Better economic planning
Getachew Asfaw is an economist and a consultant by profession. Having worked in economic planning for so many years, he accumulated vast experience in analyzing Ethiopia’s economy. He studied economics starting from the imperial period and later went on to further his studies in the then Union of Soviet Socialist Republics (USSR). He has served in the then Northern Ethiopia Regional Planning Office, the Ministry of Planning and Economic Development, and later the Ministry of Finance and Economic Development (MoFED). Currently, Getachew works as an independent economic advisor and regularly contributes economic articles to local media outlets. For the last three years, he contributed articles to the Reporter Amharic on a range of economic matters. He is also a published author with his third book hitting shelfs recently. Birhanu Fikade of The Reporter sat down with Getachew to reflect on the scorching hard currency shortage, inflation, the renewed privatization drive, economic planning and the state of Ethiopian economy in general. Excerpts:
The Reporter: The Ethiopian economy is often referred to as one of the fastest growing economies in the world. What is your view of that narrative?
Getachew Asfaw: There are positive aspects about the economy that cannot be denied. High-rise buildings, roads, and some mega projects have been built. However, these all have needed the sacrifice of many Ethiopians. Many had gone to bed with empty stomachs. A lot of young people had migrated. Farmers have seen little to no improvement in their lives for many years. But few places like Addis Ababa have witnessed this progress. It is difficult to certainly say there is a real economic growth or redistribution of wealth. If the progresses are made a result of wealth redistribution, then it could only mean that the allocation of wealth has been from the poor to the rich. Wealth has been diverted to major urban centers from rural communities. Having considered all the challenges many Ethiopians are still facing, considering how many stallholder farmers struggle to survive on a piece of land while a few become opulent, we can’t say Ethiopia’s economic growth is very remarkable. We have to remember that 80 percent of the population still utilizes backward farming tools in agriculture. I find it difficult to say there is an incredible economic growth noting the drawbacks and the challenges we need to address.
You have published two books between 2016 and 2018. But during this time, the country has witnessed political upheaval unlike any other time with potential impact on the economic reality. How do you see and characterize the trends in these years?
I would rather talk about the situations which are milestone to the economy. I want to contrast the economic conditions of the country by referring to the Structural Adjustment Program (SAP) which was introduced in the 1980s and the country’s move towards the developmental state oriented economic model afterwards. These are milestone phenomena in the Ethiopian economy. Since the early 2000s, we had witnessed a confused government managing the economy. They had privatized some state owned enterprises mostly nationalized during the military government. The way they exercised privatization was also questionable. Properties of the public have been transferred to individuals and the procedures have not been open and the public has never been consulted. Many employees were laid off. We didn’t witness any significant change in the market due to the privatization. It should not have been a political decision. But, because it was made to be, we could not see more employment been created. The prices of goods and services have sky-rocketed creating a situation which is contrary to the developmental state approach. Price of food items such as teff for instance witnessed astounding inflation; back then 100 kilograms of teff was bought with 50 birr and now the price has inflated to be 2500 birr. Many young people have migrated searching for better lives abroad. Of course, we could see some characteristics of a developmental state in our government. It tries to develop some sectors where private actors were mostly non-existent. Exporters have been well privileged at the costs of the public. Their contribution is minimal compared to the sacrifices the society has forgone. I wouldn’t say we have had an up-and-coming developmental state model which has been exercised in the country for nearly three decades now.
The recent decisions of the ruling party to privatize essential state owned enterprises which have had absolute market monopoly for years have caught many by surprise. Some argue the decision came due to the pressure exerted by Western governments. Do you agree with that? What will be your take on the matter?
To begin with, developmental state is not about division of ownership of critical economic resources; it is not about deciding which part of the economy is part of the state and which part should be in the hands of the private sector. It doesn’t work that way. In the eyes of developmental state, critical industries or sectors need to remain in the government’s possession in a view they would grow and let others grow as well. Developmental state means the implementation of selective approaches. For years, the government has resisted the privatization of Ethio-telecom, Ethiopian Airlines and others; it was not merely because of its ascribed philosophy of developmental state model. It is because of their socialistic orientation that they kept ownership of those enterprises. Regardless of state or private sector ownership of enterprise, the role of the government’s policy should have been oriented towards the growth and contributions of those enterprises or sectors to the overall economy. France being a capitalist nation leads the economy on the basis of state planning. Though not seriously considered as what we have seen in the East Asian economies, France could be referred to as a developmental state since it still maintains control over some sectors in the economy. The U.S. passed through the developmental state phase while developing their industries. They protected their industries from foreign competitions. The developmental state approach existed long before the East Asians had elected to exercise it.
