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Misguided privatization

Misguided privatization

Fisseha-Tsion Menghistu (Prof.) is a tax and investment expert with a total of 50 years of experience in the area. He also has a considerable amount of experience in teaching at a tertiary level having lectured in seven different universities at postgraduate level. Most recently, he has taught at the Ethiopian Civil Service University and the International Leadership Institute, where he also served at vice-president. Now he has turned his face to consultancy and is in the process of establishing Afro-Global Consultancy Service.  Fisseha-Tsion’s professional career goes back to the era of Emperor Haile-Selassie I where served as the public policy advisor to the then Ministry of Finance. His educational track record encompasses taxation of mineral resources, international transfers and international law. Asrat Seyoum of The Reporter sat down with the professor to reflect on the recent shifts and moves in the Ethiopian economy and the impact in the coming years. Excerpts:               

The Reporter: To start with, what is your diagnosis of the current macroeconomic conditions in Ethiopia?

Fisseha-Tsion Menghistu (Prof.): As far as the macroeconomic conditions of the Ethiopia is concerned one of the glaring issues at this moment is the accumulation of huge external debt in tune of 24 billion dollars and some 50 billion birr uncollected tax revenue. On top of that, there is a considerable level of urban unemployment compounded by an ever widening gap between the rich and poor. Furthermore, there is huge balance of payment gap as we continue to import way more than what we export. Unlike many experts, I see a multi-dimensional crisis in the macroeconomic space. The incidence of poverty is still very frightening and the quality of education is nowhere we want and expect it to be; so I think we found ourselves in a much dire multi-faceted socio-economic problem. Personally, I worry about fast eroding cultural values of the nation on top of many other pressing challenges. Despite optimism by government officials and experts, I see a lot of problems brewing under the surface.  That is why I argue this is the right time for us to stop and take a stock of what we have achieved so far and where we want to go from here. Take agriculture, for instance, I have been taught for more 50 years that, Ethiopia has the potential to be the breadbasket of not only Africa but the middle east as whole; but where are we now in this regard. Why are we still food-dependent despite the potential and the level of investment we have put into this sector. In terms of industrialization as well what I see is not real transformation into an industrial economy, but a sort of prefabricated industrialization. Still our industrial base is at a very low level.

But the past two decades have been quite progressive for Ethiopia; at least as far as reports of the Ethiopia government and international organizations are concerned. So, how did we come to this depressing assessment at this time? What went wrong?

As far as I am concerned, this so called double-digit growth that we supposedly have been enjoying in the past years is just on paper. I mean, do we really have to take what these international organizations are saying or do we need to corroborate that with the facts on the ground. Indeed, the political turmoil of the past three years has taken its toll on the economy. But, this so called investment driven economic boom has to be investigated for what it has achieved in terms of changing the lives of people. In fact, I am yet to see an independent local research that explores the socio-economic impact of these most talked about Foreign Direct Investments (FDI) in Ethiopia. If you look at most of these FDI dominated sectors, most of the gains in terms profit and revenue are in fact accruing to foreigners and foreign economies; I do recognize the job creating role of these industries but even that is still in thousands and what does 50,000 or 100,000 jobs mean in a country of 100 million people. However, I would like to see what kind of impact these investment projects have in local economy; for instance, in terms of technology transfer, meaningful employment and in improving the trade balance of the nation. When I say this, I do see the progresses we have made in terms of access to education and public health care and the like. However, most of the so called experts, who by the way do not have a very convincing credential, tend to exaggerate the gains of the economic growth to the ordinary people.

Ok, what about reports of Government of Ethiopia (GoE), do you find that less credible as well?

Look, what I see with the government, as far as the management of the economy is concerned, is that they don’t want to involve even the patriotic scholars at their disposal and hence I see them being a bit fidgety about the economic figures. I don’t think they have been entirely economical about the truth regarding the economic conditions of the country. The bottom line that is that one can give the people hope and tell then what they what to hear; but eventually the people are bound to see the real truth from their own lives. We have been hearing about this miraculous economic growth, so where has this new wealth gone; has it trickled down to the society? We should be able to answer these questions if we are to begin to be on the same page. I think, what we should do is hold a genuine high-level economic dialogue among the government, patriotic scholars and political parties.

