Monday, May 20, 2024

Striking balance between liberalization, protecting domestic investors

The directive issued in March by the Ethiopian Investment Board — chaired by Prime Minister Abiy Ahmed (PhD) — that opens up the export, import, wholesale and retail trade, which hitherto had been the exclusive preserve of domestic investors, to overseas investors subject to certain conditions has drawn mixed reactions. The liberalization of these key sectors of the economy caught many off-guard though it did not come as a surprise for observers of the Ethiopian economy. The federal government has been dropping hints for years now that such a move was afoot without specifying a timeline. In fact, the premier explicitly said during discussions he held with local investors a fortnight ago that the retail sector would be opened to foreigners. A continuation of the raft of reforms Prime Minister Abiy’s administration has been pursuing since he assumed office six years ago, the latest policy shift marks a major departure from an investment regime that had been in place for decades.

Ever since the first legislation governing foreign investment in Ethiopia was enacted in 1992 after the country abandoned its command economy policy in 1991, the country has been pursuing a policy that has been guided by the notion that the task of building the national economy must primarily rest on exploiting domestic capabilities. Accordingly, selected trading sectors deemed to be of strategic importance have been off-limits to foreign investors with a view to give local investors time to strengthen their capacity and compete with their overseas peers. This policy objective has clearly not been met despite the decades the restrictions have been in place. The directive lays the problem partly at the door of domestic investors engaged in the protected sectors, blaming them of failing to deliver the expected service reach, quality and efficiency as well as “an increasing bent of unlawful practices”. It also attributed the failure to the absence of fair competition practice in these sectors and deficiencies in regulatory oversight. It’s the exigency to chart a new course which addresses these shortcomings that the Investment Board says necessitated the gradual opening of the restricted sectors to willing and capable foreign investors. 

Opening up the import, export, wholesale and retail trade sectors can have several potential disadvantages for a country like Ethiopia. While trade liberalization can have such dividends as increased competition, enhanced efficiency, and access to a wider range of goods, there are also some downsides that need to be considered. As a country with a developing economy and unique socio-economic conditions, there are several potential disadvantages the nation must to be mindful of. One of the primary concerns of opening up these sectors is the potential impact on local businesses. Small and medium-sized enterprises in Ethiopia may struggle to compete with larger, more established foreign companies that have greater resources and economies of scale. This could lead to increased market concentration, with a few large players dominating the market and squeezing out smaller local businesses. This, in turn, is liable to exacerbate the chronic unemployment, one of the most difficult macroeconomic challenges plaguing the economy.

A particularly troubling ramification of liberalizing the import/export sector is the dumping of cheap foreign goods on the local market. While this may benefit consumers in the short term by providing them with access to a wider range of products at lower prices, it could entail long-term consequences for domestic production. Local industries may struggle to compete with cheaper imported goods, inducing to a decline in domestic manufacturing and a loss of jobs in these sectors. This could have broader implications for the economy as a decline in domestic production only serves to give rise to an increased reliance on imports and a growing trade deficit. The likelihood of this specter passing in the short-term, however, is low given the minimum capital threshold set by the directive are only palatable to global giants in the sector, not small or medium-sized investors. When it comes to opening the door for foreigners to the wholesale and retail trade sectors, its implications for food security in Ethiopia is of great concern. Ethiopia has a predominantly agrarian economy, with a large proportion of the population engaged in small-scale farming. Enabling foreign companies to become significant players in the market is apt to prompt a stiff competition for locally produced agricultural goods, potentially driving down prices and reducing the incomes of smallholder farmers. This could have serious consequences for food security, as farmers may struggle to make a living and invest in their farms, leading to reduced agricultural productivity and increased food insecurity.

Another potential disadvantage of the liberalization drive is its impact on government revenue. Ethiopia relies heavily on customs duties and other trade-related taxes as a source of revenue. Allowing greater access to foreign companies could trigger a price war between competitors, which could in turn reduce the government’s ability to collect revenue from imports. This is bound to have implications for public finances, potentially precipitating budget deficits and a reduced ability to embark on public investments in infrastructure, education, healthcare and other social services.

Although the cautious opening up of the import, export, wholesale, and retail trade sectors can have varied benefits for Ethiopia, its undeniable downsides call for exhaustive deliberations among stakeholders in order to minimize their deleterious effects. Challenges such as a crushing competition for local businesses, a decline in domestic production, implications for food security, and reduced government revenue need to be taken into account during these discussions. In this regard, it’s crucial for policymakers to strike a balance between promoting trade liberalization and protecting the interests of domestic investors and vulnerable populations. It’s also incumbent on them to conduct a regular assessment to determine if the liberalization has brought about the intended outcome and take the necessary corrective measures if it does not live up to expectations.    

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