Addis Fortune (Addis Ababa)

21 October 2012

Ethiopia: What the World Bank Thinks About Ethiopia

Photo: Manoocher Deghati/IRIN
Women selling vegetables at a market (file photo): Food price inflation dropped to 13.2 percent this month, down from 17.6 percent in September.

interview

Thinking beyond dogmas is typical of Guang Z. Chen, the resident country director of the World Bank Group (WBG) in Ethiopia. An educational background that took him between the two poles of the existing world, his country of origin, China, and the global superpower, United States, might have contributed to his ability to easily and smoothly sail through the overlapping waters.

A development economist trained at Sun Yat-sen University of China and Harvard University of United States, Chen has ample development experience to capitalise on, while leading one of the largest portfolios of the Group in Africa. His hands-on experience in managing tailored projects in sustainable development, transport sector development and infrastructure development in Latin America would obviously boost his stature within the policy sphere. In this exclusive interview with GETACHEW T. ALEMU, OP-ED EDITOR, the country director discusses issues varying from structural imbalances to political transition. Excerpts:

Q: Before two weeks, the International Monetary Fund (IMF) has released its Article IV Consultation Staff Report, in which it has provided its view of the Ethiopian macroeconomic environment. The report recommends for the government to facilitate deep structural changes in the economy with a focus on the private sector. Do you share their view?

Guang Z. Chen: Yes. First of all, as you know, during the preparation of our country partnership strategy (CPS) endorsed in September, 2012, we had had a discussion with the government. Of course, the macroeconomic balance was key part of the discussion. There is a concern of macroeconomic imbalances witnessed with the rapid growth of the last seven years. One of the concerns is similar to what is being raised by the IMF; macroeconomic structures. We recognise the fact that the gross domestic product (GDP) targets are very ambitious and rely very much on public sector financing. There is a funding gap in between and the concern is how to fill the gap. The macroeconomic structure would affect how the gap is to be filled, while the growth is sustained. I think, this is where the concern is.

Private sector is one angle of it. Because when you have more private sector investment, it partly helps to bridge the financing gap. Essentially a national GDP accounting constitutes private and public investment. Thus, private investment is one part of it. It certainly is not everything.

There are also monetary policy issues, including how to keep inflation down. These were all discussed with the government. In fact, we also highlighted it in our latest CPS. Our approach in this would be to have ongoing dialogue with the government on how bridge the gap and how to bring in additional resources into the country. The focus would be more on private foreign direct investment. But obviously the management of monetary policy to keep inflation down will also be a focus because we believe that the high inflation is not sustainable and not helpful to attract more resources.

One of the key challenges in this country is that public sector investment is high but savings are very low. Partly, this is impacted by high inflation. So, yes, there is a concern about macroeconomic balance and structural changes. But I also think that the government is making progress.

Q: Could we, then, say that you have seen a green light from the government about these measures that you have recommended?

Yes, we see that the government is taking steps, such as establishing industrial zones, to attract more private investment and foreign direct investment.

Q: But one of the fears of the Board of the IMF, expressed in the report, is the probable plan of the government to finance part of the deficit from central bank borrowings. Could we actually say that the government is displaying enough commitment to stabilise the macroeconomic imbalances?

Yes, I think the government has enough commitment to take the necessary steps. Its policies in the last seven years have been through cash budgeting. Its commitment for zero borrowing from the central bank to finance its deficit is, I think, why we are seeing the trending down of inflation in the last couple of months.

But, just simply doing that is not enough. The concern is that the gap is still there. How it is going to be financed would be important.

One of the concerns is that the GTP growth should be stretched over a longer time frame so that to minimise the impact on the macroeconomic balance.

I would take a much more pragmatic approach on this. The GTP targets are agreeably very ambitious. They may or may not be achieved. There are three more years to go. But, my view is that, even if the government does not achieve all 100pc of the GDP target, achieving, let us say, 70pc is very commendable for country growing from a very low base.

Q: It is to be recalled that the Protection of Basic Services (PBS) program was actually started during the political upheaval of 2005/06. But it seems that most of the donors of the programme, including the World Bank, prefer to maintain the programme, despite the changed realities. What is the justification to maintain it if the donors believe that the realities have changed?