Do you subscribe to the logic of developmental state economic model of Ethiopia?

Quite 0simply, I don’t. I say this because I don’t think we have gotten our priorities right in terms of what we need to achieve with respect to the economy. I am not really interested about the various economic models. If you can remember, we have spent a lot of resources to import various management models such as Business Process Reengineering (BPR), Balanced Score Card (BSC), Kaizen and so on. None of them has born fruit. This is because our unique conditions are not really suitable to any type of model that we are attempting to emulate. Even when we do import these models, I don’t think we are adopting them to our local situation, smartly.  For instance, I don’t understand why we are not talking about sustainable development and focus only on economic growth. Even our constitution talks about the right to development, the right to clean environment and so on; most of these priorities have been brushed aside in favor of quantitative economic growth.

Let’s forget about these economic models and just think in terms of various ways to guide the Ethiopian economy. As much as there are many people who advocate for free market allocation of resources, there are those who argue that countries at a lower level of development need the conscious involvement of state and direction in allocating resources to most development enhancing sectors.  Where do you fall in this spectrum?

Simply, if we start form the history of the country, the role of government in Ethiopia has been quite strong. The government has been considered as a paternal figure to the people. So, it is safe to assume that Ethiopians are predisposed to believing in the role of government. Personally, I prefer a smart and interventionist government whose actions are limited to sectors which are critical to the economy. Whether the government has done this or not is debatable. Yet again, I also hear people arguing that the private sector in Ethiopia has to be in the driver’s seat. But, where is the private sector in Ethiopia?  Do we have the kind of dynamic private sector which can drive the economy in Ethiopia? I have serious doubts. So in the absence of such a private sector the state has to play a critical role. However, that said, we also have to understand that entities under the state and those operated by a private sectors have entirely different goals. While private sector operators is driven by profit and maximizing gains, state entities has additional responsibilities like offering reasonable services to the public, creating employment and others. So, when we compare the success of a state enterprise, for instance, and that operated by the private sector, we have to take into account all these additional goals of the state enterprises. If the state enterprises are as competitive as their private counterparts that is goods, but they can’t be expected to rise to that level since their objective is not solely profit maximization. While pursuing my education abroad I have seen firsthand some of the old state enterprises in the developed world; before Margaret Thatcher come to power, British telecom, British power, British Railway and the like were all under state control. So, the concept of privatization gained momentum much later. Similarly, in Eastern Europe, the concept of privatization became dominant after the disintegration of the former Soviet Union. Back then, especially in these economies in transition, a lot of people were talking about privatization and need to develop the private sector. But, we have to ask what has been the socio-economic benefit of this massive privatization projects around the world.

But, why haven’t the private sector grown to become a formidable force in Ethiopian economy in the past decades?

 I think first and for most it has to do with the mindset of the private sector itself and its aspiration to grow. Meanwhile, the policies followed by the Ethiopian government as well have not been favorable to this sector. On the other hand, the leaders of the private sector have not been as strong and vibrant as one would have liked. Represented by their various chambers, the private sector has to go a step ahead of the government and present formidable policy challenges to the government. You can do this by leveraging the scholars and experts available in the economy.

In the meantime, the government has been looking to FDI companies to come and jump-start the nation’s export oriented manufacturing sector. What is your take in that regard?

