Ethiopia: Abiy's Daunting Economic Assignments

The 2nd Tripartite High Level Ministerial Meeting of Ethiopia, the Sudan and Egypt on the Great Ethiopian Renaissance Dam (GERD) opened earlier today (15 May 2018) at the Intercontinental Hotel, Addis Abebi.
opinion

A huge assignment awaits Prime Minister Abiy Ahmed (PhD) to put the industrialization effort of the nation in a stable footing. And there is much that needs to be done in both policy or strategic front as well as operational front, writes Getachew T. Alemu (getupfront@gmail.com), an economic development and investment consultant with Apex Consulting, US, and Director of Strategies, ExoTalent.

A new dawn has come to Ethiopia, according to some, with the coming into power of Abiy Ahmed (PhD) as the new chairman of the ruling EPRDF, and hence the Prime Minister of Ethiopia. For a nation that has been grappling with two years of popular protests in two of the major regions, associated conflicts, death and destruction, ethnic animosity, uncertainty and destabilized trade activities, the decision of the ruling front to bring Abiy to the helm was, by and large, comforting.

Abiy seems to command huge positive public support. His rather emotional, personalized and gratuitous inaugural speech has furthered the communal support garnered, unlikely to an EPRDF official.

In terms of substance, though, his speech had nothing new. It rather falls in line with the long overdue lines of the ruling front. Even more submissive are the policy promises that he indicated in his speech. He seems to put his development agenda under the banner of the second edition of the Growth & Transformation Plan (GTP II), although a disproportionate number of the targets outlined in the Plan are missed and there is little chance to make up for them in the remaining two years.

As far as policy indications are concerned, then, Abiy's speech is a missed opportunity. It does not contain any indication of a policy change that the ruling front wants to implement, along with the leadership reshuffle.

It is obvious, even to a layman, that the economy is where Abiy's capability, commitment and foresightedness will be measured. As far as the broken politics and the rather narrow (largely monopolized) political space is concerned, what is in demand is an openness and will to give some and take some. Dealing with the economy, however, demands creating tailored policies, weighing alternatives and implementing the best-fit alternative. There is a sense of urgency in doing all that and the stakes are high both at the micro and macro level.

Agricultural productivity is still low in the majority of the nation's smallholder farms. The scaling-up policy, which intends to bring all smallholder farmers to the productivity level of model farmers, has not been effectively streamlined. Some studies show that the marginal difference between the productivity of model farmers and average ones stands at around 60pc.

Although such marginal difference is not constant in all localities, agro-ecologies and crop varieties, considering the fact that about 81pc of the population lives on farming, one could see the huge task remaining in terms of intensifying agriculture to provide increased productivity and production.

Making the task all the more daunting is the frequent drought that affects the nation (it needs no reminder that about eight million people are in need of emergency food assistance at the time) and the ever-changing climatic condition in the country. Both have increased vulnerability and reduced resilience of farming households.

It is not only agriculture that sees structural hindrances, however. Industry and services are no better. The industrialization effort of the nation, mainly sitting on the Industrial Parks (IPs) development, has had its own challenges. Attracting able and quality foreign direct investment (FDI) is a major issue facing the parks.

With park development happening in different regions, some very far from the capital city, the task of attracting investors has been an uphill one. To compete for both resources and policy attention with the Industrial Parks, the development of Agro-Processing Parks has also gained momentum.

Yet, no clarity has yet been established as to the linkage between the two and the way to manage the externalities. Adding another layer on the industrial policy intricacy is the development of the industrial parks by regions and promise of developing IPs for migrants from neighbouring countries using donor money, mainly European.

It is not only the industrial policy sphere that lacks clarity, however. Implementation is also as confusing. For starters, the role of regions and the federal government is not clear. As it stands, the cream goes to the federal government, while the dirt stays for the regional governments to clear. And the latter relates to rural-urban migration, housing demand, public services, environmental pollution, increased cost of living and other negative externalities that regions hosting IPs ought to deal with.

Further, there is no linkage between the IPs and the local SME endeavour. The IPs are export-focused and the local SMEs are far from the quality standard that exporting required. No plan is yet there on the linkage that has to be there.

Over five years in the line, the IP strategy is yet to prove itself to be worth perusing, in terms of foreign currency generation and job creation. Instead, problems such as high staff turnover, low productivity, poor environmental standards and inability to attract local investors surround the IP hoopla.

Generally speaking, there is a huge assignment in terms of putting the industrialization effort of the nation on a stable footing. And there is much that needs to be done in both policy or strategic front as well as the operational front.

In contrast, the service sector demands less of a policy intervention. This, however, does not mean the assignment there is less demanding. Improving the sector's operational standard, reducing informality, enhancing the adoption of IT in the sector, incentivizing innovation, improving human resource capacity and making the sector competitive is a huge task ahead. And that, in policy terms, entails a huge task of identifying problems, analyzing them rightly and proposing tailored solutions.