It is a fair question. Yes, the program was started in 2005/06 because of the political concerns that forced development partners to suspend budget support. But, recognising the fact that, at that time, the country was going through the very early stages of decentralisation process and the government was also establishing the mechanism of providing basic services at the local level, the program was designed to sustain the process. Without it, basic services would have been in crisis.

Looking back, the programme had been going on for seven years, now; lots of progresses have been made. Hundred thousands of teachers have been hired. About 40,000 health care workers have been hired. These are all delivered basic services as recurrent cost is the major part of it.

Of course, the programme is not all about education and health but extends to some basic infrastructures like water supply and sanitation, agricultural extension services and rural roads. We do recognise that this programme has several benefits.

One is that it provides some sort of predictable finance for the government to provide basic services. The government takes strong ownership of the programme. The donor support takes only about 40pc of the total cost of the programme; the rest is covered by the government budget.

This is also a program implemented in what we call ‘using the country system'. Basically, the leverage is what the government has developed. This program has introduced lots of elements in terms of local capacity building; in terms of budget transparency. Now woredas publish their budget for the public to see what they are doing. So the program has benefited a lot.

Q: But, if the government has this much of a commitment to sustain the program, why don’t the donors exit and the government includes the program in the normal development process of the nation?

That is a possibility. It is a transition. We are currently doing the third phase of the programme but we are also making some adjustments to the program. While recognising that access to basic services have been provided and the program has made good progresses, we see that quality of the services, especially in some services such as rural roads and water supply and sanitation, have still some scope to improve. We would continue to support the process but with more focus on how to enhance quality.

One has to also recognise that decentralisation in this country is only about 10 years old. This is a large country. One cannot expect for everything to be in place in such a short time. There is still room for improvement.

For example, there ought to be systems at woreda levels to make sure that money allocated is properly spent and properly accounted, supported by proper financial statements. These are works in progress.

I think there is still more room for further improvement. This is why we continue to support the program. But we recognise that we are not going to do this programme forever. Even for the latest phase, our funding is only for the first three years. We are discussing on the alternatives of sustaining the programme into the government system after that, while our money, as you noted, could be allocated to other sectors.

Q: In referring to the new CPS, I have observed that there is a difference in growth records between the World Bank and the official government data. It has been the case for many years and remains to be confusing. Where does this difference comes from and why does it become difficult to align the data set to produce similar results reflecting the reality?

Yes! It is a recognised fact that there is a difference between our numbers, largely consistent with that of the IMF, and that of the government. We have been trying to work with the government to see how we can understand, a little bit better, on how the government comes up with the GDP projections. This divergence, by the way, became large in the last two or three years; before, it was not this much large.

This work is ongoing. In fact, there is an IMF mission working with the government to enhance the understanding of how the GDP numbers are done. I don’t want to prejudge the conclusion. The effort is to try to understand where the sources of growth are, where the estimate comes from and what the bases of the estimate are.

From the World Bank side, this discrepancy will, at the end of the day, boil down to the capacity of the Central Statistics Agency (CSA). We are working with the government on improving this capacity. In fact, we are in the process of preparing a 10 million dollars grant to improve this capacity.

That being said, while recognising the discrepancy, even at eight per cent, the growth is impressive. The key thing is to look at the sources of growth. This is, as I said, a work in progress.

Q: I was also surprises to see that the CPS recognises the Development State model of the EPRDF-led government as a major factor for the realisation of the rapid economic growth of the last seven years. You are bold enough to recognise it. At the same time, the CPS notes that the model has created pertinent challenges, especially in the macroeconomic front. Do you think the model is sustainable?

This particular model was practiced in many East Asian countries, since 1970s. Japan, Korea, Singapore, Malaysia and China have employed this model. But there are differences. When these countries implement the model, largely driven by government efforts, such as selecting winners and putting resources, they did have a high saving rate. They were able to mobilise resources.

But, Ethiopia, unfortunately, has a very low saving rate. Hence, there are not much deployable resources. The natural resources base is also very low. That is why we recommend for the nation to focus on ways of mobilising resources.

Labour intensive industries are important, we see, as they are important fronts to attract foreign direct investment. Korea and Japan had very large labour intensive industries in 1960s. Such an effort had gradually moved to the other countries.

But we also recognise the imbalances; investment and saving are not matching. I am not going to say this model is unsustainable. What I would say that if the government could take care of the macroeconomic imbalances, it can make history.

