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    Interview“The Ethiopian government needs to prioritize recovery”

    “The Ethiopian government needs to prioritize recovery”

    Date:

    Kenichi Ohno (Prof.), a Japanese scholar known for his industrial development policies in Ethiopia, is a developmental economist. He has been a close friend to officials and policymakers in Ethiopia. Known for criticizing government policies, Ohno believes there is no panacea for the Ethiopian economy in the short or long run. He advises the government to secure political, regional, and ethnic stability before solving economic problems effectively. The Reporter’s Ashenafi Endale asked the renowned scholar what he feels about the current condition of Ethiopia’s economy and the way forward. EXCERPTS:

    The Reporter: You have been to Ethiopia for a number of times and have a good idea of Ethiopia’s economic trends. Tell us about your observations during your latest visit.

    Kenichi Ohno: For many years, I saw the Ethiopian economy grow rapidly and attract many FDI projects. Today, the streets of Addis Ababa are still lively with many congested intersections, new parks opening in the city, and citizens’ life seems normal at least superficially. But I also know that domestic and FDI firms face increasing difficulties and their operation rates are not improving. At the top of the list is the worsening foreign currency shortage. The upward adjustment of the surrender requirement to 70 percent by NBE hit many companies heavily. To this, we must add the impacts of the northern conflict, the severe drought and locust problems, AGOA suspension, the lingering COVID effects, the scarcity and dearness of certain imported items, and so on. The list is long and we must admit that the economic crisis Ethiopia faces has deepened in the last few years.

    You also came at a time when the three-year Homegrown Economic Reform (HGER) program just phased-out and a new three years program was rolled out. How do you evaluate the past three years in Ethiopia in terms of external debt, inflation, job creation, stability and overall economic performance?

    An official explained to us that the HGER program, together with other programs implemented in the last three years, brought great results. Agricultural production rose sharply even to the extent that Ethiopia no longer needed to import wheat as before. Coffee export also hit a new high. Multi-source irrigation projects, accompanied by the importation of many water pumps, contributed to this feat.

    The government started the conflict reconstruction process in cooperation with the World Bank and other donors. Tigray is still a conflict zone so the reconstruction must begin from non-Tigray areas. The United States still takes a tough stand on Ethiopia but the government is working with bilateral donors and multilateral organizations to overcome the economic crisis and the reconstruction process. I respect these policy efforts.

    However, the problems are very huge and remain so, and government efforts so far have not solved them. Inflation is high, people’s real income is on the decline, external debt service is becoming more difficult and Ethiopia needs debt rescue measures by some generous creditor countries, and drought and locust affected farmers and pastoralists need relief.

    Some FDI firms are also closing operation and even leaving. The macroeconomic challenges are enormous. The country needs to secure political, regional, and ethnic stability before it can solve these economic problems effectively. Ethiopia faces a great policy challenge.

    What areas should the next three-year plan and next ten years plan prioritize? What is also your take on the ongoing privatization and liberalization process?

    The Ethiopian government needs to prioritize recovery and construction in the short run, but it also needs to sustain and execute its long-term development agenda. Both are needed, and the next three-year plan must do both.

    I understand that the World Bank is helping Ethiopia with conflict damage assessment and also released USD 300 million loan for reconstruction. Other donors are also helping.

    As for long-term policies, the administration is going forth with structural reforms, which means breaking state monopoly, selling state assets, and introducing true competition. I am all for this policy direction, but I must also warn that privatizing state-owned businesses is a long endeavor. You must balance speed and fairness. State businesses must be restructured and improved before they are put on sale.

    Maybe the government is expecting large revenue from the sale of state assets. The Ethiopian Investment Holdings (EIH) was recently established for this purpose. The EIH will surely play an important role in structural reforms in the long run. But it may not raise sufficient funds for the current Ten Year Development Plan. The same thing goes for financial sector liberalization.

    Ethiopia needs to open up the financial sector—banks, bond and equity markets, etc.—in the long run following proper steps. This will not happen overnight and financial liberalization is fraught with many risks. Do not expect that allowing foreign bank branches will quickly eliminate the foreign currency shortage. The wrong speed and sequencing of financial liberalization will damage the national economy.

    In Asia, countries that opened up financial sectors carelessly were hit by severe currency crises in 1997-98 with declining GDPs. Ethiopia must learn how to do this properly from theory and international experiences.

    As japan is the origin of developmental state, do you recommend developmental state economic growth model for African economies? What types of approaches can realize industrialization and structural transformation in Ethiopia?

    I think Ethiopia already has a proper policy framework. The HGER has three pillars: macroeconomic stabilization, structural reforms and sectoral promotion (industrial policy). These are appropriate boxes in which to design and place necessary economic policies. The problem is that they are still too general. This can be said especially for the last pillar: how Ethiopia should select and develop key industrial sectors.

    The current choice of agriculture, manufacturing, tourism, ICT, mining, etc. is too broad. The important thing is what concrete measures are needed to develop certain subsectors of agriculture, manufacturing, etc. not just citing them as priorities. Here, from my experience of policy dialogue, lies the weakest point of the Ethiopian government.

