Refreshingly original, both in form and substance, the emphatic inaugural address by Prime Minister Abiy Ahmed has generated a strong sense of optimism in the nation. Not only has it rekindled hope, but it also has set high expectations, writes Eyob Tekalegn Tolina (email@example.com), a political economist that was the manager of the Ethiopian Public Private Consultative Forum (EPPCF) most recently and a director at an American investment firm currently.
Refreshingly original, both in form and substance, the emphatic inaugural address by Prime Minister Abiy Ahmed (PhD) has generated a strong sense of optimism in the nation. Not only has it rekindled hope, but it also has set high expectations. Indeed, there is a lot on Abiy’s plate.
In the spirit of advancing a healthy dialogue, I would like to discuss some of the issues the Premier has laid out in his speech, including an agenda close to both my work and my heart. It is the nature of the state-business relationship in the context of the Ethiopian developmental state experience.
Abiy has stated – rather unequivocally – that his party would hold firmly on to its developmental path. It is a remark that led some to argue that under his administration, there will not be a significant change in the way the Ethiopian government views its role in the economy.
But what exactly does the Prime Minister mean by holding firmly onto the developmental path? Is he reaffirming the party orthodoxy or does he see a need for change?
The ideology of “Revolutionary Democracy” drove the project of state building in Ethiopia since 1991. Though a subject of heated debate in the Ethiopian political discourse, finding a precise meaning for it is difficult, whether one goes through party documents or engages senior party officials in discussions. From a few pieces the late Prime Minister Meles Zenawi has written, Revolutionary Democracy is often described in contrast to neo-liberalism and used by the ruling party to describe the type of alliance and the political economy the regime sought to establish.
In Meles’s view, to achieve its developmental objectives, the Ethiopian state needed to build an effective developmental coalition and create a political economy conducive to development. Given the mostly agrarian socio-economic base, neo-liberalism was not considered favourable to build such a political economy. Ethiopia, therefore, needed a different type of political organisation that mobilises the vast peasantry class as its social foundation. Revolutionary Democracy is thus used to describe such political organisation and social mobilisations.
Sarah Vaughn (PhD), a scholar who carefully studied the ruling party’s politics, notes that Revolutionary Democracy embodies the aspirations of the EPRDFites to forge a “direct alliance with the people.” The fundamental problem lies, however, on how such alliance was construed and the manner in which the ruling party went about forming its “developmental coalition. ”
From the get-go, the Revolutionary Democrats adopted an exclusionary approach in the coalition they sought to establish, identifying specific groups as fit and others as unfit to be part of it. Specifically, the private sector was categorically excluded for Meles writes in his unpublished thesis, “it is not difficult based on our analysis so far, to identify who the candidates of such a coalition can be. One group that cannot be part of the coalition is the private sector.”
The private sector is perceived as a potential hindrance to the state from achieving its developmental mission. In party and government rhetoric, particularly in the earlier years of the regime, the private sector was described as weak, unproductive and rent-seeking, unable to neither create value nor accumulate technological capacity needed for economic transformation. Such thinking had shaped the mindset on the private sector for decades to come, resulting in significant negative repercussions on the state-business relations in Ethiopia.
Despite some improvements in the last few years, by and large, an environment of mutual mistrust and suspicion continues to characterise this relationship. As Arkebe Oqubay (PhD) admits in his 2015 book, owing to the mutual suspicion and mistrust, creating an effective and long-lasting state-business relationship has proved to be difficult.
Evidence abounds on the precarious nature of this relationship, ranging from the planning exercise, the regulatory regime, and the lost opportunity as far as exploiting the full potential of the private sector goes. The preparation of national development plans, for instance, has primarily been a state-driven process. The involvement of the private sector varied from one planning period to another, only lacking uniformity, consistency, and predictability. Even though some of the planning efforts saw better participation by the private sector compared to others, the general tendency was for the government to prepare a plan and invite the private sector for somewhat procedural “consultations,” often held to deliberate on completed plans.
The “consultative forums” were used to create awareness rather than for solicitation of inputs. This could be the reason why, for instance, the first edition of the Growth & Transformation Plan lacked a clear private sector focus. It failed to articulate the role of the private sector going beyond a mere reference that it is an engine of growth.
The regulatory regime is another indicator of the problematic nature of the state-business relations. The regulatory environment is overly cumbersome, which, arguably, is a result of the prevailing political climate that is suspicious of the private sector. The general mindset in the bureaucracy tends to focus on policing its operators than facilitating business.
