Ethiopian Economy: Temesgen Zewdie, MEDREK

Temesgen Zewdie
Temesgen Zewdie, MEDREK

Q. To what extent should the involvement of state in the management of the economy go?

The factors of production like land, capital, labour, and entrepreneurship are all sources of wealth. These will be controlled by the private sector.

In a country where the major source of capital – which is land – is controlled by the government, farmers consider themselves as  employees of the state. Not only does the government control the land, now it even controls what crops are harvested and where they are supposed to be collected.

The major player in both sectors, owning the land and the crops on the land, is the government. The ruling party has its own trade conglomerates that control the fertilizer of the land and the farmer plays no role becoming a political instrument for the ruling party.

The farmers are insecure because the ruling party can repossess their plot of land at any time should the party suspect that the farmer has no allegiance to the said party. So it is a political game being played by the ruling party.

If MEDREK gets an opportunity to form a government after the coming election, the ownership of land will definitely belong to those who till the land and the government would not be a major player in the market but the private sector.

This ruling party has businesses in nail manufacturing, flower farms, including small enterprises that should be owned and operated by the private sector. It is very difficult to say there is a free market economy in Ethiopia. In a country where the major employer and the market player is the government, there is no free market economy. That is what Revolutionary Democracy is all about-one dominant party in politics and in the economy.

The government needs to play its natural role in terms of defence, foreign affairs and, what we call in business, natural monopolies. For instance, in the energy sector there may not be enough investors in this area who can participate, since it is very capital intensive. That sector probably can be played by the government.

But MEDREK is going to change that, if we get an opportunity to form a government, the private sector should be given full authority to manage the economy. We would hand over companies that are owned by the ruling party to the public through auction. The market would be based on demand, supply and price. Consumption and distribution would be dictated by the needs and wants of the consumer, not the ruling party.

Interventions by the ruling party have shown, time and again, that it failed, exposing people at the lower level of society to extreme hardship. You can take the example of sugar. Their action are distorting the competitive nature of the economy.

Q. Where would the significant involvement of a government in MEDREK be?

Small government is good government. The government should have a very small role in the free market activity of the economy. MEDREK will restrain its role in the market but that does not mean that we are not going to intervene when and if it is necessary.

Q. When is that?

When there are factors that could destabilise the society, we will intervene to bring back the market and the social well-being of the society to a normal state. MEDREK would set into place a regulatory framework that would make the competitive nature of markets free for everybody to play in.

If conditions arise where few sellers are in a monopoly or oligopoly, they control prices and products in such a way as to affect the majority of the people.

It would be incumbent upon the ruling party, MEDREK, if we get a chance to form a government, to intervene and stabilise the market because society is being affected not by normal interactions of market give and take but by the monopolistic stake of a few sellers. So in that condition, it would be reasonable and responsible for any ruling party to intervene and stabilise the market.

Q. How would MEDREK intend to use the fiscal and monetary instruments of the economy?

Both monetary and fiscal policies should not be controlled by one branch of the government, which is EPRDF’s case is the executive branch.

In other countries, for example, if you take the Federal Reserve of the United States, not only are they neutral and independent, but they are also elected for a term of office that outlasts both the legislature and executive branch of government. They intentionally designed the system in such a way that both the legislature and executive branches would not be able to influence the monetary supply of the country.

Here, however, the Central Bank of Ethiopia is totally under the control of the ruling party; and at times when they have to raise the money supply – they do not. At times when they have to reduce interest rates – they do not. At times when they have to raise the reserve requirements of banks – they do not for political reasons.

We are in an inflationary period; we have been in inflation at least for the last two years. So, people are suffering because the ruling party has a large appetite for money. So, there are too few goods because there is too much money in the economy. So, during times like these, responsible governments do take bitter pills.

What is a bitter pill? It is a restraint – an austerity programme, or a belt tightening programme by the government to contain inflation. But this ruling party is not interested in doing that because they want to use this as a political message and be seen as having a growing economy.

But the economy is growing at a severe cost paid by the consumers. Too much money is being poured into the economy – more than the economy of the country can handle. So we have stated again and again that interest rates have to be raised as any responsible government would do at times such as this. A responsible government would raise interest rates, cut government spending, raise bank reserve requirements and try to create productivity within the market.

Fiscal policy is used by the government in raising and reducing taxes, increasing the tax base and increasing or reducing the tax rates. Whatever measures are taken to bring about and sustain a healthy economy is done by the executive branch using fiscal policy.

But the ruling party is now saying that they have done both, without using any of these tools; that is impossible. Therefore, the economy is not being managed; it is being mismanaged. And people are being victimised due to this continued claim of GDP growth because the ruling party wants to tell the people, for political purposes, that for the last seven years the GDP has been growing. They have rejected both of these instruments and have refrained from using them for political reasons. I would say that is irresponsible.

Q.You do not think that there is an economic growth?

Economic growth at what cost? That is what I am trying to say.

There is an economic growth if you are talking about GDP. It is like over eating; it is not useful at a certain level. After some point, the law of diminishing returns takes hold. Now I am saying that instead of healthy growth this is hurting a lot of people. The society is paying the price in terms of inflation and unemployment.

You can take this as you want, there is growth in the construction sector. It is obvious and everybody can see it. There is too much money in the economy – this is a fact. There are too few products – it is a fact. But society is paying a price; those who earn fixed incomes from government salaries are paying a price because there are no products that they can afford to buy.

There are retirees with fixed income. There are government employees who live on a certain amount of money every month. They can neither send their children to school nor can they buy their groceries because there is too much money in the economy. Things have gone out of control and the state of the economy is not healthy. It is inflationary and that is what spread unemployment. This is like a family who is over-spending its income, thinking to borrow some more for the next month and live that month – but they are accumulating debt.

Ethiopia is a net debtor nation meaning the economy is being financed by somebody else. This is bad. The economy should be financed by home grown growth. This money that we are spending has come mostly on loan, grant or aid. It is very superficial. It is not sustainable.

What we call growth and balanced growth is when the society has savings in the bank and the bank loans this money out to productive sectors. The Ethiopian population’s savings is significantly low. How could they save when they do not even have money to sustain themselves and their livelihood for the month? It is very difficult to say they will save money; for what interest, for what gain?

The interest rates the banks are paying is so low that nobody will be interested in saving their money.

At four per cent interest rate during this inflationary time, the economy is mismanaged and I do not think the ruling party really understands the intricacy of a modern day economy and what monetary and fiscal economy means. I do not think the incumbent has an understanding of the significance of these instruments.

Q. What sort of reform should be done?

Just do the reverse of what Ethiopian Revolutionary Democratic Front (EPRDF) is doing. If we can do that, I am sure we will advance the economy to a healthy economy. We do not want to lead the people to believe that the economy is growing when the economy is not home grown.

We want people to have a culture of saving making sure interest rates are competitive. Products should be bought at a price supported by demand and supply. Interest rates should be negotiated between banks, borrowers and lenders. This freedom should be given to the private sector.

In the economy, the major player should not be just few monopolistic organisations. It should be wide and accessible enough to the private sector. Currently, the major player is the ruling party. It is the supplier and it is the buyer in every aspect.

If you take the grain, coffee market, and all agriculture products, the government has a warehouse where these products are being produced. The government is the buyer and seller. They are fixing the price. When the price is fixed there is no free market. They are buying the farmers’ products according to prices they themselves have set and taking the products to government warehouses. There is no interaction between the buyer and seller.

Market economy is based on a free signal from the market to the producers. Therefore, market signals should not be blunted by the involvement of the government. When we say we are a free market economy, the market signals should clearly, without any distortion in between, be transmitted to the producers so that one can engage in production based on market supply and demand. They can choose areas which are productive for them. These signals should not come on instruction from the central government but should be an inter-play between buyers and sellers.