The government expressed intentions to hold on to its major shareholder in some of the strategic enterprises slotted privatization. Well, it has also introduced a public Private Partnership accord recently. Could we say these are signs of shifts from developmental state model to a purely capitalist camp?
Privatization doesn’t necessarily indicate the government becoming liberal. After the financial crisis in 1997, East Asian countries have changed their approach. The cheap labor oriented manufacturing industry model has made its way to the high technology based manufacturing processes in these economies. For that to happen, these developmental states needed to rely on the West to bring in those technologies. Circumstances would force your approach or model of economic development. The recent privatization to be made by the government of Ethiopia is an indication that it has recognized it no longer is efficient in running those enterprises in accordance with the global dynamics. If the government is saying it is no more competent in running those enterprises, I think that is the right move.
Let’s talk about the impacts of the recent devaluation. Despite the well-known rationale of boosting the export sector, many economists have downplayed the decision to devalue arguing it has exacerbated inflationary situations. Do you agree with that?
Inflation could come as a result of devaluation. Devaluation or the decline in the purchasing power of the local currency is also a reflection of the trends of the markets. Devaluation could also be a policy tactic focused on enhancing exports by discerning the imports. However, the real cause of the devaluation has got to do with the situation of the real economy. The purchasing power of the birr had been eroded over the year, which indicates depreciation in the real economy and the need for adjustment.
Too much money chasing too few goods is the definition of inflation. But there is also an inflationary situation that is required to have in order to keep the economy going. In the case of the current Ethiopian economy, what is the recommended level of inflation?
For many years, money supply in this country has kept increasing on by 28 percent, yearly. The real economy grew by 11 percent. Hence, for a GDP growth of 11 percent, if there was an equivalent amount of money supply, the inflation would have been held at a zero level. It’s possible to increase the money supply as long as the inflation would help the economy keep the momentum going. That is in fact advisable. In our case, broad money supply growing by 28 percent and considering the real economic growth, you would find a 17 percent net money supply that necessarily causes inflationary pressure. This policy is not healthy. On the other hand, the National Bank of Ethiopia (NBE), despite all the pledges for curbing inflation and containing it in single digit, we don’t see it practically taking measures to do so. In fact, it says it applies strict tight monetary policy but that is not clearly seen on the ground. We need to note here that there is a tradeoff between inflation and unemployment. If you apply a contractionary monetary policy and limit the supply of money, you can contain inflation but it is sure that unemployment rises as investment, consumption and expenditure decline. Expansionary monetary policy on the contrary reduces unemployment but give rise to inflation. Hence, striking the balance between these situations is the role of the government. In the case of Ethiopia, tradeoff between inflation and unemployment is ostracized. There is a problem somewhere. In fact, we call this situation a stagflation (inflation and unemployment) and it had happened in many Western countries. That is why many of these economies have reintroduced the neoliberal model. Before the Second World War, the western nations solely remained as liberal economies. But after the war, many economies had faced serious unemployment challenges. Thanks to Maynard Keynes, the well-known economist who had devised a theory on how to reduce unemployment helped these economies to reemerge out of stagflation situation. The political alliance of President Ronald Regan, Prime Minister Margaret Thatcher and Chancellor Helmut Kohl helped to reintroduce liberalist system which until 1970s was not in play and the current neoliberalism exists because of the work of these politicians. This is the reality of the west and we are not there yet. We don’t have a liberal market. Unfortunately, the change in the price of goods and services is unpredictable in this country. Unemployment is very high. A liberal economy plays a significant role in corresponding consumers and producers. It brings these actors together and helps markets function properly in addressing glitches of inflation or unemployment. In the case of Ethiopia, the focus is on investments, on roads or buildings, not on the cost of living. The government often blames traders for price hiking. But it is not only the traders who are to be blamed. The government is lacking leadership. It failed to adjust irregularities of the economy and we as society should criticize it for its failure. We should be vocal of its bad management of the economy.
