Should We Fear “Khaki Capitalism”?

Under the stewardship of the Revolutionary Democrats, contemporary Ethiopia’s economy has developed some rather ironic contrasts. Within two decades, it has managed to attain the second largest GDP in the COMESA trading bloc, while maintaining the lowest share in GDP per capita. At 1.2 billion dollars, Djibouti has a GDP per capita that is double Ethiopia’s 550 dollars. Although agriculture remains the mainstay of the Ethiopian economy, with a share of close to half of this total – the largest in the bloc – the share of industry to GDP accounts for just 11pc – the lowest in the bloc, with a range from Burundi’s 18pc to Zambia’s 35pc.

The Revolutionary Democrats have been aware of this structural imbalance in the economy from the day they took over the custodianship of the Ethiopian state 25 years ago. Prioritising the transformation of the subsistent agricultural economy, they have always aspired to leave behind a legacy of industrialisation in the style of South Korea, Taiwan and even Japan. All their policy and ideological documents are expressions of this conviction.

If they have battled their opponents over anything throughout the years, it has been about the timing, sequence and emphasis of their convections, more so than the substance. Yet, effecting structural transformation in an economy is a process and not simply a declaration of intent. It requires a focused drive in aligning policies, in order to incentivise prospective industrialists through tax holidays and preferential customs tariffs; the provision of land, finance and infrastructure; and building a bureaucracy that is competent in avoiding hurdles from production to the consumer markets.

The World Bank – a keen monitor of Ethiopia’s macroeconomic performance – once called upon the EPRDFites to improve the skills development in running the business of firms in manufacturing, while streamlining the investment climate to redirect resources from poor performers to dynamic companies.

To their credit, the Revolutionary Democrats have clarity on the direction they have opted to take along these lines. They have an ambition to boost the share of the manufacturing industry in the economy to 18pc – increasing it four-fold – by 2020. If achieved, their policy will result in the creation of employment for 1.5 million citizens – again a four-fold increase – and an export revenue of five billion dollars, enhancing the 10pc share of manufacturing in the export sector to 25pc.

These lofty goals may sound ambitious, even by their own standards. To naysayers, they could appear to be part of an electoral manifesto designed to impress voters. Nonetheless, the numbers of past accomplishments testify to the fact that they have the grounds to dream big.

On aggregate, productivity and value addition in the manufacturing sector has not stopped growing over the past 10 years – a trend never before seen in the country’s economic history. From a manufacturing output valued at 35.1 billion Br in 2006, Ethiopia has registered 105.2 billion Br’s worth of industrial production in 2014. This is a huge feat by any measure.

This 200pc increase may appear to be a remarkable achievement in its own right; but, viewing it from the perspective of the contribution the manufacturing sector has to the overall economy, it is insignificant. It is a long way from the advancements required to introduce the structural shift required to absorb the massively increasing young population joining the workforce.

Pundits see the absence of a magic wand to pull the country through to its designed destination as a void. Interestingly, it was the military’s industrial complex that the former Prime Minister Meles Zenawi saw as a potential tool in this respect, creating home grown capability with their characteristic discipline.

He was not the first to aspire the application of military capability, discipline and efficiency to effect transformational change in an economic structure. A five-star General during the Second World War, former US President Dwight D. Eisenhower, was both the proponent of the concept and warner of its potential influence on policymaking. In articulating their fears, those who harbour deep concerns over the conduct of the high military brass running the Metal & Engineering Corporation (MetEC) may borrow one or two of his words.

Eisenhower famously said: “In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist”.

When a CEO of a state enterprise testifies before Parliament over the alleged poor performance of the MetEC in erecting sugar mills, it is reasonable to believe that many of Eisenhower’s fears are coming true. That may, however, be little more than a false alarm, as building military-industrial complexes to enhance civilian industrial production is normal – in countries from Sweden to China and the United States to Pakistan.

In the interest of healthy debate and constructive outcome, the fear should rather be redirected to a debate on the need to refocus the purpose, and discipline the conduct, of the MetEC in order to ensure it succeeds in its mission. Despite its appearance, by design or otherwise, the MetEC is essentially a civilian firm, as any state-owned enterprise is, if scaled up by its legal statute. Established with 10 billion Br in capital, it was created as a hub for the nation’s factory productions, with the strategic goal of guiding the growth of small and medium sized enterprises in the manufacturing sector.

For an underdeveloped economy, such as Ethiopia’s, this goal remains valid today, although the course the company took has been derailed along the way. Inheriting nine industries under the Ministry of Defence, and merging them with over 60 stated-owned manufacturing units, the MetEC today is not only one of the largest employers, with a 13,000 workforce, but it also generates billions of Birr in contracts and businesses to third parties. Many of these are taken from other public companies in the absence of competitive bidding.

The company has become notorious in its middleman business practice, whereby individuals and companies are forced to procure items only from its subsidiaries. A partner may not be allowed, for instance, to buy transformers from anyone but the MetEC, though it is obvious that its value addition to their production is no more than an assembly job. Its executives’ arm twisting attempts to compel factories to install power saving gadgets from the MetEC for a price five times higher than what could be bought from China is not a fair business practice.

The scandal over the issue of a vessel bought from the state-owned shipping lines, which was ultimately disposed of as scrap metal, serves as a reminder of the MetEC’s ill-fated desire to be in every corner of the economy. If their critics see in the acquisition of property, ranging from hotels to warehouses, the MetEC as a Good Samaritan of the Ethiopian economic transformation, little should it be surprising. The executives in uniform should rather accept the fact that they are only one player among many trying to put the pieces together. It should not be their business to aspire to reach the heights whereby they are too big and indispensable to fail.

Neither should it be inconceivable to see the MetEC going astray in a place where there are loose safeguards from the civilian oversight, and left alone when it becomes defocused from its original mandate. Such would result in a replay of the entrenched place the military industrial complexes enjoy in the economies of Egypt, Pakistan and Iran. With their model in “Khaki Capitalism”, they are the embodiment of Eisenhower’s worst fears.

The MetEC’s critics should also come to terms with the fact that the company is here to stay, and it can be a force for good. Thus, refocusing their energy to ensuring that the company stays true to its purpose, urging its executives to remain focused on where they can be most relevant and demanding from the civilian oversight to tighten the safeguards, would be a positive approach. After all, it is men and women in Khaki who run the show, with their discipline, of course.

Published on Jun 21,2016 [ Vol 17 ,No 842]



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