Ethiopia is faced with the challenges of low standards of living, low productivity, massive unemployment and underemployment, food insecurity and income inequality. One would think then that the government is playing an active role in promoting the development of the private sector as a means for addressing economic problems and thus bringing broad-based sustainable economic growth. This is not the case though.
Economic growth and development depend primarily on a country’s ability to invest and make efficient and productive use of its resources. In fact, there cannot be growth without an adequate level of qualitative investment.
The rate of economic growth is determined to a high degree by the rate of capital accumulation, the addition of new capital stock, which directly depends on the net national investment and indirectly on the net national saving. Thus, investment is both the means and causes for economic growth.
However, based on property ownership rights and decision-making processes in resource allocation, the economy of any country is composed of two independent parts: the private and public sectors.
Both are essential components in the process of stimulating and promoting economic growth. But, comparatively, the private economy is capable of boosting economic growth over and above the strength of the public sector. Its vital role in bringing a broad-based, healthy economic growth is incomparable. It may sound a cliché by now, but the private sector is indeed the engine for economic growth through its unique ability to improve the allocation of resources, as well as their efficient use.
In developing nations such as Ethiopia, the private sector has the potential for generating inclusive, healthy and sustainable growth. Adding to this is its crucial component in addressing development challenges by boosting growth, creating income and employment, ensuring food security, creating demand and enhancing productivity.
The government has planned and is working for the nation to secure a low-middle income status by 2025 as well as bring structural economic transformation. Here, enhancing the growth and development of the private sector will play a multi-dimensional role.
The reality on the ground is different though. The role and contribution of the private sector to the national economy is limited. The private sector’s contribution to the national economy in terms of gross domestic product (GDP), and the share of aggregate employment and in capital formation are low.
This is because the government has not recognised the importance of the private sector to economic growth for the last two decades. This is despite playing a fundamental role in creating employment, generating revenue, and providing social services.
Given the limited effort made to promote and enhance the growth and development of the private sector, the double-digit economic growth that the country has been registering for most of this decade has not brought about tangible results on the ground. This is especially true where the macroeconomy is concerned, with depletion of the forex reserves, inflation and massive trade imbalances plaguing the economy.
For too long now, the government’s strategic approach to growing the economy has been to rely on public spending, especially on infrastructural development. This has crowded out private investment.
The strategic roadmap of the government has only ended up growing the state’s role in the economy. Since EPRDF became part of the government, the share of the public sector to the GDP doubled. Reversely, that of the private sector’s has been stagnant, standing at around a fifth of the GDP. This is below the subsharan average.
There is a significant consensus among academics, policymakers, and scholars that the private sector has the potential to generate inclusive and sustainable growth and is more efficient and effective in addressing development challenges.
Besides, they argue that especially in developing economies, without promoting the private sector, countries can hardly improve the broad-based lower standard of living of the masses as well as drive productivity, efficiency and qualitative growth.
An economy largely supported by even capable and autonomous institutions will fall prey to the inefficient allocation of resources. No government, let alone that of Ethiopia, can have the necessary amount of data and the capacity to analyse and distribute resources where it can be most productive.
This process of allocation, and then mobilisation, should be left to the natural forces of supply and demand. By creating an effectively regulated money market and deregulating strategic components of the service sector, especially finance, the government can create an economy where the most durable players are those that can adapt and innovate. The government can enhance productivity by merely playing the part of a transparent, inclusive and competent regulator.
Not surprisingly, wealth creation, without effective distribution of it, has led to socio-political problems that have given rise to unrest and instability. It should serve as an important reminder that the statist approach to economic growth has been the wrong approach.
Improving the health of the economy then requires the ruling coalition to adopt an economic strategy that may be in contrast to its long-held ideology and leftist roots. The second edition of the Growth & Transformation Plan’s (GTP II) rhetoric that the private sector is the engine of growth should be translated into policy action.
The economy must be liberalised to the degree that resource allocation and mobilisation is left to the interplay between supply and demand. The EPRDF’s Executive Committee’s decision to privatise state enterprises in aviation, telecom, logistics, transport and power thus is a step in the direction.
Indeed, if that is where the ruling coalition plans to stop, it would only be a short-term solution that can attract foreign currency but will not address the underlying economic challenge of lack of productivity.
For this decision to be a turning point, the government should work extensively to incentivise the private sector by opening up the capital account, making institutions autonomous, and lessening public sector bureaucracy.
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