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    InterviewRethinking market-based solutions

    Rethinking market-based solutions

    Date:

    James M. Roberts is a research fellow at Economic Freedom and Growth Center of the US-based Heritage Foundation, founded some four decades ago, in the area of international trade and economics. Heritage Foundation, a leftwing, pro Republican think-tank, annually publishes country-specific report called economic freedom index. Roberts was in Addis this week for two days in relation to the 2016 economic freedom index together with other delegates representing the Ethio-American Chamber of Commerce. According to him, Ethiopia and many countries in Africa were found to be less free in economic terms this year implying high prevalence of corruption, futile state control and dominance affecting the free functioning of markets. An economist by training, Roberts has strong opinions when it comes to state enterprises, the role of China in Africa and the like. Prior to joining the Heritage, Roberts had served for more than 25 years at several posts in the State Department. Birhanu Fikade of The Reporter sat down with Roberts to learn more about the economic freedom report, the meanings of the indices and the scores, and how the capitalistic camp is still playing significant role in the global economy. Excerpts:

    The Reporter: To begin with tell us what brought you to this part of the world?

    James M. Roberts: well, I am here because we at the Heritage Foundation have the occasional opportunity to promote our publication: the Economic Freedom Index Report. Every year, we have the chance to go to some countries to tell our story and add our voice to the peoples’ voices that are in favor of market-based solutions. Heritage’s economic freedom index, which we do with the Wall Street Journal, reflects our values regarding market-based democracy. We don’t prejudge countries because of that; but we just think that there is a pretty good level of consensus in world today about market-based solution, especially since the collapse of communism.

    So that is part of the mission that brought you to this country?

    What brought me to Ethiopia was the opportunity to be able to make a pit stop on my way while doing a tour in some African countries. I was also hoping to talk to the newly-reorganized Ethio-American Chamber of Commerce here. It’s an American-Ethiopian composition. Often- times, I will talk with that group. If there are organizations in the civil society that follow economics, I could talk to them as well. That was the idea. The report we produce is a well-established product that has a worldwide credibility. So, the visit was also related to letting people know about this report.

    Before dealing with the indices of the economic freedom report, can you tell us about the core principles of economic freedom itself?

    They basically revolve around four pillars: the rule of law which comprises the judiciary system, the protection of property rights including the cadasters and the titles of property and the position of the government with regard to fighting corruption which always is a problem. We tried to see in the report if the government is well equipped to fight corruption. The second area is the size of the government; how large is its tax base and how does it spends it. The third area is how well the government regulates the economy. And the fourth area is the openness to the international trade, investment and banking. We use international data sources to analyze these variables.

    Why does it really matter to focus on economic freedom? How open are governments to take the suggestions of the report and make reforms? 

    I think it’s in the interest of countries to do so. If they don’t, it’s up to them. But it is the interest of the US to see a more prosperous, free and stable world. Things we talk about in the report can only make that better. That’s one reason we do it. We as a US think-tank have also donors who back our activities. We don’t have any government funding and we are independent. But, the people who fund us want to see a safer and more prosperous world. They want to see a stronger US national security. This kind of effort is part of that. But, it really is up to each country. We try to see policies countries have taken up and where they ended up especially looking at the collapse of the Soviet Union and how countries have changed after that; which is in a constructive way.

    Let us to talk about countries like Ethiopia, which have been showing good economic progress in recent years. But, peculiar requirements of the Heritage economic index might not recognize the achievements of these countries. How are issues of labor rights, human as well as political rights entertained? How do you guys devise a parameter that correlates to such issues?

    The goal of the report is not to look at the human rights per se. I mean it is part of it. But, an organization called the Freedom House Democracy does that well. The Transparency International looks at such issues and in fact they have put statements in their website currently regarding countries that have greater incidences of corruption. Corruption has to do with human rights. But, that is not our principal message. Our message is that it is important to have a more balanced policy in this direction and that there is no need to have a bad track record in human rights all the time. You have an expanding economic pie. You have more opportunities for jobs to be created and people will be generally happier. They will have a more stable government system in place which goes very much hand in hand with economics. Hence, this is really the focus of it.

    Let us now turn to the indices put in the annual economic freedom report. How do you categorize countries based on the scores or their overall performances?

    We have six categories. At the very top, there are only six countries that are totally free economies. These countries have scored above 80 out of a total of 100 points. The next are countries recognized as mostly free, where the US is currently categorized into because of the nationwide spending problem; people in the US the at moment are spending so much more than what they actually make. It is a deficit spending. There are more issues related to the country’s shift to lower scores. Then comes lots of countries classified as moderately free. We have countries in the category of mostly unfree economies and at the bottom we have the oppressed nations. Each one of these groups has their own characteristics and patterns that the average person can recognize.

