As the Ethiopian private sector is weak and fragile, there would be many gaps if government withdraws from and leaves the economy to private firms. Thus, the role of the state should not be limited to the provision of certain economic and social infrastructures, but go as far as investing in areas where the private sector is unable to involve due to fear of long gestation periods, huge capital requirements and sectors that are deemed less profitable, writes Gedion G. Jalata.
The Ethiopian government on June 5, 2018 announced to undertake partial and complete privatization of major state-owned enterprises. According to the government: Railway Service, Sugar Plants, Industrial Parks, Hotels and other manufacturing enterprises could be transferred to the private sector partially or fully while in Ethio Telecom, Ethiopian Airlines, Hydropower Plants and Martime Transport Enterprises, the government will retain controlling stake and transfer the rest to domestic and foreign investors. The government necessitated such a move in an effort to boost and modernize the country’s economy. However, information is not unveiled whether the financial sector will be open for foreign investors or not.
There have been some underlying factors that necessitated such move including the persistent foreign currency shortage; the deficiency of state-owned enterprises in undertaking corporate reforms; promoting the private sector development in the economic development of the country and the increasing debt threshold of the country.
Indeed, the journey to privatization started in 1994 when the Ethiopian government launched the Privatization Program in accordance with Proclamation No.87/1994. The government consequently established the Ethiopian Privatization Agency by law and subsequently privatized public enterprises of different size and operating in different economic sectors. In this regard, several public enterprises such as large and medium scale industries, small firms operating in the retail trade sector, agriculture enterprises, hotels and tourist attractions have been transferred to the private sector. Certainly, this is high time to study the impact of past privatization in the country in order to draw an important lesson before we embark the new initiative on privatization.
For or against privatization?
There are fierce debates for and against privatization. Proponents of privatization argue that it has some advantages in general such as private enterprises are interested in making a profit, and are more likely to cut costs and be efficient than public enterprises; privatization also helps generate revenue required for financing development activities undertaken by the government.
Nonetheless, many opponents argue that privatization leads to less accountability, deterioration in services and may not necessarily ensure efficiency gain as some researches on privatized state manufacturing enterprises – beverage, textile and leather sectors – in Ethiopia indicate. Likewise, the privatization of Kenya Airways did not bring the expected result. On the contrary, the Government of Kenya has been trying to bailout the Airline. The government, therefore, has been trying to buy more shares from the airlines to regain its former control.
Furthermore, opponents of privatization argue that privatization may not be necessary if sufficient measures are taken to create a level playing field for fair and free competition between public and private firms and when public enterprises acquire autonomy with a challenge to determine their existence through market forces. The relocation might even deteriorate the conditions of privatized industries if the new owners and their managers did not have prior experience and adequate information on how to effectively manage privatized enterprises by taking into account their peculiar conditions. Profit maximization being their principal motive, private firms may lay off workers, whose social cost may not be bearable in developing countries like Ethiopia.
As the Ethiopian private sector is weak and fragile, there would be many gaps if government withdraws from and leaves the economy to private firms. Thus, the role of the state should not be limited to the provision of certain economic and social infrastructures, but go as far as investing in areas where the private sector is unable to involve due to fear of long gestation periods, huge capital requirements and sectors that are deemed less profitable. It should also maintain large ventures under its disposal, the privatization of which might cause social shocks in the process of restructuring. This could create additional production capacity and employment opportunities in the economy. In this context, a cautious move to privatization journey is timely and pertinent for Ethiopia.
It is also important to recall the global financial crisis of 2007 and the associated series state bailout measures by the developed countries including the US, which brought back the debate on the role of the state in economic development fully. The economic rise of South East Asian countries especially the four tigers namely Hong Kong, Singapore, South Korea and Taiwan as global economic force also remind us the role of the state in the development process. These were economies in which the states had ‘governed markets’ to ensure high levels of accumulation, technology absorption and conquest of foreign markets.
It is argued that cautious and pragmatic approach adopted by the government may not result in the weakening and ultimate demise of developmental state as it happened in many African countries. This is mainly for the reason that the developmental state trajectory of African countries was reversed by the Structural Adjustment Programme (SAP) of the 1970s and 1980s except Botswana and Mauritius, which managed to continue their developmental state trajectory and helped them to be among the middle income countries.
As the new Ethiopia’s trend still indicates, the government will retain the majority share in the strategic sector of the economy such as the airlines, telecom, and energy generation among others. This means that the government is still in the driver’s seat. To sum up, it is worth quoting an UNCTAD report: “what is required is a new [democratic] developmental state that is adapted to the challenges of the twenty-first century; creates and renews the micro-foundations of democratic practice to harness local, bottom-up problem solving and opportunity-creating energies; and embraces a wide range of governance modalities and mechanisms action, to achieve a national development vision”. The role of a strong democratic developmental state, which is a rare bird in the governance terrain, is bringing inclusive economic transformation and equity, which are the underlying priorities in both the Sustainable Development Goals (SDGs) and Agenda 2063’s ten-year plan – the inevitable tasks the should be achieve by African countries.
Ed.’s Note: Gedion G. Jalata is CEO of Center of Excellence International Consult. The views expressed in this article do not necessarily reflect the views of The Reporter or the consultancy firm he is affiliated with. He can be reached at [email protected] or [email protected].