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Troubling times

Troubling times

Tesfachew Taffere (PhD) is one of the veteran high-profile Ethiopian economists who served in many international organizations such as the United Nation agencies. Until a few months prior to his retirement, he worked nearly for 30 years at the United Nations Conference on Trade and Development (UNCTAD). His expertise in the field of economics at UNCTAD landed him the directorship of division Africa, the Least Developed Countries (LDCs) and Special Programs. He has written scores of scholarly articles in those areas. As part of his responsibility regarding the annual publication of UNCTAD’s reports on LDCs, trade and development, among others, Tesfachew frequents Ethiopia and many developing nations to make a case for and voice UNCTAD’s position. Tesfachew was in Addis in his role as an advisor to the Secretary-General of UNCTAD to launch the 2016 Trade and Development Report, one of the flagship publications of the organization. The findings of the report are gloomy concluding that the planet has become a troubled place where many economies and trade activities are disrupted across the board. Consecutive declines in the prices of commodities, sustained low level of economic growth in many developed countries entwined with political instabilities have earned 2016 the unenviable reputation of a dangerous time to live in, the report claims. Similar concerns are true when it comes to the situation of Ethiopia, Tesfachew says. He is of the view that political conflicts need to be addressed before it’s too late. Undertaking reconstruction efforts afterwards has never helped any country recover fully from the trauma, he notes. Birhanu Fikade of The Reporter caught up with Tesfachew to learn more about the impacts of political conflicts and their likely downsides for a country should they prolong.

The Reporter: - You came to Addis to launch the 2016 Trade and Development Report (TDR), one of UNCTAD’s flagship research outputs.  The report’s part that struck me most is the claim that this year is “a year of living dangerously”. I find this to be an ominous sign. Tell us a couple of things that make this year dangerous. 

Tesfachew Taffere: - The annual report looks at trends in economic as well as trade and development around the world. It mostly focuses on developing countries from the global perspective. We described 2016 as a year of living dangerously because after nearly five years of consistent decline in trade, much more so in the past two years, we are witnessing across the world economic and trade performances which need to be adjusted downwards further in terms of growth. Trade has been growing only by 1.5 percent. This year the U.S. growth rate has to be adjusted a little bit downward to one percent and Europe around 0.7 or 0.8 percent. Even in Africa where growth has been robust in the past 10 to 12 years it has now declined to around two percent on average. North Africa’s growth hovers around the 1.7 percent mark while sub-Sahara Africa on average again grew by 2.5 percent. But of course there are a few countries that are performing much better. Ethiopia, Rwanda and Uganda can be mentioned in this regard. From the whole, including the likes of China, the amazing performers of Asia have all had to adjust downwards. China’s growth at the end of this year is estimated to be 6.2 percent which, though comparatively high, is very low for China. In a nutshell, this is partly why 2016 has become a troubling year. Why troubling and living dangerously? Because after the 2008 financial crisis the downturn has become more unavoidable. We were however expecting by now a full-fledged recovery, swing in the assumption that commodity prices would go up while advanced countries were expected to start growing. It was also hoped that the Euro crisis was to be normalized. Eight years after the crisis what we have seen is the contrary. That is why we are signaling this year as dangerous. We will see what happens next year but the changes are very worrying.

There is an adage that holds as long as consumption is there commodities will always enjoy a certain level of demand and that consequently prices are going to rebound. But now that does not seem to be happening. What went wrong?