Notions that the regulatory environment is complicated and unfriendly to the private sector are well established. There are for instance over 1,320 license categories under the Ministry of Trade, according to a 2014 study by bKP, a consulting firm that reviewed the licensing regime in Ethiopia. Businesses here are being required to obtain multiple and redundant licenses for similarly related activities, against international best practices. The business-licensing regime in Ethiopia is unduly prescriptive, establishing unnecessarily too specific and too many licenses.
The number of regulatory hurdles is excessive, making the process of starting a business prohibitively tiresome. Take the case of competency certifications requirements, whose importance and effectiveness are highly questionable. Though this has improved lately, a simple act of registering trade names is so complicated that businesses had to wait for weeks to get their names registered. Such requirements are often used as an excuse for more corrupt practices rather than as a means of protecting the public interest.
Many businesses also complain about lack of transparency and accountability in the regulatory regime. Members of the private sector complain that they have no say in how their companies are regulated as effective consultations between the government and private sector actors are non-existent. In the absence of such discussions, regulations enacted tend to deviate from practice on the ground and run into serious implementation challenges. Given the capacity constraints and lack of coordination in the bureaucracy, businesses often deal with contradictory requirements from different government agencies.
Listening to the Prime Minister’s speech I choose to believe that change is in the making. In his message to the youth, the Premier has pledged not only to create jobs but also furnish opportunities to help youth entrepreneurs.
Says Abiy: “The mindsets and the elaborate and discriminatory bureaucratic hurdles which stand as obstacles will be removed.”
He also promised that his party would learn from past mistakes and make-up to our country. These remarks give me hope that there is an opportunity to look at the role of the private sector in Ethiopia’s developmental state anew; improve on the precarious nature of the state-business relationship; and, create an enabling environment for the private sector to play an active and meaningful role in the economy.
If Abiy is to live up to his promise of making up for the country by addressing past mistakes, however, I do not believe implementing slow and incremental reforms are the way. There is a need to revisit the entire regulatory regime with a changed mindset of facilitation as opposed to policing, and by introducing smart regulation that serves the regulatory purposes without stifling innovation, creativity, and entrepreneurship.
The myopic view of the private sector has been costly to the nation, measured both in lost opportunity and the viablity of the national development project. As impressive as the economic growth achieved over the last decade is, it failed to bring a meaningful transformation in the structure of the economy as evidenced in the stagnant growth in the share of the manufacturing sector to the total GDP. Successful experience of the East Asian developmental states shows that as interventionist as they were, unlike Ethiopia, they paid serious attention to the domestic private sector growth.
For instance, provision of credit to the private sector was much higher in Korea compared to Ethiopia. Private sector credit to GDP averaged around 30pc in Korea in the 1970s compared to about 20pc here. Ethiopia’s income level would have been much higher had it managed to provide more credit to the private sector, as a 2015 World Bank study finds.
The problem with Ethiopian development state experience is therefore not that the government plays a very active role in the economy, but more on its misguided thinking that the state can do it alone. If we had to explain this using the concept of embedded-autonomy, which is central in developmental state literature, the Ethiopian state focused too much on the autonomy aspects, ignoring the significance of embedding the autonomy.
Developmental states should have a substantial autonomy, a sense of corporate coherence and a Weberian bureaucracy. For the state to be genuinely developmental, however, the literature goes, the autonomy should be anchored with strong societal ties, which should lead to a mutually beneficial relationship between the state and the private sector.
Chalmers Johnson, the very person credited with introducing the concept of developmental state, provides an insight into how such arrangements worked very well in Japan. The state and private enterprises are engaged in a mutually beneficial relationship to achieve developmental goals and enterprise viability.
Transforming the nature of the state-business relationship should, therefore, be an essential area of focus for the new administration. It demands a complete change in mindset for the ruling party needs to reexamine its views on how an effective and sustainable developmental coalition can be established. The private sector should be not only an indispensable part of this coalition. It is a critical engine of growth. Failure to genuinely appreciate this and ensure the efficient functioning of the engine could potentially upset the entire development project. The Prime Minister would be better of in focusing on turning on the engine with utmost urgency, as the results achieved to date can only be sustainable if the role of the private sector is enhanced.
In revisiting the balance between the roles each plays, there is a need to prudently evaluate the merit of each public investment project. The net benefit of each investment should be scrutinised depending on which investment results in a higher marginal product. A marginal product calculation conducted by the World Bank seven years ago shows private investment was 22.5pc compared to the marginal product of 7.5pc for public investments.
A national development goal is a collective enterprise that cannot be left to the government alone. The private sector cannot expect a transformation to happen by watching from a sideline what the government does. Hence, its leaders need to step up by becoming active and equal partners. Mutual interest must be developed, and an enabling environment should be fostered to build a strong social capital that supports and sustains the development project.
To overcome constraints that limit the country’s ability to capitalise on its comparative and competitive advantages, solutions should be sought jointly.
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