Q: Aren’t you concerned about the democratic deficit that exists in the model?

That again is a very philosophical kind of debate. There was what was called the Washington Consensuses saying that if you let the private sector grow and have a democratic political system, the economy will take care of itself. Some countries that pursued that may or may not have been successful. Ethiopia is choosing a different path, which is an interventionist state model.

Whether this model will take Ethiopia into a middle-income country or not, as I would say, is to be seen. Though we recognise that there is enough scope to involve different groups, including civil society, within the development process, it is not for us to dictate the model. At the end of the day, it is up to the government and the people of the country to choose their own path. We may or may not agree with the model. But we always try to find ways to work with under that particular model.

Q: It is also mentioned in the CPS that a slowdown in Euro Zone and the anaemic growth in US might affect the export performance of Ethiopia and eventually it has been the case in the last fiscal year. You consider it as a major external shock that the country’s economy might face in the coming years. What do you recommend for the government to do in order to absorb the shock effectively?

One has to recognize the thing Ethiopia fared probably better, compared to other countries, in terms of dealing with the impact of the last financial crisis in 2008; I think the net impact of the crisis on Ethiopia was not as bad as in other countries. Probably it is because the country is relatively less reliant on the international market and natural resources export is small as compared to the aggregate GDP.

What is important for Ethiopia to move forward is to diversify its source of export earnings; not just rely on European market or US market but add other emerging markets. This is one reason that, I think, for Ethiopia to move forward, it has to undertake industrialization process by introducing labour intensive industries that could create jobs. This kind of industry has several impacts; one is to create jobs, create sorts of stable earnings for low income people which create market, than the state market, for demands. Because at the moment, about 80pc to 90pc of manufacturing goods are imported. But some of these goods could be produced here if proper ways of accessing capital could be created.

Doing so can help replace some of the imports that consume foreign exchange. That is how the country could absorb external source.

Q: It seems that the World Bank is interested to get back to budget support. The latest CPS mentions it as something to be considered within the next years. But, in the mean time, it seems that cases of corruptions are increasing in the public service. Reported corruption have significantly increased in the last two or three years. How do you guarantee that your money is going to be spent well?

This CPS is going to cover the next four fiscal years. We do not anticipate that we are going to have budgetary support operation, this year or next year. It is going to take time. For us to develop the budgetary support operation, we need to guarantee that there is a sound macroeconomic environment. It is a condition for us to do budgetary support.

In that, we still have progresses to make. We recognize there are some structural issues in the microeconomic balance.

Yes, we are concerned that the money has to be put in the appropriate use. This is why we continue to work on public expenditure management system; to ensure that capacity has been build at all levels of government, from federal to regional and woreda level. This is part of the third phase of the PBS program which would continue for the next two three years. When we will reach to a decision to be back to budgetary support operation, I think, is something to be seen,; it could be in the next two or three years. It is something that we are working on.

We are keeping it as an option to support the government programs. At the moment, as we speak, we are not there, yet.

Regarding increasing cases of corruption, of course, we are concerned about it. I would say the government is committed to tackle it. Yes, as you know that this is the country that has anticorruption commission. I do not think that there are many low income countries to have this kind of, at least, mechanism or system in place.

So, I think, all together, we have good elements in place to work together in this area.

Q: Are you happy about the political transition that is going on in the country?

I have to give the credit to the government and the people of Ethiopia for the good transition following the passing of the late Prime Minister Meles Zenawi. Because, if I have heard history correctly, this is the first time to have peaceful political transition in last hundred years or something.

I have to give credit to the government that everything follows the constitutional process. Of course, in addition to that, you have a party process, which I am happy to see that it is also supporting the process. So far, yes, all the elements are in place for a more smooth political transition.

Of course, everyone recognises that Meles was powerful for 21 years. He had very particular way of governing the country. The new leadership and the new government will take time to see how to consolidate the political bases and how to govern. I am confident, based on the elements I have seen over last couple of months in terms of transition, that we can continue to pursue the CPS, a large portion of which was developed before the transition happen. The attitude of other donors, I think, also falls in the same path.

Q: Do you see a country that is heading towards inclusive political system?

If the question is about political openness, I think it is gonna take time. But I see the trend towards it. We are certainly encouraging the government to be more politically open.

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