Unilateral Application of Neo-liberal Policies Hurts Economy

The decision to partially privatise profitable state enterprises in major sections of the economy is a scheme that the Bretton Woods institutions have long been advocating. But the decision needs to be reconsidered given the economic conditions on the ground, writes Alemayehu Geda (Prof.) (ag112526@gmail.com), professor in the Macro & International Economics Department at Addis Abeba University (AAU).   

During his visit to the United States, it was reported that Prime Minister Abiy Ahmed (PhD) held constructive discussions with officials from the World Bank and the International Monetary Fund.

I do hope so. It is crucial to remember that through what is known as structural adjustment programs, which includes privatisation of state assets, the policies of these institutions have had a hand in perpetuating Africa’s economic stagnation.

Together with liberalisation and the devaluation of currencies, privatisation was one of the key policies that Africans needed to undertake to receive financial support from the Bank, the Fund and, through the their approval, from Western nations.

Such neoliberal policy packages detrimentally affected economic growth in Africa in the 1980s and 1990s. During a period when these adjustment programs became rampant, not only did economic growth decelerate close to two percent a year – in strongly adjusting countries there were recessions – but also structural transformation remained elusive, according to the Economic Commission for Africa.

The number of people living below the poverty line doubled between 1981 and 2000 to 313 million. During the same period, in East Asian countries, their developmental state models were able to bring about structural economic transformation and alleviate poverty by 63 percentage points.

Accepting modern structural adjustments, which in the current situation entails wholesaling prized state assets, we could be falling into a similar trap, as well as onto dependency on China and others that may acquire significant stakes in our public firms.

In the last three years, the Bank has been calling on the Ethiopian government to devalue its currency as a means of addressing its stagnant export revenue, swearing all the while that the inflationary consequences can be avoided.

With the benefit of hindsight, we know now their policy advice was incorrect given the fact that while export performance remained stagnant, we are stuck with double-digit inflation. This affects their credibility and should show us that their neoliberal ideology is not grounded in practical analysis as it relates to our national economy.

Throughout the negotiation processes during the past 27 years, the Bretton Woods institutions have insisted that the Ethiopian government follow a wholesale privatisation of state enterprises and opening up of the financial sector to foreign investment.

Although the ruling party failed to bring about competition and efficient service in many major industries, to its credit, and unlike many governments in Africa, it has thus far resisted the pressure. Against such a tradition, it should not be the case that the government gives into structural adjustments – out of financial constraints of its own or on the advice Bretton Woods – this time around.

Privatisation may have its benefits, but there is no practical reason why the government should move forward with selling its assets in a financially successful enterprise like Ethiopian Airlines.

From an economic point of view, we can see two factors for the privatisation of public assets. The first is the neoliberal argument that the private sector is more efficient than the public sector, which implies that efficiency will supply excellent services at lower prices to consumers.

But perhaps the most important reason for the government’s change of heart in privatising profitable state enterprises is the severe shortage of foreign currency and the swelling debt level that stands at over half of annual GDP. These are by themselves the result of past macroeconomic mismanagement and corruption.

Notably, such a stressful and vulnerable position can be exploited by the decades-old subscription to free-market economics of Bretton Woods institutions.

The neoliberal argument for privatisation is that by allowing competition, it will lead to efficiency by firms capable of providing excellent services at a lower price. However, for this to happen, the groundwork for competition needs to be created.

Handing the monopoly of the telecom sector from the government to private hands could end up hurting consumers. The private sector cannot be held to the same level of ethical and legal accountability for how high it can raise prices or where it chooses to spend its profits.

Although some of our public companies in sectors such as telecom or logistics need to be privatised, with the necessary level of transparency and care, there is no credible reason to sell Ethiopian Airlines.

The performance of the airline for more than half a century is commendable. Given its profits, there is no economic justification for why it should be privatised. It has registered 25pc growth for the last seven years, according to its own website. This is far higher than the average growth rate the top seven largest United States airlines have registered, which stands at single digits.

With current and non-current liabilities of close to 21 billion Br and 42 billion Br, respectively, in 2016, its asset and liability position also shows that the airline is in good shape. Its current assets, standing at almost 89 billion Br, are well above its liabilities.

In fact, in a study I conducted with a colleague, we found that Ethiopian Airlines can handle global competition through the opening of the sector. On such grounds, privatising such an asset does not make sense.

The weakness is with the industry, which has constrained competition locally and regionally. This has resulted in the higher fare prices charged for such flights. This may entail opening up the local and regional markets to private operators to bring competition and low prices.

Apart from the economic argument, there are also political and cultural ones. Ethiopian is our “pride.” It is a rare enterprise that we have managed to make successful on a global scale. It is one of the few symbolic institutions that are run by Africans and is also efficient and competitive on the international market.This is an institution with an accomplishment that deserves to be emulated throughout Africa as well as Ethiopia. It has been a strong enough institution that was able to ensure its continuity and survival despite the various regime shifts in the past half a century.

Selling Ethiopian, currently expanding throughout Africa, could also be construed as a matter of selling a piece of our heritage and a part of our social capital. The decision to privatise should be reconsidered.

It has to be understood that successful enterprises such as Ethiopian may not be the last to go. Opening up the financial sector has been on the agenda of the Bretton Woods institutions for some time.

Liberalisation here will not hurt. In fact, competition would have positive externalities. However, opening the sector to foreign competition now without building up the regulatory capacity of the National Bank of Ethiopia (NBE) in place is a recipe for disaster.

There should be a time and place for the employing of neoliberal policies, which if not thought through carefully will have long-term negative implications for the economy.

By Alemayehu Geda (Prof.) (ag112526@gmail.com),
Alemayehu is a professor in the Macro & International Economics Department at Addis Abeba University (AAU).   

Published on Aug 11,2018 [ Vol 19 ,No 954]



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