Ethiopian economy is well regarded as a supply side stress economy. It’s a net importer but gives emphasis to the export sector and provides lavish incentives to those who are engaged in export. On the other hand, the country’s mounting import bill has caused a hard currency shortage crisis. How can this be reconciled and what do you think are the short, medium and long term remedies?
In fact, it has remedies. In economics, there is what we call a two docks model. This model takes into account the equilibrium of current account balance with investment and saving deficits of a given economy. Adjusting the deficit of saving and investment locally means having a positive current account deficit in the global scene. It is also necessary to balance the deficit between revenue and expenditures. A county’s balance of payment is made of capital account and current account. The current account deficit of Ethiopia shows USD 13 to 14 billion gap. Export revenue generates USD three billion and we have close to USD 17 to 18 billion is an import bills. Hence, USD six billion is covered with the help of aid and remittance. The remaining gap is covered by concessional and commercial or non-concessional loans. An amount which we couldn’t cover with all these instruments will be serviced from the country’s foreign reserves coffers. Any country should at least have to maintain a foreign reserve that could help to meet a three month import requirement. NBE says it has accumulated a foreign reserve that can meet a two month import requirements. But in reality, I bet they only have a reserve of 1.2 month requirements. I think that is one of the desperations that forced the government to privatize the essential enterprises. I am of those individuals who supported this idea. As long as they are not efficient and couldn’t be more productive as targeted, it’s important to privatize state owned enterprises. However, I believe, there are other factors that forced the government to do so. Hard currency shortage is one big challenge to begin with. The government was shorthanded when it comes to creating macroeconomic policy conducive and suitable for the private sector. Compared to the neoliberal economies, the free market trends exercised in Ethiopia, in my opinion, are extensively open and mostly unregulated. In addition to the emphasis given to producers or manufacturers, the government has to focus on consumers as well. I don’t reckon any policy direction channeled towards consumers. Productivity of employees should be considered. Wages are progressively raised despite meaningful contributions in the productivity of labor. The government has to deal with such issues to address critical imbalances.
You express yourself as an economic planning expert, so how do you evaluate the economic planning in Ethiopia?
Planning is an extended explanation and definition of policies. I consider planning as an expert oriented and inclusive planning or politically oriented planning. The inclusive or politically oriented planning is basically derived from what stakeholders of certain economic sectors have to say. The expert oriented planning is drafted based on professional and learned policies. It takes into account those models such as the incremental capital-capital output ratio. An addition of one more capital in the economy, by how much will help to increase the GDP growth is the concern 0f the incremental capital output ratio model. We can have Coup Douglass Model, Harold Dammar Model and others to consider while planning. An expert probably is effective in drafting economic plans by combining the expert oriented and the inclusive planning methods. During the military regime, the experts responsible in drafting economic plans were skilled in computing incremental capital output ratios and submit the plans to the authorities. They decide based on the plans. Currently, planning is done mostly on a collective and hands-on approach. The plans focus on the services of the government as a reference. The needs and motivations of farmers, producers, consumers and the like should be considered. When the price of fertilize is high, then the tendency to plough and cultivate farms is going to be altered. Hence, you should consider the ratio of inputs with the required amount of production when devising an economic plan. I think the planning expert is no more focused on his proficiency partly because the politicians don’t tolerate specialists to exercise their professional abilities. For instance, it is hard to tell the ill-fated sugar development projects are merely the works of planning experts. Once, I heard the deputy commissioner of the National Planning Commission saying future mega projects require serious professional planning if they are evaluated to be feasible.
What will be the fate of the Ethiopian economy in the coming five or ten years?
The new prime minister pledged to respect professionalism and merit based sense of duties. To have appointees assigned based on merits than political or ethnic affiliations; I think there is a better future and hope. We have to recognize the fierce competitions, the dramatic changes and dynamism in the global situation. We have to be competent.