    As you have said it there are countries which fall in the category of oppressed economies. What do you advise them to move up the ladder to say moderately free or beyond?

    I think it certainly very important to focus on the rule of law pillar. That is probably the most important concern because that refers to the issues of political stability. If you have unstable political situation, you might not be able to bring together a strong economy. Of course there are places that have a totalitarian approach to governance and still managed to have strong economic performance. One can argue about that. But if you don’t have stability and basic peace and that people do not have the confidence to go about their daily business and not worrying about their safety, it would be difficult. That has to be a number one priority. That also elevates the confidence of investors looking to invest in that country. Therefore, I would say part of that is probably related to the openness to the world trade and world investment activities.

    In the report Ethiopia scored 20 points out of the 100 in area of investment and financial freedom. What does that really signify to the country?

    Well, it signifies that the government has taken certain set of decisions about those areas, although they might have their justifications, which are proving to be contrary to the prevailing trends internationally. But, they have decided that may be because it is going to work for them in the short term. I am not here to criticize them. I am just here to say the results of the country are up against other competing countries. In the world marketplace, this country is going to be seen to having those deficits and weaknesses with regards to transparency of investments, ability to own land, ability to seek regress and ability to resolve disputes in courts. It is all connected. The same thing can be said for the banking sector. There is going to be less access to capital if you don’t have many banks operating here.

    The banking sector in Ethiopia is closed to foreign operators. What can you say to that especially when the government claims that it is essential to build local capacity before competing with international operators? Is this a reasonable argument?

    That is best captured by the saying: “putting the cart before the horse”. You have to bring in technological transfer that amounts to a lot of free international properties say software, human capital and trainings. It is again those foreign banks that could bring in world class expertise; that are going to allow the development of the local banking sector. I respectfully disagree with that kind of approach. It is the same with what I have heard from some companies which have looked into investing here in some industrial sectors, mostly in agro industrial area. The government said to these companies that they should invest here first and later they can build the market. But, the companies are saying that is not how it works. They prefer to create demands and build the brand recognitions first. Then they will substitute the imports by producing those products here. The global supply chain and distribution channels and the cool chain and others need to be put in place first and after that the companies would come with considerable amount of money to invest. The government rather insists that they should bring the money first. So again, it’s a wishful thinking. That will be the case only in the ideal world. The investors won’t put their money in risky investment unless they have made a calculated assumption about the probabilities of getting their money back.

    What about the concern that the local banks could be swallowed once the international, well-established and experienced banks are allowed to operate in the country?

    I guess that’s a popular myth. It might be a scare tactic, I don’t know. The fact is that the local banks know their customers best. Retailbanking is about knowing your customer and having those relationships. Foreign banks could not have that. I don’t see why a space for both to compete is not there. They have a kind of money which is centered on big projects which need to be financed. But, considering retail banking, I don’t see local banks being threatened by having competition.

    What can you say about the private sector versus state run enterprises’ role in a certain economies like Ethiopia? Government enterprises are becoming stronger than the private companies in many countries. Is that something that might be entertained in the report?

    You may not be surprised to hear that we have a skeptical view of state run enterprises in general. We think that they breed corruption, inefficiency, favoritism, nepotism, protectionism; a lot of –isms out there which are not really helpful than being more of hindrances. They also give rise to export credits. They create distortions. They create trade diversions if not trade creations. The Chinese are guilty of that. We are terribly on the record opposing our own export credit provider, the EX-IM Bank of America, so to speak. In general, we don’t think that it is the moral that is going to work the best. We understand many countries do that. In the US we have state-run companies as well. There are political reasons why we get that. It’s a theoretical approach and it’s not the best way to go. If anything, the goal should always be to privatize them and scale them back. State-run enterprises might serve some purpose for a while in whatever sector they are established in; but why not privatize them later.

    But the Ethiopian government argues that the private sector is skeptical about investing in some sectors, and hence need for government intervention. Yet, it promises to eventually leave  the space for the private sector. How can that be seen from the economic perspective?

    I have done a lot of work in Latin America. The history of import substitution theory is not encouraging. It didn’t end up with the way the intellectual theory hoped it would. In fact, it led to stagnation and protectionism. It also resulted in permanent lower level of output. Hence, people down in South America have rethought about that. Argentina and others came out of such situations. Countries have experienced drag in growth, as bad as the Soviet Union in some cases. The government pretended to pay people and people pretended to work. They made products nobody wanted. They manufactured inferior goods. The governments with this notion of import substitution are fencing off certain sectors. It is a crowding out the private sector.

