system that Hailemariam leads has many aspects of volatility that could endanger its very existence.

The latest press conference that Hailemariam held with local and foreign journalists, for instance, has brought one of the volatilities of the system to the fore. Asked to reconcile the diverging views on the financial system of the nation and credit availability, the Prime Minister boldly replied that the system is sufficiently liquid and has no cash flow problem. Mentioning the latest assessment made by his administration, Hailemariam said that there is no problem within the financial system that could challenge the smooth performance of the economy.

As much as his answer might be right, considering the fact that his administration had pushed the central bank to pump about three billion Birr into four private banks, it seems to have sidelined the fundamental deficit of the system. The system that Hailemariam oversees suffers from a long overdue chronic problem – very low private credit to gross domestic product (GDP) ratio. No treatment is in sight, as the policy sphere lives in denial over the importance of the issue.

For the past 60 years, despite the change in government, the Ethiopian economy has been witnessing a very low amount of credit to the private sector. The ratio of credit to private sector to total credit has been oscillating between 11pc and 16pc. The latest data shows that the amount might have inched up to 20pc. Even then, the ratio stays very low compared to the sub-Saharan average, which is about 45pc, and the global maximum of 80pc.

The issue of credit to private sector would not be debatable had the economic ambition of the nation been to maintain the status quo. But the declared ambition of the nation is to push itself up the ladder of economic development to eventually join the middle-income category by 2020. It is often said that the impetus for this journey would come from the structural transformation of the economy from its agrarian base to industrialisation.

If one is to go by the economic history books, there is an essential paradox within this very approach. Structural transformation, as a purely economic concept, requires a complementary shift in capital formation and investment away from the state and into the private sector. This is largely to do with the inherent incentive that establishing and managing industries requires.

An economy could not bring sustainable industrialisation without the essential shift in economic value addition away from the state. That seems to be the very contradiction that the administration of Hailemariam Desalegn lives with.

On the one hand, it aspires to industrialise the nation. On the other, it would like to maintain a tight grip over the capital the economy generates. It is as if the administration wants to have the cake and eat it.

Global evidence shows that structural transformation can happen fast in nations wherein capital formation is dominantly undertaken by private enterprises and individuals. The best bet for the states in such a process is to make the environment conducive for the rational economic decision making of enterprises, whilst tackling market failures, whenever they occur.

Viewed under the prism of this very calculus, however, the nation under the leadership of the EPRDFites is no different than it was 60 years ago. Credit to private sector remains depressed by regulatory measures and the expanding dominance of the state in the economy.

Even the limited supply of credit by private banks is hindered by regulatory measures, such as forced investment in government bonds and an imposed loan portfolio structure. The big state-owned banks continue to give preference to the unabated resource demand of the state. And the resultant outcome has become a private sector that is unable to get enough finance to venture into engagements that could have helped realise the intended structural transformation.

Furthering this weak edge would obviously have its own cost to the economy. In addition to prolonging the realisation of industrialisation, it could hamper the envisaged structural transformation. That is why the administration of Hailemariam ought to give emphasis to the structural problems, as much as it does to denouncing critics.


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