First of all, I have no problem with FDI and foreign investment as whole. Nevertheless, I am also a strong believer in not letting foreign investors operate as they wish in local economy. I strongly believe in government or private sector joint venturing with FDI companies in various sectors. You see, I worry sometimes that we don’t really investigate some of benefits they promise to bring to Ethiopia like technology transfer is accomplished. We have to evaluate how open they are to share their know-how with Ethiopians. For sure, they might create a lot of blue collar jobs and unskilled employment; however, how many of them would even be willing to share their management and accounting skills with local professionals. In fact, the managerial and technical know-how are indeed the crown jewelries of the business and they don’t want to share that. We also need to define what kind of foreign investment and investors the nation need. For instance, we see a lot of foreigners in trade and petty production sectors in Ethiopia; so is that beneficiary to Ethiopia? On the other hand, we also need to be inward looking and ask what we have done to promote our industrial base, locally. I hear many people referring to the development history of Southeast Asian nations. But, we know that even the Chinese have closed their doors for so many years nurturing their capacity before they opened up their economies. So, if Ethiopia decides to open its door too quickly, we surely would become a dumping ground for other country’s products. Look at the import composition even at this stage. We see a lot of imported agro processing outputs such as juice on the supermarket shelves. Why are we allowing people to import products that are not in line with development priorities of the nation?

In the past, Ethiopian government has implemented a massive privatization program where it has sold more 400 companies to the private sector. Now, we are hearing of privatization in a deferent circumstance. Can you draw the line between the two and what to expect from the recent shift?

What I have indicated about privatization in Ethiopia, past or present notwithstanding, I believe some of recent SoEs which are planned to be privatized are essentially properties of the Ethiopian public. They were established to serve the interest of Ethiopian people. As far as I am concerned, this is not the right direction to go. Look at Ethiopian Airlines and the Ethiopian Shipping and logistic Enterprise; they are above all national flag carriers which are the pride of the nation. On top of that, these companies are indeed well performing enterprises and I don’t see the reason for their privatization; it certainly is not about efficiency. If we also look at Ethio Telecom, because it was operated by the government and has monopoly power, it has managed to generate a lot of surplus over years; a surplus 6 billion birr which in turn help to finance part of the Addis Ababa Light Rail system. Literally, the government is planning to handover a cash cow to the likes of MTN or other foreign companies. Even in the case of the developed world, as I have indicated earlier, the privatization of these government owned service providers was shrouded with optimism regarding the improvement in services to consumers after being transferred to private ownership. Later on, both government and the consumer public ended up falling hostage to these companies. So, we need to have a very strong reason to privatize since it is an exercise having a far reaching consequence. Why are we privatizing now? Is it because of our external debt stress? If so, what have we done with the money we borrowed? Has it trickled down to the public in the form of a sustainable improvement in livelihood? We really have to stop and think. Are we perpetuating the same cycle of debt and development? Are we privatizing to continue the same economic cycle? We need to debate on this matter. What would be the fate of the employees in these companies as the new buyers push for more automation and increased layoffs. On other hand, I also believe that, the current ruling party and the government as whole don’t have the right to sell these monumental SoEs since they were entrusted with them and have not created them, in the first place. These enterprises were passed down from previous regimes and the current one has no right to alter their status in such a profound manner.

But, given the macroeconomic problems we have discussed above: debt stress, foreign currency shortage, and balance of payment, what do you suggest by way of alternative remedies?

The first thing to do is introduce a very strong fiscal discipline to the extent of adopting an austerity budget. Frankly speaking, I don’t understand the logic of government officials driving fancy Landcruises while the majority is suffering because the country could not import food and medicine. So, we need to economical with our spending. As far as our import bill is concerned, I feel that a lot of resources are spent on serving the rich than the poor. The most basic commodities the likes of teff and Wheat are produced here; and vast majority of the people is consuming that. So, we need to be more serious and limit our import commodities. We also need to review our import substitution strategy. Whether we are rich or poor we are paying the cost of policies we have pursued in the past. So, if the government is really committed it should stop and think and take a serious action.

But, most of these government projects require huge investment outlay and do you think taking austerity measures would work? Can it sustain the growth?

I believe the crisis at hand forces us to take a very drastic decision. I personally believe in prioritizing our projects with exception of the Great Ethiopian Renaissance Dam. But, if some of these projects had to be shelved, they should be shelved.