The global economy is in a bad shape. Investment and trade are not growing. Outputs are not growing as they ought to have. The main problem for us, as stated in the report, is the issue of aggregate demand, which is consumption. It remains subdued and we think that the advanced economies being resourceful and very rich and having the capacity are the once that are stimulating growth by creating more demand. The reaction of many advanced countries in the past six or seven years was directed towards dealing with the crisis by taking a cautious policy approach. The crisis was fuelled by a fast growing debt. The private sector debt and somehow the public sector have resulted in a financial crisis that morphed into a real economic crisis. But back in 2008, the crisis started with the financial sector due to the free flow of capital and that in turn created imbalances in the exchange rate to affect many economies. Many banks speculated financial flows against real investment in economic activities. That, together with the subprime crisis of the real estate sector in the US, has contributed to the global economic crisis. The government has been stimulating demand by lowering interest rate and allowing banks to lend a bit more freely to buy homes in the US. In such a way the advanced countries attempted to stimulate growth. China, together with fast growing countries like Brazil and Argentina, were able to sell to these countries manufactured goods at cheaper prices. That meant that China and others needed to import most of the raw materials required. Such was how growth has been so far stimulated even in Africa and other places. But the moment advanced countries started to reduce government expenditure, the moment private sector started to be careful about investment in the aftermath of the crisis, the moment they started shedding labor and unemployment, the moment prices went down some of the properties began to be repossessed by creditors. People were forced out of their jobs making it difficult for them to pay mortgages. They began to buy and consume less. That in turn means less demand and less demand results in less supply which in turn results in less production. If production declines there will be less demand for raw materials resulting in decreases in prices. Everything in the global economy is interlinked to affect every corner of the global society. Hence, to answer your question yes decline in consumption or aggregate demand is the cause of the problem and that is why trade is lower now than it was before the crisis. The solution lies in stimulating economies so that demand is created. But this doesn’t mean that the accumulated debts should be ignored. They have to be paid. But waiting until they are fully paid off will subdue growth and further intensify the problem.

While outlining the outcomes of the report, you mentioned that Ethiopia is seen as being reluctant to join regional economic communities fearing fierce competition from the likes of Kenya. You said that the country’s economy is big to withstand competition from these countries. How solid is that argument?

Two things need to be well understood here. For instance the East African Community (EAC) comprises of Kenya, Uganda, Tanzania, Rwanda and lately Burundi. These are the traditional east African countries and Ethiopia might join them once invited depending on either side’s interest. Anyway that’s a different issue. But we need to focus on the member countries of the Common Market for East and Southern African (COMESA). It is the larger group to which Ethiopia has acceded for the free trade agreement. If memory serves me right, I think 14 countries are included in this block. It includes Egypt and all the way down to Zambia and others excluding South Africa. When you look at the COMESA’s Free Trade Area (FTA) program, they have put a roadmap until 2021 where they anticipate to become fully integrated. As far as Ethiopia is concerned our understanding is that it’s a careful decision. They thought that if they join immediately and accelerate the accession process surely they have to open up the economy. Hence, delaying the process of joining COMESA shows they are trying to protect the local market as being part of FTA means letting countries such as Egypt and others take advantage of the economy. I think this is the concern. But what we are saying is that Ethiopia’s economy is strong enough to compete and may not be flooded by products of the COMESA members. In fact the country has enough production capacity to flood the countries with leather and other products. Hence, we don’t think the cautious approach of the government is warranted. They should accelerate the accession process. They should also consider joining EAC as well.

But the process of joining FTA under COMESA is very sluggish on the side of the eastern Africa region compared with other regions. When the issue of competition is considered, we feel that the manufacturing sector here lacks that sort of sophistication to vie with others.

We do and we are beginning to have that. Many companies are being attracted to the industrial parks targeting the US market. For instance, the shoe manufacturing sector is coming into the play. But what I am saying is there is also a huge market in Africa for this country’s manufactured goods. I can give some examples. Central and eastern parts of Africa buy hundreds and thousands of pairs of army shoes from Asian countries. But you have big capacity here to manufacture and supply the shoes at reasonable prices. That’s my argument, that Ethiopia can afford competition.

Does that necessarily mean opening up the economy to the rest of the world as well?

Not necessarily. That is out of the scope of the FTA agreement or may depend on the countries’ decisions. They can demarcate the areas of trade among themselves. Mind here that the WTO accession is different from the regional mechanisms. At the WTO members might request liberal policies within the rules of the WTO.

Let’s move on to current political issues which we would like you to comment in terms of their foreseeable impacts. We fear it’s going to affect FDIs, the tour and travel industry as well. What can you say to that from the economic perspectives

