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Prominent US economist optimistic over Ethiopia’s economy

While on his private first visit to Ethiopia, a prominent US economist and professor at George Mason University told local reporters that he is optimistic about Ethiopia’s economy while signaling areas that challenge the country’s future.

During a media roundtable on Wednesday facilitated by the US embassy in Addis, Tyler Cowen, a professor of economics and a Harvard alumnus said: “I am probably more optimistic about Ethiopia than any other African nation.”

The professor was asked a slew of question on a range of economic issues of both local and international concerns. He was asked about the hard currency shortages Ethiopia has been facing. Cowen stated that the hard currency shortage – as long as the interest rate remains somewhere between 30 to 33 percent different from the market rate – will always remain to be problematic.

Hence, the government might be forced to free up the interest rates in the future and when that happens, according to him, would likely be painful for at least the first two to three years, Cowen predicts. “Doing that will positively affect the economy by allowing more capital to flow,” he said. “Timing is crucial to change the interest rate. Fixing foreign exchange and restoring normal capital at some correct pace is necessary,” he suggested.

When asked about his views on allowing foreign financial institutions in the view of addressing the hard currency crunch, Cowen said that it does not solve the problem when prices are set wrong. “As long as the price is set too high for the value of birr, there will be a capital imbalance in the country.” The current account deficit of Ethiopia currently hangs around 8.5 percent of the GDP. But even with a 10 percent GDP growth, the deficit or the capital imbalance as the pundit pointed out, could not be addressed in a sustainable manner.

To let foreign banks operate in Ethiopia; first questions needs to be answered such as would they bring foreign financial expertise? Do they bring capital? Does the country need some expertise and capital in the first place? “If that is what Ethiopia needs, they should consider the risks. Careful considerations as to who should be allowed to come are essential,” he said.

Cowen suggested the need along with putting a sound regulation in place.

Talking debt sustainability issues, he equates the situation of Ethiopia with the previous position of China where it had faced a lot of debt burden. In the case of Ethiopia, where the country is racing to erase debt burden with GDP growth, Cowen argues that the question should be whether the debt out-races the growth or the vice versa. Losing the race while focusing on debt servicing mechanisms instead of charting economic growth is possible for Ethiopia to remain intact.

Cowen underscores prioritizing foreign investments and dealing with government induced economic growth since it has its own issues. But when it comes to FDIs, the professor said that Ethiopia has been suffering from bad images of the past.

“In the US very well educated and very sophisticated cosmopolitan people have no sense of how nice things are in Ethiopia and how well things are going. These include people with PhDs in economics familiar with Davos for a regular economic meeting.”

According to Cowen, Ethiopia needs some kind of public relations campaign which will not necessarily be done by the country itself but by those sympathetic to the country who could write and back Ethiopia’s changed image.

The professor went on to add his views on whether Ethiopia could be better off without the likes of World Bank Group (WBG), the International Monetary Fund (IMF) and the World Trade Organization (WTO). Cowen is of the view that Ethiopia would remain as it is now even if WB is not functioning anymore. Highlighting his positivity towards the Bretton Woods Institutions; both IMF and the WBG as Cowen says are not nearly as relevant as they were predating the rise of populism in the West.

Cowen’s biography shows that he is Holbert L. Harris Professor of Economics at George Mason University and he is the director of the Mercatus Center. Cowen received his PhD in economics from Harvard University in 1987. He was recently named in an Economist poll as one of the most influential economists of the last decades.

Once, regarded as America’s hottest economist” by Bloomberg BusinessWeek, Professor Cowen was also a New York Times bestselling author. His book, “The great stagnation: How America ate the low-hanging fruit of modern history, got sick and will (eventually) feel better” earned him a great acclaim leading the Foreign Policy magazine naming him as one of its “top 100 global thinkers” of 2011.