31 July 2018

Ethiopia: The Economics of Elite Bargain in Ethiopia: Can It Be Inclusive?

opinion

Addis Abeba — What is happening in Ethiopia in the past three months is nothing short of tectonic. A follow-up to four years of anti-government protests in many parts of the country, mainly by the young population of the country, the shift has brought the ruling elite to a state of near-fragmentation. But the worst was avoided by the coming to the helm of the first Oromo Chairman of the ruling party, EPRDF.

Series of changes have been made since then, in both words and actions. This include, but not limited to, admitting state terrorism, officially recognizing opposition parties as "competing parties", commitment to reform binding legislation, releasing political prisoners, inviting and reaching out to political agencies based both in the country and abroad, mending relationships with Eritrea and strengthening diplomatic relation with Gulf countries (formerly treated suspiciously by the Ethiopian state), making decisions to privatize part and whole of state-owned enterprises, constructively engaging the Ethiopian Diaspora and many more.

For a country that had been living under monopoly of power, discourse and messaging channels, the shift seems to have resonated in a way of collective euphoria and excitement. And there is nothing better to show this than the level of support that the new Chairman of the ruling elite and the Prime Minister of the Country, Abiy Ahmed (PhD), is garnering across the political aisle. This support ranges from considering him as anointed king to one with exceptional political skills to push the ruling elite to reform.

Although the Premier has indicated that everything, including the constitution, is negotiable, the actions on the ground show that major economic pillars, such as private ownership of land, the power and role of the market and limits to the interventions of the state in the market are not being pushed forward to the negotiating table.

Considering what was happening in the country in the last three years and what Prime Minister Abiy is trying to do, one could conclusively say that Ethiopia is witnessing another era of elite bargain. It is not the first time for the country to witness the unfolding of such an event, but the situation seems to be different this time around.

Looking at literature about elite bargain, one could see that the concept is all about negotiated political settlement amongst the elite of the nation, often coming after political crisis, which destabilizes the elite. Such a bargain is about creating a political organization that intends to avoid fragmentation and looks to create inclusive political space by way of negotiated political arrangements.

Although the concept of elite bargain is largely political, it has huge implications to the economy of a country. Since political arrangements decide on the structure, nature, beneficiaries, allocation and utilization of state resources, the linkage with and implication on the economy is considerable.

Leaving the political discussion to political scientists, let us look into the economic aspect of the bargain.

It is not the first time for such a bargain to happen in Ethiopia. It may be useful to take stock of the historical aspect of it. For their significance and timing, it will be relevant to zoom into what has happened after the overthrow of the Imperial regime, the fall out of the socialist-dictatorship (the Derg) and what is currently unfolding.

The economic background of the elite bargain that led to the overthrow of the last Imperial regime was one of structurally exploitative feudalistic arrangement. Factors of production (labor, capital and land) were owned essentially by the Emperor. He is bestowed with the exclusive right to define the ownership structure of the factors of production and how they are allocated.

Economically speaking, the economy was hugely asset-based and capital-constrained. The productivity level of agriculture, the mainstay of the economy, contributing up to 85% of the GDP, was very low and remained largely subsistent. The industrial base was low, infrastructure provision remained dismal and service sector was minute (if ever, existent). Records shows, for instance, that service export was less than 1%, in 1973/74.

Economic policymaking was hugely centralized and was considered to emerge from the wills of the Emperor himself. Proclaimed under the series of five-year plans, the focus of the economic policy of the time was to shed off "backwardness" and bring about "modernity". And the focus has been on "taking the people of Ethiopian in the path of modernity as seen and considered relevant by the Emperor". As such, the institutional arrangement of the economy was designed in a way that takes this supreme power of the Emperor to "give out economic growth and modernity" to the people of the country.

In real terms, however, the economic structure was, in the words of Daron Acemogul and James A. Robinson, "exploitative". They are designed to enrich the few connected feudals of the time, including the Emperor and his families, albeit at the expense of the masses. The masses remain "servants" of the acquired privileges of the few and the connected. Not only were they devoid of ownership of capital and land, they had little leverage over their own labor.

