“The ruling party does not understand the concept of growth properly”
Temesgen Zewdie is vice chairman of Unity for Democracy and Justice (UDJ). He is a business administration major and member of the House of Peoples’ Representatives.
Asrat Seyoum and Zekarias Sintayehu of The Reporter spoke to him on selected economic issues raised during Prime Minister Meles Zenawi’s report to the House last week and other related subjects. Excerpts:
In the parliamentary session held a week ago Prime Minister Meles Zenawi presented a nine-month report. After his report you asked how the inflation rate was brought down. In fact, you were questioning if the government was implementing monetary and fiscal policies. Can you elaborate on that?
Usually, when macro economic variables like the rate of inflation are regulated, it is done with help of conventional economic policies. However, what I understood from the report and the question and answer session afterwards was that no such instruments were used since it was not, mentioned any where in the report.
In my view this is not possible. Ethiopia is not the only one to experience a high inflation rate. Economic activities usually assume a cyclical behaviour . When they heat up it is a must that the government, whether it likes it or not implement the policies mentioned in your question. To begin with inflation is nothing but a scenario where too much liquidity (currency) is chasing limited goods. Hence, to curb inflation either of the two (monetary or fiscal) instruments should have been used. It is really simple, actually we can say that no monetary policy has been implemented since the inflation is still there. The government ought to have used these policies. For instance, in the case of monetary policy the interest rate should have been raised. On the fiscal side, either the tax base should have been widened or taxes should have increased. However, none of these happened. So it is clear that no policy was implemented.
On the other hand, the government should also decrease its fiscal deficit. The reserve requirement of banks should increase and at the same time productivity levels have to be improved for us to believe that a policy was implemented. However, with all these not materializing how can one control inflation? May be, if there is a theory that we do not know, that might explain the phenomenon. Anyway, the prime minister did not respond to my question properly.
With regard to the reserve requirement of banks, banking professionals have been saying that it is too high and has to be reduced. At the same time, even the World Bank has indicated that the government is using contractionary economic policies to curb the inflation. Were you perhaps referring to desirable policies in the above question? Or are you certain that such policies do not exist in Ethiopia?
The National Bank of Ethiopia, which says that such policies have been implemented, is actually controlled by the executive (government). So, we believe that such policies were not implemented at all and it is just for political reasons that the government is saying so. On the other hand, the International Monetary Fund (IMF) and the [US] State Department have both revealed that currently inflation stands at around 26 percent. Well, inflation is still increasing and in my view people have reached a level where they can’t afford their basic needs. Ironically, the premier’s report says that inflation has declined to a very low level. If so, why are we not feeling its efffect on our life? I am a member of parliament, I have constituencies who tell me that the inflation is still high. Based on these information I am forced to question the credibility of the statistical data presented to parliament.
The report also forecasted that the export sector would achieve a 25 percent growth rate by end of the current fiscal year. Do you think that this projection is realistic? Or do you contest this figure as well?
Well, if you see the export sector it would be clear to you that it is a less diversified sector. In fact, according to a report by the Ministry of Trade and Industry, only 35 types of products are exported to the international market. However, when it comes to export earnings, we know that the classical commodities – coffee and sesame – dominate the picture whereas the other products are not really bringing in a significant amount. What I am saying is that we can earn better foreign exchange by diversifying the agricultural export products and by working on the major export products like coffee. The problem here is none other than weak leadership. For instance, the trade deficit of the country has been widening continuously, in fact the country does not have a trade surplus vis-à-vis any of is foreign trade partners.
As a political party ready to take power if elected, what would you do to correct the trade deficit and the balance of payment problems?
It is not rocket science if you think about it. We do have the resources and the human capital to achieve what it takes. It is a matter of proper planning. If we do that, whatever we produce could satisfy local demand and we still can have enough to sell at the international market.
It seems that we are not producing at all. For the most part the country survives on foreign borrowing and occasional grants. Even the growth at the moment is not the result of our own national saving and investment, rather it hangs on the back of foreign borrowing and grants. In effect we are mortgaging our future generation . . .
Actually the question was directed towards the export policy and the balance of trade. What concrete suggestion would you make to the improve it?
The primary remedy here is to increase the volume of exports. The World Bank’s growth corridor theory is also suggesting the same thing. It aims to exploit the special export potentials of regions to improve their export earnings. If their export orientation is promoted properly then there will be no way that their trade deficit would not improve.
What is your take on the fiscal deficit and different views regarding the various way of financing it?
In my view the main problem with the ruling party is that it does not understand the concept of growth properly. The economy at the moment is loaded with natural and unsustainable trends. It is expanding the economy with loans and grants. When the economy heats up the government needs to take the kind of measures that I have outlined above [decrease fiscal deficit, raise interest rate, increase reserve requirement, increase productivity]. It has refused to take these measures for political reasons.
For instance, I asked the prime minister about GDP growth and it significance to our country. In fact, the measure of GDP tells us nothing about a society’s development. GDP shows the increase in production but not the decline in human well being. So, it actually fails to measure welfare. The worsening in welfare due to pollution of the environment and many other adverse conditions is not covered within the GDP measure. There is a way to incorporate all this. The prime minister might not be aware of it but it is called the Human Development Index (HDI). In fact, for a country as vast and enormous as ours HDI is the proper tool to measure development. It is actually misleading to rely on GDP.