Q. Do you see structural changes in the economy of the country?

I do not see any change. The nature of this ruling party whether in politics or economy is a command economy and a totalitarian. Because what the ruling party says everybody does. There is no other way of doing things. Even if by some accident the ruling party continues after May 2010, I do not assume any structural changes in the economic policy of the incumbent. Because they have already stated time and again every economic activity is going to be done from the centre. Market economy is just a way of getting a loan and credits from the western countries.

Q. What does MEDREK propose?

Well I am not going to propose anything for EPRDF. What I propose is for the electorate to vote for MEDREK in 2010 and there will be major changes in a sense that there will be stability in the economy and politics. People would be the major players of the economy and politics at the grassroots level. There will be total freedom in the market interplay.

MEDREK’s responsibility would be to regulate and to bring about laws and regulations that will benefit the whole society and whole sectors of the population and economy, not a sector or group. Both the economy and politics would be totally in the hand of the population.

This country and its sovereignty belong to the people. The people dictate how things should be run in every intersection in the society.  There will be many thousands of civil society interest groups in this country if MEDREK is elected. Every one of them will be taken into account. The interests of the people through their representatives will be reflected both in the economy and politics.

Q. How do you see the contribution of the various sectors to the GDP?

Special emphasis will be given for the resourses of each sector. Those sectors will be brought out to benefit the community of the area which the natural resource is found. Intervention and control by the government will be minimised. The creativity and entrepreneurship skill of the people would be encouraged. This will be a participatory government. We would encourage initiative and encourage the dynamics of individuals and groups to initiate business ideas. That is where the change will come from. We are going to bring out the initiative of people to play in the free market economy.

Q. Is a macroeconomic policy where there is a rapid economic growth while maintaining low inflation rate sustainable?

Yes it is doable, but it will be very difficult to do that without using monetary policy. But the way around it is to have the economy perform productively and make some economic productivity gains. Otherwise it will be very difficult.

Inflation, deflation and recession are economic cycles in free market economies. Sometimes it will be important for the government to cut spending. But no government wants to cut spending because of political reasons. But genuine governments should explain what is to be done.

When the economy overheats, there are reasonable fiscal and monetary tools that are conventionally used by all governments in economic theory except in communist or socialist states. At least one or the other of fiscal or monitory policy must be used or both of them have to be used.

What EPRDF claims to have achieved, growth without using these two has never been done. It must be a new discovery and that was why I brought the question up in Parliament for discussion.

Q. What will MEDREK do to address the inflation issue?

MEDREK will open up the market to participatory play, provide information to the producer, buyer and supplier and also the consumer. So in a free market economy, price always gravitates towards equilibrium – if not exactly then in close proximity.

There will be a true reflection of market and supply. The invisible hand should operate, not the government. But there should be times where the government intervenes in market for reasons of stability, and to protect the interest of the masses. But in major cases the invisible hand operates. MEDREK will remove all the barriers this government has put in place.

Q. How about balance of payment crisis and the trade deficit?

We are buying more than we are selling. We are importing from abroad more than we are exporting. Our appetite for imported goods has increased. We are importing not only capital goods, we are also importing consumable goods like ketchup, tomato sauce. How difficult is it to produce tomato sauce? So, very little import substitution is done to save foreign exchange.

One of the things that we would be focusing on is import substitution. Domestic investors have to be encouraged to produce goods and services that can help us from importing in hard currency.

Q. Would subsidising the local producers not be in conflict with a liberal government ideology?

No, because it is a temporary subsidy. Things have to be valued in terms of the benefit they bring out to the country and the people. If we can subsidise a home grown investor by giving free land and tax holidays, it will cause the business sector to engage in home grown services and products. So, in the long run, the benefit to the people and the government by saving foreign exchange would be tremendous.

Q. How about managing the depreciation of the Birr and the exchange rate regime when trying to encourage export competitiveness of the country?

We have to export more and not depend on few agricultural items. The amount and the quality and the volume of the agricultural product that we are exporting should be changed significantly.

In other sectors like human resource development and tourism, we will make trade participatory in items of export.

And the exchange rate regime should not be dictated by a ruling party, it should be dictated by the market. Money is bought and sold like products are bought and sold in the rest of the world. Ethiopia cannot be an island.