    What is your opinion regarding the developmental state ideology, modeled after Asian Tigers, to which many African countries including Ethiopia subscribe. Also unlike the Asian Tigers, African economies as the economic freedom index shows remain poor achievers. Why is that?

    I think one of the big differences between the Asian Tiger model and the Sub-Saharan African experience has been the level of dependency on foreign aid and donor assistance, which the Asians didn’t have. They never had that. They just lifted themselves up. That is the biggest difference between Africa and Asia. We had Korea fifty years ago at the same level of an average sub-Saharan country. But, they are at the very high end today. Although the model was less agreeable to what we adhere to, they have applied market responsive and privately owned and incentivized policies and were able to make better products.

    One of the specific things worth mentioning is the development of industrial parks and the accommodative approach of the government to attract more foreign direct investments. It is considered by the government as part of incentive packages as well. What are your thoughts?

    I don’t know how that is working out in the case of Ethiopia. I haven’t looked to that. That would be a good question to ask the government. I want to see someone to show me the results because what I have heard is that a certain number of American companies that looked in to come now have decided not to. All governments including the US give tax incentives and benefits. But, in general we don’t like that anywhere.

    But, there are the likes of PVH coming to do business here. Despite the low scores of economic freedom, the government claims that they are providing attractive incentives to attract investors…

    As I said I am want to judge that by the results. I would say if it’s a managed trade, if there is protectionism to guarantee market share, then that is not going to work to benefit the larger economic sector. But, it might be good for that company. My understanding is that your telecom industry here could use more competition and investment but the government doesn’t want to lose control. It’s the question of facing up the reality.

    Is it fair to say that countries like Ethiopia are fearful of the 2008 financial crisis if they open up too soon?

    From my point of view, it is the opposite. The countries that had done the macro economic reforms under the Washington Consensus in the 90s, the emerging markets, withstood the financial crisis better than the developed world. It hit harder the developed world, not the developing world. That is my opinion. I think that is a rhetorical argument. The reason that Washington Consensus is falling out of favor and there is a more sympathy for neo-Marxist philosophies and the likes of Thomas Beckley who theorizes this sort of philosophies is because the Washington Consensus reforms have never been implemented fully or were not finished. They never had been done at a deeper level, at the local level; at a rule of law level. It was only done at the macro level. They dealt with the payments, clearing accounts, making the federal reserves, the European Central Bank and all that. That wasn’t enough. We really need another round of Washington Consensus to finish the reform job.

    The Breton Wood institutions were much criticized for prescribing policies of Structural Adjustment Program (SAP) which in many countries including Ethiopia had resulted in unpleasant outcomes. For four decades, the Heritage Foundation had dealt with economic policies of each country. But, what are the criticisms against the foundation if there has been any?

    I suppose people would say that this advice might be good under the time of President Ronald Regan but the world has changed. We had a period what they call the great moderation which started with Regan up until the financial crush. We have seen the huge expansion of the US economy in the world. We don’t just buy that argument. These are almost like laws of economic behavior. What’s happening is that around the two financial crises periods the commodity prices have collapsed; China collapsed and the US has found so much natural gas and oil and became the swing producer in the OPEC, through which the price of oil is determined in the markets.  But, now these countries are not rolling in windfall profits for commodity sales. The problem is that a lot of these countries during the good times had the chance to make reforms with politically difficult decisions. Back then, they had the money, now they don’t. They will say let’s deal the cards again. But the cards have  already been dealt.

    Earlier you mentioned China. They are achieving a lot of progress in their economy…

    But, actually they are not. They are not telling the truth about their performance. They claimed this year they have grown five percent; and they were growing eight to 10 percent in the past. For example, the growth of their electricity output was only 0.5 percent. That doesn’t equate the reports by major commodity exporting countries to China which are reporting huge reductions in their exports. They are hiding a lot of very bad news. They have huge overcapacity in certain enterprises. For instance, the steel overcapacity angered G20 people. They have put in place the conditions for deflation. They tried to have both approaches of centrally planned economy with political control. Ultimately that doesn’t work.

    But talking about China seems a little bit like talking about Africa as most nations in the continent have depended on China for commercial and non-commercial funds. How can one possibly detach the two?

    It is detachable. China has made deeper commitments to Africa. But, when they came in and give assistances it is always tied with their products and labors. The host country doesn’t get that much out of it. Roads, airports and others might have benefited some countries. The elites get much of the benefits I guess. The average person has not benefited.

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