How do you evaluate the growth of the country in terms of HDI? Do you have the data?
Not quite. But recently I came across what is known as the Ibrahim’s index, named after a Sudanese wealthy businessperson. It is actually an internationally recognized index. With regards to good governance, Ethiopia stands 37th in Africa. If you really evaluate the other measures as well you can see that we are not there yet.
Yes! But with regard to HDI, the focal points usually are health, education and the like. So with the help of concrete data can you show that Ethiopia is not making progress in those areas?
Unfortunately, all of the areas mentioned in the question and the data generated about them are both monopolized by the government. So such data is still questionable for me. I can’t really buy them …
But what about the data from international institutions like the IMF and WB?
In my view the reports generated by these institutions are impartial. However, what they actually say and what the government media say that they say is totally different. I am sure that the reports would not go beyond encouraging beginnings. The point I want to make here is that we need fair and impartial institutions telling us the exact status of the economy. For instance, the state controlled national bank can not be expected to release fair and impartial reports. I have been asking about the debt position of the country in parliament. As a member of parliament I am obliged to inquire about such things and for reasons still unclear the debt statistics is treated as matter of state secret.
The government is liberalizing (privatizing) the formerly state-owned companies. With regard to this the liberalization of the banking and the telecom sectors has also been in the center of discussion for quite some time now. What is your view on this issue?
When it comes to the banking and the insurance sectors, we support reservations on liberalizing them fully. If you look at those sectors, they are not yet strong to withstand fierce market competition. So, we actually support this restriction to liberalize (I mean fully liberalize to allow foreign investment) them at this stage.
However, when it comes to telecom services we believe that it should have been fully liberalized a long time ago. There are areas where the government enjoys a natural monopoly. But, telecom certainly isn’t one of them. The experience of other countries, in fact, tells us that private sector involvement in the telecom sector is vital in terms of providing quality services to consumers. If we just forget about problems related to the provision of telecom services to rural areas, since they are the customary justifications given to restrict the private sector, why can’t private investors at least participate in the repair of cables, for instance?
It is absurd that the government wants to control all the productive sectors in the economy; it is in conflict with the essence of a market economy. When we consider privatization, it has been some what years but the government has not fully done it. In some instances you see really poor judgment calls like liberalizing the gold mining sector and still operating soap and nail factories; it is not even sensible in terms of financial gain. It is because I raised these issues at parliament that I was subjected to a strong criticism by the prime minister, as you remember.
After the premier finished his report, there was a question and answer sessions and as the discussion progressed the issue of liberal and developmental ideologies were raised. What is your take on these ideologies?
The basic essence of the liberal economic theory is transferring the factors of production like land, capital, labour and entrepreneurship over to the private sector. Look what is happening now, the government controls the land as well as most of the agricultural inputs and hence the market. Is it the kind of economic system that we should strive to achieve? The answer is fairly clear, it is no. You can look at the situation surrounding the sugar shortage in recent times. The government is telling us where to buy, how much to pay and the like. This is not the distinctive feature of a free market economy. Now, you can also see that the impact of government intervention in the market is hazardous. In fact, following state intervention the price of sugar reached almost 22 birr per kilo. If the market is not allowed to drive the interaction it is always a problem.
Furthermore, if you see the employment composition of the country, it’s the government that consumes most of the labour force. But, if ours was a liberal economy with the private sector dominating the market, the largest employment opportunity should have come from the private sector. So the market economy, in our context, has yet to go a long way.
How do you see the tax regime and regulations of the country? Do you see problems with them?
Taxes have to be paid. There could never be any debate about this issue. The central issue here is about the fairness and the justice of the tax system. For instance, the level of tax paid by the rich individuals is not proportional to their wealth while the poor are forced to pay high taxes. We are not saying that tax should not be paid by the poor. What we are saying is that tax should be proportional to what people earn; it is only fair to do so. Even under such condition there is no governmental body that looks into such unfair tax collections. On the other hand, even when an appeal is made on the tax levied, the authorities do not respond appropriately. It is important to encourage those not yet in the tax system to pay their taxes willing and not coerce them to do so.
Finally, talk about policy issues. At the moment the government is pursuing an agriculture based economic system. What is your view of this policy? Do you think it has achieved its goal?
For the past 18 years agriculture-led industrialization has been given a chance but failed to work at all. By the way, this view is shared by the IMF and the WB too. Over 25 million farmers have less than half a hectare at their disposal. Farm lands have been ploughed time and again for years.
There is no land for crop rotation and hence there is no meaningful way of replenishing soil fertility. On a related note, farm land is controlled by the government. That makes farmers feel like they are employed on the farm. This demotivates them from improving productivity. Aside to that agricultural inputs are supplied by government companies under the most uncompetitive settings. As a result farmers cannot even feed themselves, let alone the whole country. If we were to suggest any corrective measures it would be to change the land tenureship policy. Farmers should feel that the land they till belongs to them, otherwise the sector would not flourish.
Video: Temesgen Zewdie questioning the PM’s report: