Ethiopia: Incumbent Should Not Retreat from Debate on Macroeconomic Policy

Bereket Simon
It was evident that Bereket was trying to pin his government’s performance in building the nation’s infrastructure.

Finally, the Revolutionary Democrats felt it necessary to unleash their treasured arsenal in the person of Bereket Simon, an old hand of the ruling coalition, in what looks like one of, if not the last, debates, held last Wednesday, May 5, 2010.

Not surprisingly, he helped to elevate the level of the debate, framing his party’s long held ideological and conceptual standings over its opponents in a manner that no other debater from his camp has managed to do so far. Where he failed to succeed, which was no fault of his own, was to get the other politicians of the fractured opposition camp to match his calibre and political flair. If the electorate misses Brehanu Nega (PhD), that star debater of the 2005 electoral episode, as many have told this paper, it was glaringly reflected during this debate.

It was evident that Bereket was trying to pin his government’s performance in building the nation’s infrastructure (a visible record and remarkable accomplishment by any measure) to his party’s ideological footings, as opposed to what he described as continuous pressure from the global neoliberal forces to do otherwise.

Sadly, almost all of his opponents appeared to have chosen to hold fast in their hapless focus on obvious issues such as whether or not there really were all those new roads, bridges, dams, and airports that the incumbent was referring to. The clever Lidetu Ayalew, the Liberal Democrat, was alternatively interested in using his time to list his party’s electoral promises, although his readings from the manifesto his party authored was uncharacteristic of him.

Understandably, the incumbent’s record in financing public infrastructure was one of its fortes. Those who would like to challenge a party with such a record would need to do a lot more preparation than was betrayed by Medrek’s Gezachew Shiferaw’s (Eng) ill-informed criticisms of contracts with the Italian company Salini Construction. Mamushet Amare, from the All Ethiopian Unity Organisation (AEUO), was in utter denial of massive public infrastructure works that were there for anyone to see. The debate in fact should have rested on the very ideological convictions Bereket attributed his party’s record to.

Indeed, the ruling party has been following a particular brand of ideology that it dubs as Revolutionary Democracy. It has a worldview that includes the control of state power to effect social transformation, including in the economic sector. It has seen the state machinery as a powerful instrument in its efforts to overcome poverty, a battle it defines as the topmost priority for this country.

Such a worldview of its role in society appears to have given its leaders carte blanche to allocate the nation’s resources as they see it fit. As a result, they have created a state that is too big, large, cumbersome, and inefficient, all attributes reserved for the all-traditional Ethiopian state. It is this worldview of the state that has finally led them to have a macroeconomic scenario today with economic growth over the past seven years, although also characterised by low savings as well as insufficient investment.

Their opponents were not observed to have been politically refined enough to admit the expansion and structural transformation in the economy and challenge them on the source of the growth. They would have discovered that much of Ethiopia’s growth on the economic front is largely based on credit, although this credit was used to finance investments in infrastructure, unlike in the United States where it was spent on consumption.

The way the Revolutionary Democrats have perceived the role of the state they control made them allocate over 50pc of the federal budget to finance capital expenditures. They have decided to retain large state enterprises and direct their resources to what they see are their policy priorities. They have a firm grip on their fiscal, monetary, and exchange rate policy instruments, all with the intent to achieve the economic growth they hope will help overcome poverty.

This ideological underpinning has led them to have a macroeconomic reality of low inflation (single digit) and high growth (double digit), aided by an expansionary fiscal environment. The current budget deficit (one per cent) is considered a reasonably welcome standing. So far, they have not been disappointed with the results.

There is indeed economic growth in Ethiopia. The questions that needed to be asked were rather regarding the equitable distribution of this growth and whether or not it will remain sustainable.

There is reason to believe that in the absence of a further set of reforms, in order to lubricate the structural transformation of the economy, the expansion of the economy may not remain sustainable for too much longer. Indeed, it takes little imagination to realise that Ethiopia’s economy is largely dependent on the agricultural sector. Over 80pc of the populace depends on farming for its livelihood, contributing in real terms 42.6pc (2009) of the annual gross domestic product (GDP), as opposed to over 55pc a decade ago.

If the Revolutionary Democrats believe that an appropriate macroeconomic policy prescription for such an economy is agricultural development led industrialisation (ADLI), it should only be understandable. It was only defeatist of the opposition to argue, during the debate on rural development, against the Ethiopian Peoples’ Revolutionary Democratic Front’s (EPRDF’s) policy priority to develop the agricultural sector. Sadly, none of the opposition parties came up with alternative policy prescriptions but claimed that they would develop the agricultural sector alongside the manufacturing sector, all at the same time. There simply are not sufficient resources, including human capital, to do that.

China, whose rise as a global economic powerhouse might have given some solace, has had to develop its agricultural sector and rural areas before it developed its highways, industries, and flashy cities. In the words of Justin Yifu Lin, chief economist of the World Bank, providing economic incentives to farmers and workers, as well as attracting foreign investment, “were the priorities at the beginning.”

The World Bank itself made a turnaround (after 30 years) two years ago in calling on governments in poor agrarian countries to invest in the agriculture sector. This has been the kind of recommendation the Revolutionary Democrats have followed over the past decade. To their credit, it has brought them modest growth.

Nonetheless, macroeconomic analysts see the structure in the economy changing. Agriculture no longer holds its mighty position. The size of the service and manufacturing sectors in the GDP is increasing. For instance, the service sector comprised 44.5pc of the GDP in 2009, as opposed to 38.4pc in the year 2000. Although the size of the manufacturing sector on the other hand hardly changed during this period, the shares of these two sectors in the portion of economic growth registered over the past seven years has been increasing.

This development shows basically two things as agriculture is increasingly giving way to the service and manufacturing sectors as major sources of economic growth. Firstly, it will be difficult to continue with the current growth scenario, and, secondly, there needs to be further reforms to meet the emerging challenges.

In order to sustain growth, the party to claim political power at Arat Kilo will be required to introduce a series of policy reforms in the provision of loans and credit to the private sector, utility provisions in telecom and electricity services, avoiding dependence on import taxes as a major source of state financing, the promotion of the emergence of efficient and capable bureaucracy, and the easing of regulatory burdens on the private sector.

In the absence of policy reforms in these areas, any party in charge of managing the macro economy will inevitably be challenged. Whether or not the Revolutionary Democrats are prepared to become forces to push these reforms through is anyone’s guess. But they need to engage in a debate on the subject for the electorate to have a clear understanding of their intentions.

There is no better place to do so than in the ongoing televised debates on varying national issues. To date, there have been nine rounds of debates, mostly political in nature but significantly on the economic policy front as well. It is not clear, however, whether the debate of last week is to be the final debate in the electoral campaign of 2010.

If that is to be the case, it will be an unfortunate deprivation to voters.

The subject of debate on macroeconomic policy issues is on the table. It was one of the two issues contending parties were not able to reach an agreement on, when the issues of electoral debate were selected by the council of political parties a couple of months ago. There has not been a firm decision to date.

With the voting date coming so close (two Sundays left), conducting one more debate that would wrap up the series of debates held so far would only help the electorate in its decision of who to award its votes to. Reaching out to voters, in their final bid to persuade their supporters and perhaps undecided voters, which appear to be in significant numbers, particularly here in Addis, could only help the contending parties, including the incumbent.

Fortune