By Asrat Seyoum
The Washington-based international institutions such as the International Monetary Fund (IMF) and the World Bank (WB), in one way or another, occupy the front seat in the global economic arena.
These organizations exert a relentless effort to collect data, forecast trends and comment on economic policies of countries. Needless to say that sometimes such an effort ends up in huge disagreements with client countries on policy and implementation issues. Yet, the comments and, of course, the financial support of the Bretton Woods institutions remain to be critical especially for developing countries like Ethiopia.
The institutions are basically advocates of free (liberal) market-led economy with a strong private sector. Hence, the financial assistance (development assistance) is there to promote such policy directions. Nevertheless, the confessional loans and grants through various packages of the Fund and the Bank finance quite a number of projects in the developing countries that are deemed essential to these economies. In light of such responsibilities the two have set up a joint development committee that convenes every year in spring to build inter-governmental consensus on various developmental issues.
The committee, formerly known as the Joint Ministerial Committee of Board of Governors, was first set up in 1974 to advise the heads of these institutions on critical developmental issues. Through time, the committee revised the mandate and discussion on issues of environment and trade and had also become part of the agenda.
This year the joint committee has once again reconvened in Washington. According to senior official at the bank, development related issues, particularly the current economic condition of Africa, will be at the center of the proceedings. Obiageli Ezekwesili, vice president for the African region at the bank, at a video conference held on Monday, noted that the forum would be critical to African countries since issues of great interest, with regard to the development of the continent, would be at the top of the agenda. She said that the replenishment and recapitalization of windows of assistance like the International Development Assistance (IDA) would be considered at the conference. She noted that the African financing committee for the environmental issue that is chaired by Prime Minister Meles has been negotiating possible compensation for the continent at the conference in Copenhagen. Hence, recognizing the pressing nature of the matter, the issue would be tabled at the spring meeting and it would be discussed in greater depth. According to the vice president, environmental degradation cannot be taken for granted in Africa’s context at the moment, since the continent is paying a high price for the damage to which it contributed less. She pointed out that in some African state, the impact of the environment has become grave to the extent that it had reduced agricultural productivity almost by half. Furthermore, it was also learnt that a series of round-table discussion on important economic issue would be held at the meetings.
While illustrating the significance of the joint session, the vice president and the chief economist for Africa, Shanta Devarajan, has also taken time to discuss the economic progress that the continent is making at the moment. In general the chief economist praised African economies in the light of the sustainable growth rate especially coming out of a devastating crisis. Shanta says that at the moment Africa is one of the hottest destinations for foreign investments in the world mainly because of its favourable economic policy environment. Furthermore, he said that the coming decade is going to be Africa’ decade and it won’t be a difficult task for most of the African countries to meet the long anticipated Millennium Development Goals (MDGs).
Based on the bank’s data the chief economist said that prior to the world economic crisis the African economies were growing at the fastest rate. Coming into crisis the these economies were growing at 6 percent annually and after the crisis this figure plummeted to 1 percent. The decline, according to the bank threw back, an estimated seven to ten million Africans into the poverty bracket. Furthermore, during 1998-2008 about 22 non-oil African countries had registered a 4 percent annual Gross Domestic Product (GDP) growth and poverty had declined in the continent consequently. During the crisis most of the economic literatures and professionals had predicated that since Africa was least integrated with the global economy it would be less affected by the crisis. According to Shanta, this did not quite happen. In fact the continent was hard hit by the crisis and growth was slower to some extent. However, still the continent emerged strong from the crisis. This year the growth is expected to be 4.5 percent.
At this juncture one might wonder how and why such growth was possible at this time in a continent where conflict and poverty has a strong grip. Actually the bank attributes this stride to strong macroeconomic policies. Shanta cites the experience of countries like Ghana and Ethiopia in implementing tight macro-policies while going thought the crisis. For instance, the two counties mentioned above were implementing contractionary economic policies to overcome large fiscal deficit and higher inflation rate during the time. According to Shanta, at a time of economic crisis countries would be tempted to inflate their economies and run a very large fiscal deficit that at end of the day would be difficult to finance. However, he said that contrary to such a temptation most of the African countries had maintained quite tight macroeconomic policies. In this regard, the chief economist also cites the level of inflation rate in Africa in mid-2005, which is half of what it was in the same period a decade ago. To sum it up, against Shanta’s and other professional’s expectations, the crisis did not reverse the growth momentum that had been building up since the period prior to it. Hence one of the fastest turn-around from an economic downfall in the continent’s history has been recorded in the process.
The story is not different for Ethiopia as well, according to the bank. The statistical evidences at the bank shows that the country is sustaining fast economic growth in spite of the painstaking inflation rates. However, on top of the inflation the recurring famine and drought in the rural areas also contributed to the worsening of poverty in the country. Hence, the relevant question would be this: “In the face of such adverse situation how can economic growth reduce the poverty level and improve welfare of the people?” The chief economist actually put forward three basic pillars for GDP growth to ensure poverty reduction. To begin with, he regrettably admits that inflation is always a taxation on the poor. “Whether faster or slower, economic growth inflation does not do anybody any good,” he says. For that matter, he said that even without inflation economic (GDP) growth cannot be guaranteed to bring about poverty reduction if certain conditions are not fulfilled. For growth to alleviate poverty, first and foremost, it has to be connected with agricultural productivity. In a developing country like Ethiopia where most of the population earns its livelihood from agriculture, a growth that can impact this sector would succeed in reducing poverty.
On the other hand, GDP growth should be able to create more productive jobs in the economy. He says that if the growth is consumed by paying the already employed labour force a higher wage rates, while there is vast labour force lying around in a unproductive engagements, then it cannot be a poverty-reducing growth. According to the bank, some 70 to 80 percent of the total labor force in the continent is still employed in the less productive informal sector; hence growth addressing this issue would, in effect, reduce poverty.
Furthermore, GDP growth has to be connected to factors known as the Human Development Indicators (HDI). Shanta said that health, education, pure drinking water and the like are factors that, in one way or another, indicate the quality of life and the well-being of the society. In fact, the broad definition of development also incorporates such factors. In this regard, the chief economist pointed out that with respect to health and education statistics, Ethiopia is registering a steady improvement together with the GDP growth. “The country has not only shown rapid economic growth but has also succeeded in achieving remarkable improvement in the health and education sectors as well,” he remarked. However, he did mention that these Human Development Indicators started from a very low level and still there is a long way to go to fulfill the standard services.
In general some of these economic assessments by the bank seem to be very optimistic. In fact, the chief economist predicted that in the continent at least a few countries can achieve the Millennium Development Goals (MDGs) by 2015, if not soon after that. However, given the current favorable policy environment, massive infrastructure deficit and major human development needs, the bank strongly believes that the continent is a hot destination for investment and has what it takes to make it.