    Despite intensive policy learning by the previous two Prime Ministers, Ethiopia’s capacity to draft effective real-sector promotion policies remains poor in comparison with high-performing Asian governments. Ethiopian top leaders and high officials are dynamic, but there are problems with policy design and implementation on the ground.

    My practical suggestion is to let competent foreign experts first show a good model of how to do it—whether it is industrial park management, one-stop investor service, attraction of high-quality FDI, export promotion of high-end products or others. Ethiopians should learn from this model, internalize it, and make necessary adjustments to Ethiopian reality. This is better than creating new policies by Ethiopians alone without deep knowledge of how the world is succeeding or failing with this type of policies.

    PM Abiy’s administration adopted the ‘pragmatism’ model, a deviation from EPRDF’s developmental model. Which one better fits Ethiopia’s current situation? How do you define pragmatism, under Ethiopia’s context?

    I understood what Meles wanted to do and what developmental model he pursued because we had many discussions and letter exchanges on his economic philosophy and strategy. He had a long-term vision. He also implemented specific measures to achieve his vision in kaizen, leather export, sugar production, agricultural extension, etc. You can argue whether his vision was good or bad, and I must say he did not succeed in producing manufacturing dynamism, economic transformation, or a long-term roadmap for economic liberalization.

    As for Abiy’s long-term developmental philosophy, I still do not grasp the details. I don’t know concretely what he means by pragmatism. If it is to cope with currently urgent problems, all governments do that. He must mean more than this. I am unsure what his position is in the policy debates about state versus market, developmentalism versus the Washington Consensus, horizontal versus vertical industrial policies, the infant industry promotion, etc. These were the issues Japan, the World Bank, and others have hotly debated since the 1980s. Maybe he thinks Ethiopia doesn’t need such developmental debates. I am not sure.

    It has been over 15 years since the country embarked on industrialization policy. Why is it that Ethiopia’s manufacturing industry could not progress? What will be the impact when the service sectors share to the GDP rather bulges out in a country where production is much needed?

    It is not policy names but concrete contents and details that matter. I believe Ethiopia has learned a lot about industrial policy since around 2002 when the previous Industrial Development Strategy was formulated.

    However, the starting point was low. Ethiopia needs to learn much more about policy formulation, consultation, documentation, execution, monitoring and review, interaction with domestic and foreign businesses, how to incentivize stakeholders, etc. The quality of Ethiopia’s industrial policy is still low compared with the policies of Singapore, Taiwan, Malaysia, Thailand, etc. Policy learning is not easy and must continue.

    I hope Ethiopia will keep up with its learning with patience, high aspiration, and strong national ownership.

    Industrial Parks in Ethiopia were built targeting AGOA. What is the option now, as AGOA privilege is lifted and companies in Industrial Parks are closing their doors? Do you think Ethiopia’s industrial parks policy is right from the beginning, given they targeted particularly AGOA, and now have lost access?

    Both AGOA and Everything but Arms (EBA) were the main attraction for FDI to locate in Ethiopia. Now that AGOA is suspended, Ethiopia must do its best to regain it as soon as possible. This is the realm of international politics and diplomacy, and I have no qualification to comment on its prospect.

    I only hope that the Ethiopian government will succeed. Without AGOA, it would be very difficult to maintain FDI attractive policies. If you can show to investors that AGOA is being renegotiated and will be restored within a few years, most FDI factories may stay. But if suspension lasts longer or has no prospects of resolution, many existing FDI projects may begin to have second thoughts. This is a grave policy matter for Ethiopian development.

    Do you think Ethiopia can exploit from opportunities born out of COVID-19 pandemic? What should be Ethiopia’s position in the shifting global power structure?

    I am not sure if the pandemic added any great positives to Ethiopia except to say that the Ethiopian Airlines proved to be an effective hub for international transport of medical supplies and vaccines, and that COVID hit the Ethiopian economy less severely than many other African countries.

    Some new start-up businesses emerged during the worst time of COVID-19 using ICT and smartphones. The world is accelerating its move toward the digital economy, and what this implies for Ethiopia is uncertain. Will robots replace human workers in the apparel sector so Ethiopia will be left with no jobs? It is difficult to predict.

    What is your take on the ongoing privatization and liberalization in Ethiopia, across a number of sectors? Do you think the government is really reducing its role in the economy?

    As I said before, the sale of state assets entails a long journey. To do this properly, much study, work and time are needed. If I am not mistaken, the government has retreated a bit and became more reserved about the speed of structural reform than when the sales plan was initially announced. I think this is natural and reasonable.

    Privatization and liberalization should be pursued as a long-term goal for efficiency because they will not bring much money to state coffers immediately.

    What are your short and long term panaceas for Ethiopia’s economy?

    Sorry, I don’t have any panacea for the Ethiopian economy in the short or long run. We have been discussing policies with the Ethiopian government since 2008, and we still did not find a quick solution. Maybe there is no quick solution.

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