Apparently, there have been some riots and discontents here. I really can’t comment on the political causes. I am sure there are opinions about that. What I can tell you though is the following. One is that any kind of political sensitivity tends to have immediate impact on investment. No about that. We always say that when we advise countries about how to attract investment. One hour bad news on CNN can make many investors nervous. Instability tends to have repercussions on the economy. The second very important point is that at UNCTAD we have done some studies on countries that have experienced political conflicts of different nature in the form of demonstrations, coup d’états and the like and as result are facing very troubling times. What we have found is that a year or a year-and-a half long conflict could completely destroy 10 to 15 percent of the trade capacity of that country. We also found that after the conflict is over it would take 10 to 15 years to get back to pre-crisis period. Hence, the time things are neglected, the attention of people will be diverted from investment, from production. The moment governments are spending everyday trying to settle political issues rather than focusing on developmental issues then the impacts are visible. These are just simply facts from an economic point of view. But it doesn’t mean that there should not be political protests. But instability has very negative impacts on economic progresses. The economic growth pattern in the war-torn countries of Africa needed up to 15 years to get back to pre-crisis period. If we see Syria now and looking at the magnitude of destruction in that country, it would be miraculous for that country to recover thirty to forty years from now to the pre-crisis era. That much we know. Therefore, the solution is that when there are such political conflicts, the government needs to solve them immediately via dialogue and the necessary interactions. It needs to bring any discontents to the table. If you do a research on African countries that were in conflict in the decade before 2000 and look at the countries in the 1980’s counting the conflicts staged every year, roughly about 20 or so had been registered happening across the continent. The growth rate of many of such countries remained either negative or the low one or two percent. Immediately after conflicts became reduced, the African miracle started to happen. It’s not by coincidence. When less political turmoil exists, economic growth tends to be a more reality. What this means is that governments like Ethiopia, which have the desire to develop their economy, to have a high level of growth and achieve transformation, they must take into consideration the political stability aspects since it is interrelated with growth and transformation. On the one hand, if you are saying you want to transform the economy to a middle-income status and want to register 11 percent growth, have health services for everyone, spread prosperity across the broad and create employment and the like, you have to pay much attention to the political stability. It might not be easy to have the balance always. Backlash to globalization is taking place. Economic growth in the U.S. and in Europe has created many rich people. But it has created many marginalized people as well that are saying they are not part of the growth process. That is why we witnessed the Brexit. Many migrants from Eastern Europe have been antagonized for the loss of jobs in the UK. The natives accused immigrants for that.

It’s very interesting that you mentioned that a year-long protest or conflict could lead to a fall in the trade capacity of a country. This country as well is entering a year-long unrest. I am sure your facts do not necessarily indicate we are heading towards that situation, right?

I think the problem here from what I understand has been localized. Its target is directed towards specific political questions. It may have affected somehow a few flower farms. The flower export might have been affected to some extent. It’s again a scenario. It has not yet been a widespread phenomenon. Had it been widespread, it’s possible to imagine the impacts. Imagine if roads to Djibouti were blocked or railway is not working or trade could not take place. You can’t export coffee. Products would have rotted causing a decline in price. That is what we are talking about. Trade gets affected when production is at stake. A full-fledged yearlong political instability surely marginalizes the trade and trade capacity of the country.

Are you convinced by the government’s approach of undertaking a massive public investment could lead to increased FDI inflow or allow export-oriented companies to thrive? The involvement of the private sector in Ethiopia’s growth remains arguably very low despite growth trajectories.

Looking at the second Growth and Transformation Plan (GTP-II) what I understand is that the government at the end of the day wants to transform the country dramatically. The problem is that there are certain areas that the private sector prefers to join while there are some it does not participate in because they involve high risks. It may not necessarily be interested to invest in road networks or electricity distributions or else. This is where public investment is sought to lay the foundations for the private sector to follow through. You have to meet the conditions of the private sector. Here, setting up industrial parks can be considered as an urgent way of attracting private investors. The government is trying to make industrial parks more conducive and attractive for investors. What an industrial park does for private investors is that it cuts out the hassles that they previously faced to have infrastructure and other necessary working conditions in place. You can’t expect industrial parks to be installed by the private sector alone. My opinion along with that of UNCTAD is that though foreign investment is important it is not a panacea. I think countries should recognize that. Local private sector investment is what will keep economies growing. But when the local private sector is not that strong, lacks global connections and has weak marketing access then you have to rely on foreign investment. The likes of H&M do not bring capital alone. The name recognition they have in the global market is what is valued the most. They have thousands of marketing chains and outlets. Having them onboard is very essential to emerge but for the long term it is critical to depend on local capacity.

Do you believe Ethiopia has become investor-friendly?

Honestly speaking, given the capacity, the size of the population, the economic performances in recent years and its proximity, I think Ethiopia could have done more than what it has done. It’s my opinion that more investment should have come. But no doubt that what has come is encouraging. The Hawassa Industrial Park has brought some companies and that shows the country is favorably attracting foreign investments. But considering the size and potential of the economy more should have come.