7 January 2013

Ethiopia: Reform, Reform, Reform

Although there are disagreements about how accurate the growth statistics are in Ethiopia, even if the growth is at a rate of four to six percent per year, rather than the 11pc disclosed, it is still rather impressive. But how fragile is this growth? Is it based on sound economic footings or is it a bubble created by massive state spending, which is neither sustainable nor the proper driver of economic growth? What is the role of the real private sector, in the Ethiopian economy, under the ideology of the Developmental State?

There are also broader questions, raised through the promotion, by Meles, of hisDevelopmentalStatemodel as the best approach forAfrica, as a whole. How consistent are the opportunities and constraints to development inEthiopia, when compared to the rest of Sub-Saharan Africa, with a diversity of traditions and history? What is the nature and reality ofEthiopia's economic growth, and does this provide a suitable model to be followed by others?

Looking atAfrica, as a whole, the way forward is already emerging and there is great hope for the future; if it is not messed up. What is the reason for this new African Renaissance and how is it to be maintained and evolved? And specifically, how does this happen inEthiopia?

This takes us back to a fundamental question that economists have been wrestling with for a long time: what is the secret of economic growth?

Sustainable economic growth is a relatively recent historical phenomenon. Arguably, the model started in the West about 500 years ago, is the first in human history where sustainable and remarkable levels of economic well-being were attained by a broad mass of people, rather than just the rich and privileged few inRomeand ancientChina. Notions that this was only attainable by a small proportion of the global population have been blown away by the rapid economic growth inChinaand other parts ofAsia. Economists have tried every model in the book to explain this; through saving factors, trade factors, technology factors and resource factors, but none of these technical components alone, or in combination, have proved sufficient enough to explain this unique historical accomplishment.

As the most startling recent example,Chinais a good place to start the examination into what exactly is different. The change is easy to identify. It happened in 1979, with Deng Xiaoping's reforms, which allowed private business to function again. The stifling centralised state of the Mao Zedong's period, which had promised rapid economic development and attempted the 'Great Leap Forward', had produced only stagnation, poverty and famine, and change was thus a necessity.

As businesses began to find and seize opportunities, the door to capitalism was opened further. As the tide rose, all those who did not adapt were often allowed to go under; although there are still many of them around. A positive cycle of change was reinforced, with one set of reforms leading to another. Land tenure was reformed and foreign investment welcomed, as the state withdrew from the economy more and more. The Chinese economy has come far enough so that the concerns of western countries are now shared, including; environmental damage, growth at a manageable and not over-heated-rate, and the 'elephant in the room' of emerging middle-classes wanting more of a democratic say in how things are run. A recent international poll found that the Chinese population is more pro-capitalist than the Americans, or any other western country!

The African Renaissance, of the last decade or so, is both very different and very similar. The new generation of African business and political leaders began to abjure both the colonial past and blame all failures on colonialism, as well as the first generation of African leaders, dominated by predatory dictators. The model ofBotswana, from the 1960s, based on a strong private sector and a democratic state, became a positive example, instead of the negative picture painted by statist, left wing critics.

The liberation ofSouth Africa, and to a lesser extentNamibia, unleashed a further model of private sector development, which has gradually influenced the southern, and increasingly, eastern parts of the continent. In fits and starts, places likeMozambique,MadagascarandZambiahave embraced the new renaissance and drawn great benefit from it.Kenya,UgandaandRwanda, in East Africa, have also benefited from their reforms, in one way or another, and even old socialistTanzaniahas begun to throw off the yoke of statism.

For these countries, the ideology of theDevelopmentalStateis yesterday's news. They are advancing now by finally recognising that actors, other than the state, must be given the space to grow, just as inChina. TheDevelopmentalStateapproach is only attractive to the old style African governments, who want a new ideological underpinning for their continued domination and milking of their national economies.

So, where isEthiopiain all of this? Despite the ideology of the Developmental State, probably the greatest economic contribution that Meles made was to open up to the private sector and allow an emerging group of entrepreneurs to drive economic development in the country. His was a very brave move, made initially at the time of the EPRDF takeover in 1991, and subsequently reinforced.

