No Miracle Cure for the Ailing Economy, Only Bitter Pills

The world economy does not have a cold anymore, mostly attributed to the United States (US) that is not sneezing. The same can be said of the economies of China or member countries of the Eurozone, albeit for a slowdown in the former. Shantayanan Devarajan, senior director for development economics at the World Bank (WB), points that the future is not set though. Investment is not growing as it should, neither is productivity.

He holds that to get out of this muck, both developed and developing economies need to invest in both human and physical capital more aggressively. It is an economic prescription the Revolutionary Democrats had undertaken eight years ago in drawing up the first and second editions of the Growth & Transformation plans; GTP-I and GTP-II, in their parlance. And in the effort to realise it, and become a lower middle-income economy within 15 years of the planning, they have run the risk of edging the acceptable debt-to-GDP ratio the WB is claiming contributes to a slow-down in growth in its latest report.

Debt accumulation should indeed be worrisome and was one of the foreseen consequences of the devaluation of the Birr by 15pc last year, against a basket of major currencies. Public sector debt is expected to remain at around half of gross domestic product (GDP) for the next couple of years, according to Fitch, a ratings and research agency. Government’s debt is likewise expected to rise by a couple of percentage points to 31pc. State-owned enterprises (SOEs), albeit recording a decline compared to last year, still make up for around half of the public sector debt.

There are no surprises here. There have not been any secrets over the substandard domestic revenues of the country. The amount of foreign direct investment (FDI) over the past fiscal year may have been over four billion dollars, and coffee export earnings may be at their most favourable for two decades. But none of these has done any good to help diversify or meaningfully improve revenues either from the external sector or domestically.

Meanwhile, the annual government budget has been bloating, as has debt, for the sake of investments geared to usher in development. If Shantayanan is to be taken at his word, it would be a repeat of past policies that have contributed, more than anything else, to a debilitating shortage of hard currency.

It would be unfair to claim that all have been without merit, of course. There are today 44 universities across the nation addressing the higher-learning needs of almost half a million people, while infant mortality rates have declined by about two-fold than their year-2000 levels.

The same goes for investments in the areas of transportation and power generation – the latter with laudable efforts to partner with Independent Power Producers (IPP) – that will continue to attract investments and allow small and medium-sized enterprises produce more efficiently. Ethiopia foresees to generate a staggering one billion dollars from the export of, to neighbouring countries, electricity by 2023. And the recently operational Ethio-Djibouti Standard-Gauge Railway, for instance, will cut transport time by 36 hours. If nothing else, such investments have helped in creating job opportunities.

But potential remains unmet. Officials may consistently reiterate that Ethiopia is the fourth biggest economy in sub-Saharan Africa, not to mention the fastest growing; but, the nation remains one of the least productive. Supply-side constraints remain not only painful but deeply structural. GDP per capita stood at around 1600 dollars, adjusted for purchasing power parity, almost half of Kenya’s, in 2016, according to Trading Economics, which aggregates economic indicators.

This indicates that Ethiopians are not as productive as they otherwise should be. Universities often do not produce the type of skilled workforce businesses operating in a constrained market require. Likewise, the government consistently fails to allocate resources – such as land and forex, often the bread and butter of businesses – based on merit, which would have created optimum returns.

The lack of productivity has likewise meant shortcomings in at least two fronts. One is the inability to become independent of agricultural commodities such as coffee and oilseeds for export revenues. Manufacturing plants in the country over, and in industrial parks operational and under construction across the nation, have yet to pay off in producing goods competitive enough on the international market not only concerning prices – an obstacle the currency devaluation is expected to solve – but quality too.

Under-productivity has also severely affected supply. Supply in taking to meet the demand of close to 100 million people has meant more imports and an ever-expanding trade deficit. Domestically, inadequate supply has meant insufficient returns to the state, which instead of reducing its expenses, has been trying to cover them through gains from state-owned enterprises, loans and more of exports of the same items. Most detrimentally, the state has resorted to squeezing private businesses harder for failing to contribute to the public coffer, exasperating the shortage, and crowding them out from accessing finance from the formal industry.

And thus, it goes in circles. Poor allocation of resources has given way to weak domestic mobilisation, necessitating further debt. Thus, fixing development impediments is not a matter of investing more per se, but investing smartly. Resources need to be directed to areas where they could be better utilised. More often than not, this is the private sector, recipient of less than half the credit public enterprises are privy to, which for long has been left to its own devices under the weight of unsound government policies and regulations.

And for a nation that is eyeing middle-income status as early as 2025 – a target that grows unlikelier by the passing year – a state-centric growth has stretched as broadly as it possibly could without the nation having to default.

The required reforms have been evident to policymakers, if not unattainable where the courage to take such measures is concerned. Fiscal as well as monetary policies need to be rethought, with complimentary regulations to ensure their implementation.

Flexibility – creating an adequate wiggle room for private players to compete and experiment – should be the ultimate goal in drawing up new policies. Where there is demand, there is often an entity willing to cater to it. Here, the state’s sole purpose, except in the areas of public goods, is to ensure that there exists a fair playing ground and contract enforcement. The ultimate arbiter of financial success should not be the state, rather merit, which would have been a result of flexible policies in opening access to land and foreign currency. It is a misguided policy for the state to be the one to pick champions in business.

The short-term downsides of inability and unwillingness to reform, often officials’ reason for giving them scant considerations, such as an inflationary pressure, should not overshadow the long-term benefits that could be had.

Novel tools to move the economy to the next stage should be concurrently considered, such as a stock market, establishment is overdue. It can help the nation mobilise resources. It would also encourage more firms to go public, and even serve as yet another channel for privatisation, where state enterprises could be listed for public offering. It would distribute resources far more efficiently than the government currently is.

Such reforms could check a lot of boxes for the Revolutionary Democrats. Ambitious targets can be met – albeit not as early as some would hope to see them – without the need to accumulate an inordinate amount of debt.

The administration of Prime Minister Hailemariam Desalegn may prefer to take growth projections of Bretton Wood’s institutions such as the WB and the International Monetary Fund (IMF) with a grain of salt. Both forecast the GDP will contract in the coming years, much the same manner the administration is adamant in claiming last year’s growth was in the double-digits. But there is no denying that the economy is ailing.

Debt is one indication of this, much the same way stagnant exports, low imports, weak tax revenues and the current double-digit inflation. There is no miracle cure here, only bitter pills, by which it is not meant a devaluation, but a comprehensive economic overhaul. That would undoubtedly prove more bitter, but just for a while, growing palatable as time goes.

Published on Jan 13,2018 [ Vol 18 ,No 924]



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