The headwind, in this, is that the dynamics have a very short lead time and policy has to adapt to this timeline.

Unfortunately, the Ethiopian economy hosts other macro challenges too. For more than eight years, now, export continues to miss the target. It persists around the three billion dollars mark. A fitting policy, in the way of a game-changer, is yet to come. That of exporting more is not working well.

Inflation, long contained under 10pc, has now gone upwards of 15pc. With plans of the National Bank of Ethiopia (NBE) to borrow more a part of the budget document for the year and supply constraints in the market, for both agricultural and non-agricultural products, the probability that it may go higher is high.

Off-farm and urban job creation is by far the major problem waiting for a solution from the government. The existing schemes of organizing youth under SMEs and link them with public investments, such as feeder roads and low-cost housing, are seeing their limits in relation to financing shortcomings. This, of course, is not to mention low product quality, poor market information, lack of networking opportunities and undersupplied training and capacity building. Data from the government itself shows that survival and transition of SMEs stay in the lows of 30pc.

For an economy that hosts a population that is 70pc young, and around 30pc of that chunk being working age, the current job creation schemes are just not enough. What makes things worse is the fact that the entry barriers for any individual to start their own business remains huge. Hence, the road to self-employment, start-ups and own company is a far-off dream for the youth. The bureaucracy is not helpful.

Fiscal policy distortions, such as expanding budget deficit, low tax revenue to GDP ratio, an ever-increasing debt build-up and wide regional differences in both revenue and expenditure lines, add more pain to the economic matrix.

Provision of key social services, such as education, health, water supply and sanitation, also see their problems. Standing out as major challenges in these sectors are low education quality and employability, a brain drain of health professionals, poor designing of water supply schemes and huge supply backlog of sanitation infrastructure. The reality is that the negative externality of these sectors to the national and local economy is considerable.

Complicating the economic problem that Abiy's administration has to redress are off-budget mega projects, such as the GERD, sugar factories and fertilizer factories, seeing their own lag time and state-owned enterprises (SoEs), which host considerable inefficiency and lack of accountability. Both need serious administrative attention.

One could also not undermine the negative impacts of cumbersome logistics sector, lagging customs and undeveloped financial sector (and limited financial inclusion). All of these need new reform efforts to make them competitive and facilitative enough.

The economic problems are evidently huge. And their resultant outcome is growth with fewer jobs, deepening poverty, increasing household vulnerability, widening income gap and distorted wealth creation matrix. For a ruling front that claims to get its legitimacy from the farming and urban working population of the nation, then, these assignments have a lot to say about what is at stake.

Can Abiy, a rather young and relatively inexperienced figure within the EPRDF, solve the economic conundrum?

He can solve it if he can ensure institutional independence within the government and change the way economic management is done. By institutional independence, it means taking the job of managing the economy to the right institutions, such as the Ministry of Finance & Economic Cooperation (MoFEC), NBE, Ministry of Trade (MoT) and Ministry of Industry (MoI).

Under Hailemariam Desalegn's premiership, the mandate of each of these institutions has been eroded by way of taking their key roles to the Prime Minister's Office and superimposing committees. It is to be remembered that issues as varied as inflation, export and SOEs have committees at the Office. If Abiy is to succeed, then, he ought to avoid the culture of taking it all in his hands and reverse the trend. By putting effective systems of accountability, Abiy can make the institutions live up to their mandate.

Further, Prime Minister Abiy has to avoid the bosses above the bosses residing at the Office. The multiple layers of advisors there, overseeing sectors and macro issues, while there are dedicated ministers for the task, are unnecessary and redundant. The fact that these advisors are individuals with huge experience and political clout means that they can outmaneuver ministers leading government agencies. Much as advisory is important; the current layer is ineffective, unnecessary and irrelevant.

What is even a more pressing edge in the economic management is culture. For long, it has been that every line about economic management is awaited from the Office. And the flow of policy lines has been from there to agencies. This culture has disempowered government agencies and created a waiting mentality.

It goes to an extent that we have agencies whose leaders think that their main job is writing letters to the Office. This has to change. Decision making has to sufficiently be decentralized and leaders of government agencies ought to be incentivized to make responsible decisions. The culture of accounting indecision has to get base in Abiy's administration.

Both ways, though, Abiy has a tough road ahead. Considering the complexity of the economic management task that awaits him, optimism is hard to justify. Wishing him good luck, I prefer to be sceptical about it all.

Getachew T. Alemu (Getupfront@gmail.com), an Economic Development and Investment Consultant With Apex Consulting, Us, and Director of Strategies, Exotalent.

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