Given the anti-business traditions in Ethiopia, and the ideology of the EPRDF, this was a truly remarkable tactic. Businesses immediately started to take advantage of the opportunity, and tens of thousands have taken root since. The cumulative effect of these businesses is massive, and arguably, has created a change in Ethiopia, similar to that, which began in China, back in 1979. The change in business tolerance, and the eventual pro-business stance, which unleashed development in China, was much stronger and clearer than Ethiopia, however, which has only partially encouraged business development.

Why only partially? Business was allowed after 1991, but not unleashed. The constraints and suspicions on businesses are still so strong that the private sector has survived, even grown, but not flourished as it could have. Meles recognised this and undertook two further sets of reforms, after the ruling party split in 2001. The 'left' was ousted from central control and, after the shock of the 2005 election, the ruling party was made to undertake an internal reflection.

These reforms have allowed greater involvement from the Diaspora and foreign businesses, as well as making local business easier, despite Ethiopia still appearing near the bottom of the World Banks' 'Doing Business' rankings, especially in terms of the ease of opening a new business. They have been accompanied, too, by limitations, not adopted in China, such as the distinction between 'rent-seeking' and 'productive' business.

Party cadres are steeped in the evils of business 'rent seekers', a pretty vague concept, which has led to arbitrary and counter-productive rules. Businesses, especially in rural areas, need to navigate not only the federal rules, but regional, wereda and kebele rules too, which are all administered by government officials indoctrinated in party training to 'watch out for rent seekers'.

It is of little wonder that officials feel they have a free hand, and even the right and need to harass the private sector. Some foreign investors, in the flower and horticulture sectors, for example, have finally thrown in the towel. Not because they could not make money, but because of the stress of constant rule changes and the hostile actions of local officials.

Thus, the simple message to the ruling party today is, 'don't kill the goose that lays the golden egg'. The emerging entrepreneurs are very good at navigating the blocks that the government throws in their way, but they are not invulnerable. The recent sessions, where Hailemariam Desalegn and other senior officials listened to the issues from the private sector, are good, but Meles also did that on a fairly regular basis. The test is in the changes that were made as a result.

It was the personal involvement of Meles that launched the lucrative floriculture industry in Ethiopia, which overcame the gravest roadblocks, which lower officials set in its way. This case by case approach may be okay for those in the privileged sectors, such as floriculture, but the aim is to have simple, supportive and consistent rules for all actors in the private sector.

The ruling party will soon be at a crossroads. The high targets set in the Growth & Transformation Plan (GTP) are unlikely to be met. The focus on the public sector means that infrastructure will be built, but unless there is a strong and flourishing private sector too, the use of that infrastructure will not be maximised. To obtain 'Chinese rates' of economic growth on a sustainable basis, not only does one need infrastructure, but too there is a need for an unleashed private sector. This was the direction that Meles was heading in, against all of the traditional and ideological anti-business attitudes surrounding him. This is the direction that Hailemariam needs to take; the next logical step from Meles.

If the ruling party interprets the legacy of Meles as one of 'restricting and hobbling' the private sector, the economy will falter. If they interpret it, rather, as movement towards greater freedom and support for the private sector, then the long-term growth rates, achieved by China, are also possible here.

Ultimately, the secret of economic development over the past 500 years is simple; firstly, have a positive attitude towards the running of business, and secondly, make a profit. There may never be a fully supportive attitude towards business here, but there has to be enough of a critical mass and a sufficiently enabling environment, so that businesses can get on with their job.

There needs to be a clean break, with regards to the anti-business attitudes, which sets the tone for government officials at all levels. There needs to be a progression from business being tolerated, and of course it must be constantly controlled, to 'business is good, necessary and should be supported for the purpose of economic growth'. Whilst, of course, paying taxes and being responsible. The ruling party may feel they have already sent this message and that is what they are doing. They have not and they are not.

There needs to be a clean break message, along the lines of Deng's speech regarding China's great opening to the private sector, in 1997. Local business must also be more open. They should be given more space and support, but too they should put an end to their xenophobic and counter-productive opposition to increased foreign investment and competition.

Let foreign companies into the banking sector; even the telecommunications 'sacred cow' should be opened up. Ethiopian businesses will rise with the tide. Stop this incessant, "we are not ready yet, we are not ready yet". Be, at least, as brave as China!

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