Too Soon for Free Market Economy

Ethiopia has had successive governments that were on either aisle of the free or controlled market economy. Haile Selassie I’s regime envisioned one where the private sector would be the chief means of moving the economy forward, while the successive government adopted a system that was a complete opposite of that. The Revolutionary Democrats crafted their own path ahead, but one where the state’s arm in the economy is most noticeable than that of the private sector.

Such an economy as that of Ethiopia’s usually derives out of the need to ensure that resources are allocated appropriately and that demand and supply are not out of sync. Indeed, to ensure this, regulations are crucial. The trick though lies in assuring that such regulations, despite their intended purposes, do not end up hampering productivity.

Ethiopia’s government has not implemented a controlled market system per se. There are no price controls, except forms of price ceilings at times on goods and services the government considers essential here and there, such as rebar.

This may come out of the assumption that demand and supply can never really stand shoulder-to-shoulder. Take Western nations that have a vibrant private sector. They may have a meagre unemployment rate, but we have never seen a country where labour demand and supply have matched. Add to this cycles of boom and bust – great economic growth followed by a painful recession – that is a characteristic of free market economies.

Given such limitations, it is prudent that the government should ease the development of an undeveloped economy such as that of Ethiopia’s into a free market one. Demand is still too high relative to supply – rise in population numbers, and the strain of resources are the primary culprits here. It would shock the livelihoods of many people to resort to an utterly free interplay of the market forces.

There are not as many resources or as many competitors over goods to allow consumers lower prices. The consequence would be too high an inflation, specifically in cases where the government has given itself an allocative mandate. An excellent case to cite here would be the forex regime of the nation. If the government were to follow a floating exchange rate regime, the value of the Birr would inevitably depreciate acutely, causing significant headaches for a country that is import dependent.

This will happen because, under free-market economy, suppliers are only expected to think of their profits. Adam Smith believed that if everyone chased their singular ambition of maximising profit, an invisible hand would move the pieces around to allow a fair distribution of resources – prices will work themselves out.

But before that point is reached, the economy will go through growing pains that will result in a temporary but painful hike in the cost of living and the availability of resources. While any economy should aspire to the heights of one dictated by the interplay of the natural forces of supply and demand, the government in the meanwhile needs to intervene and apply regulations in a manner that would not create shocks.

That the government gives out subsidies, such as for electricity, is laudable. This has to be complemented by setting a price ceiling on essential goods that are recurrently scarce. This should continue as long as it is possible to meet the tremendous demand of Ethiopia’s massive population.

This should only take place while the private sector is encouraged to grow. Streamlining the public sector is one place to start. Ensuring that paying taxes and starting a business is easy will help drive investment locally and from overseas.

Opening up the commanding heights of the economy for the private sector will also help. This should especially be implemented where the financial sector is concerned. With better competition, it can be able to introduce new products and better services. This should attract savings that could later be used on loans for investment.

And as the economy gets healthier, the government should phase out some of the policies that have allowed it to exercise control over the market forces. These mainly have to do with the inflexibility of the pegged exchange rate regime and the leasehold system of land.

Once there is a private sector that can stand on its own two feet and carry the enormous demand it is expected to fulfil, such policies will be redundant, if not outright detrimental. At that point, there would be other means of wealth creation that can reduce the strain over these resources. When their value finally becomes a function of the interplay of market forces, without wreaking havoc on the populace, then the government would have walked the talk on its promises to bring about economic development for all.


By Belay Abera
Belay Abera is a public health professional and researcher. He could be reached at

Published on Apr 01,2018 [ Vol 18 ,No 936]



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