At macro level, the economy was growing at dismal rate. In much of the times of the Emperor, growth remained negative. The external sector was underperforming, with exporting growing at an average of 1.5% over the four decades of the imperial regime. Power production was in the order of 100MW. Even social service provision, such as education and healthcare provision, wherein the system was considered to have performed better, was narrow and elitist. The masses lack access to basic social services.

It is this structural unfairness and underperformance of the economy, not to mention the exploitative and unjust nature of the political arrangement, that the student revolution of the time went against. This revolution led to the overthrow of the feudal regime. What followed was an elite bargain, which could largely be considered unsuccessful.

The elite bargain of the time involved key economic factors. On the table were land ownership, structure of the economy, the role of the state in the economy, the place of the private sector, the approach to the management of the economy, structure of public investment, structure of markets and the state of the local economy.

Cognizant of the fact that almost all of the elite groups, except few that take allegiance to the former feudal system, had socialist leanings, the bargain involved not so much of a diversity in economic policy perspectives. There was almost comprehensive consensus on land being owned by the peasantry, the economy being centrally planned with the state playing the decisive role in investment and allocation of capital, the private sector having only marginal and supportive role to state-driven economy, markets being heavily regulated and local economy being subservient to the center.

Nonetheless, there were differences in preferred political organizations. Hence, the elite destabilization continued even years after the overthrow of the monarchy and gave the military a space to take power. What came out of the military taking power from a rather homogeneous elite, fragmented only over the issue of political arrangement, was a dictatorship with socialist face.

The resultant economic outcome was dismal economic performance. GDP growth stayed in the lowest positives during the first years of the dictatorship, and went down in the reds in most of the middle and end of the regime. Agricultural productivity remained very low, although mechanized state-owned farms were added to the dominant smallholder production system. The external sector was underperforming, even lower than the case during the Imperial regime. Average annual growth of export, for example, remained negative during the 17 years of the regime. Credit to private sector was in the order of 2 - 3.5% of in all the years of the regime. Fixed exchange rate, with ballooning import bill (largely for ammunition and military equipment), brought the current account deficit to an unsustainable level. And bulging military expenditure, coupled with multitude of subsidies, resulted in debt buildup. Dwindling state coffers led to rationing of commodities and inability of the market to provide even basic consumables.

The long overdue resistance to the dictatorship, led by the Tigraian People Liberation Front (TPLF), gained sufficient moment and embraced many other armed groups, in the form of the Ethiopian Peoples Revolutionary Democratic Front (EPRDF), and overthrown the dictatorship in 1991. What came after this was another round of elite bargain.

This round of elite bargain brought significant change in the structure and management of the economy. Key amongst the shifts were recognition of market-based economic structure, with the state playing a regulatory and distributive role. Private sector was recognized to be the engine of growth and private wealth creation obtained legal ground. Despite continued debate on it, land was decided to be the property of the state and the people of the country, with farmers having usufruct rights over it. Labor and capital got released from their passivity, to eventually be partially guided by the forces of the market. Economic policy was made to be decided by both the state and the market. Local economy was released from its subservience, by way of self-administration, and made to serve the local populace. Public investment was made to be guided by local needs, national priorities and negotiated rules of management. Exchange rate was made to be managed and external sector got anchored to the linkage between national and international markets.

At legislative level, the resultant outcome of this bargain was a largely liberal constitution providing legal ground to the economic changes. And on the ground, what this seems to have brought is enhanced economic performance, improved private wealth creation, increased employment level, improved productivity, enhanced monetization of the economy and growing vibrancy of local economies.

To show the change numerically, GDP has been growing at an average of 7.5% over the past 27 years. Private capital accumulation reached 18%, although credit to private sector remained lower than 20%. Unemployment, despite problem in the accuracy of the numbers, is only 16% in urban areas. Total grain crop production has reached 306 million quintals, lately. Absolute value of export has reached around 3.1 billion dollars in 2017, although growth rate of export has been in the decrease in the last 8 years. Access to education and healthcare has improved significantly, with primary school enrollment pushed to over 90% and infant mortality reduced to 53/1,000.

Despite the rather impressive macro performance, structural gaps remain considerable. Top amongst them are growing inequality, increasing indebtedness, widespread unemployment, poor local resource mobilization, uneven infrastructure development, uneven distribution of credit to private sector, distorted wealth creation matrix, suboptimal quality of education and healthcare and widespread corruption.

It is in the background of these structural economic gaps that the last three years of violent and protest were happening. This has led to a shift in the power circle, with the mostly marginalized sections of the ruling party coming to the core, and those who have been running the show for over two decades pushed to the sides. Complemented with the charisma and popular support of the seemingly reformist new chairman of the ruling party, Abiy Ahmed, we seem to be witnessing the start of what could be said a third wave of elite bargain in the century. Although the process is still unfolding, raising key questions and proposing some lines would be important for the bargain to be as inclusive as possible.

According to Stefan Lindemann, a political scientist at London School of Economics (LSE), elite bargains could either be inclusive or exclusive. When elite bargain is exclusive, it essentially excludes part of the elite and the interests (and political base) they represent. But often, such a bargain creates disappointment from the sidelined elite and their base; creating resistance, in the short-term, and conflict, in the long-term.

In contrast, when elite bargain is inclusive, it brings peace and prosperity. Further, it strengthens social harmony. What is typical of such a bargain is creating negotiated ways of managing and utilizing state structure (jobs) and state resources (rents).

Looking at the two past events of bargains, one could not say that they were inclusive enough. The first event that came after the overthrow of the Imperial regime sidelines elites supporting free-market, less interventionist state, enhanced role of the private sector, private ownership of productive factors and enhanced independence of the local economy. Similarly, the second round of elite bargain that came on top of the defeat of the bloody dictatorship of Mengistu Hailemariam, excluded elites standing for full private ownership of land, complete autonomy of regional economies (typically of Oromia), deliberate distortion towards local economy, local ownership of natural resources, geographic arrangement to public investment administration, liberalized labour market and regularization of informal market players.

So key questions that we ought to be raised at this point in time are: what is in the table in the unfolding elite bargain? What could be done better to make it inclusive?

From the look of things, it seems that the bargaining table will have little in the form of economic policy changes, but much in the form of political institutional changes. If we are to bound ourselves by the official declarations, the bargain will involve legislative changes (mainly of media, civil society and anti-terrorism laws), structure of the electoral board and the electoral system, the role and independence of the courts, the effectiveness and impartiality of the Human Rights Commission and the separation of powers between the various agencies of the government. More may come, in this line, as time goes for the days are so dynamic to even make educated guesses.

As far as the economic side is concerned, the bargain seems to involve the role of State-Owned Enterprise (SoEs), the strategic direction and effectiveness of public investment, the vibrancy of and support to private sector, the regulatory effectiveness of the state, the distortion in the investment space and the engagement of the Ethiopian Diaspora in the economic sphere.

Although the Premier has indicated that everything, including the constitution, is negotiable, the actions on the ground show that major economic pillars, such as private ownership of land, the power and role of the market and limits to the interventions of the state in the market are not being pushed forward to the negotiating table. So do seem floating the currency of the nation, opening the capital account of the country, liberalizing the financial sector, opening up the telecom sector for competition, ending the monopoly the national airline and shipping lines, infusing competition in the logistic sector, improving the fiscal independence of the regions, attending inequality, accounting corrupt officials, putting in place effective public investment framework and broadening the tax base

As such, the bargain could exclude elites standing for these ideas and their respective popular base. It also limits the economic outcomes of the bargain, because the structural gaps of the economy will remain around unless transformational decisions are made on key economic areas, albeit on negotiated basis.

Thus, avoiding the exclusionary nature of the bargain is the crucial decision of the day, both for the ruling elite and its competitors. And making the bargain inclusive would demand embracing all elite groups, negotiating on transformative economic agendas and tinkering over the expected economic outcomes. It is only, then, that the elite bargain of the time could ensure lasting peace and prosperity. AS

Getachew T. Alemu is an investment and development consultant, with over 13 years of experience in government and private sector. 

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