Ethiopia’s Economic Fallacy
Ethiopia’s Economic Fallacy, Nominal Growth and Real Poverty
Originally Posted on August 13, 2009
Ginbot 7 Report
So much has already been said about the Ethiopian economy and so much more can be said. The TPLF regime trumpets sustained GDP growth, opposition political parties decry bad economic policies that alienate the poor, the IMF questions the pace and scope of financial-sector reforms, and most Ethiopians ask – where is the food?
No matter what is said and who says what, the Ethiopian economy is one of the least productive economies in the world, and the Ethiopian consumer, with a nominal per capita income of $324 (IMF, 2008) is one of the poorest consumers on earth that barely affords two meals a day. According to the United Nations Human Development Index, an index that measures the level of human development (life expectancy, literacy, Educational attainment and GDP per capita), Ethiopia with the index measure of .406, is ranked 169th in the world.
With its abundant natural resources, and its second largest consumer base [≈ 80 million] in Sub-Saharan Africa, Ethiopia is one of the most attractive investment and commodity markets in Africa. Besides, Ethiopia is one of the world’s oldest continuous civilizations with an interconnected culture and history that spans over three millenniums. In fact, this historical continuity and cultural homogeneity is a rare resource that can replicate economic development efforts throughout the country. However, despite its abundant resources and three regimes in just 35 years, Ethiopia is still a textbook example of abject poverty.
In its broad development strategy, which is “Sustainable Development and Poverty Reduction Program (SDPRP)”, the fundamental development objective of Meles Zenawi’s regime was to build a free-market economic system which among other things will free the country from food dependency and make poor Ethiopians the main beneficiaries of the development strategy. However, after 18 years of development rhetoric, Ethiopia is not a free market economy and millions of Ethiopians depend on food aid for survival.
The Meles regime has repeatedly claimed that Ethiopia has experienced a sustained GDP growth rate of 10%. If this claim is correct, then why do more than 40% of Ethiopians depend on food aid? And, why does a nation that claims to have produced ‘millionaire’ farmers suffer from acute food shortages year after year?
Evidently, the classical economic concept of total government “hands-off” free market economy is not valid in today’s sophisticated economic environment where the self-indulgence of human logics has exceeded those of the market. The role of state institutions and political processes is inexorable in shaping socio-economic development in Africa. However, this role does not imply a total government takeover of the economy, as is the case, in Ethiopia.
Most free market economies have two main sectors: a dominant private sector and a public sector. However, in Ethiopia, there is a state run economy [public sector] and there is a “state within a state” that runs a parallel economy. The ruling party in Ethiopia, the TPLF, calls this sector a private sector, a misnomer, since the rules and regulations that govern the private sector do not apply to the party owned business enterprises known as parastatals. In reality, the parastatals, with unlimited access to public finance, are not public enterprises because the income they generate does not flow to the federal treasury.
The Private Sector
In Ethiopia, economic transition towards a market economy with increasing private ownership has been one of the major objectives of the TPLF regime. However, the reform process has stalled due to lack of political will. Moreover, all past and present actions of the TPLF regime in terms of legislation and policy revision has proven to be nothing, but empty words to please donors.
The Ethiopian Privatization Agency (EPA) was established as an autonomous agency in February 1994. In accordance with proclamation No 110/1995 and its amendment proclamation No 193/2000, the agency is accountable to the Ministry of Trade and Industry. However, five permanent board members of the EPA were designated by Prime Minister Meles Zenawi and the agency directly reports to the Prime Minister in all matters.
With the Prime Minister at the helm of the EPA, the agency created a powerful ethnic economic empire under the “phony” name of privatization, and transformed the formerly state-owned public enterprises [public monopolies] into party owned private monopolies. This illegal process paralyzed the movement of private capital, and as a result, today, the Ethiopian private sector is dominated by small and fragmented service oriented enterprises.
Deliberate monopolistic government policies and high entry costs have prevented domestic private investors from entering into the manufacturing, finance, and communication sectors. In almost all the cases, private investors that are not willing to venture with party parastatals cannot enter protected markets, hence, they are forced to divert their capital to less productive service sectors, or go out of business. For example, “Unity Insurance” was able to penetrate the lucrative insurance market because the powerful Guna conglomerate (owned by Sebhat Nega, ex-TPLF Politburo member) was a major investor in it.
The Government Sector
In Ethiopia the TPLF regime consumes an estimated 25% of the nation’s gross domestic product. With ever increasing internal conflicts, intervention in Somalia and military buildup on the border with Eritrea, the regime’s voracious appetite for larger consumption doesn’t seem to slow down any time soon.
Against the liberalization policies of IMF and the World Bank, the TPLF regime has continued to own and run large public enterprises. Currently, the regime is engaged in agricultural, mining, industry, trade, construction, transport, finance, and service activities. This unusual behavior of the TPLF regime has strangled the development of the private sector and has constrained its ability to govern the country.
In most cases, the TPLF regime appears to have stalled private sector reform by deliberately dragging the privatization process until the TPLF party parastatals gain strategic position in some economic sectors. For example, the TPLF business empire’s total incompetence in the field of Information Technology has prevented it from playing a dominant role in the highly lucrative IT market. Hence, liberalizing the IT and telecommunications sectors is delayed until the party parastatals position themselves as major players. As a result, the Ethiopian IT and telecommunication sector is one of the most inefficient.
The Party Parastatals
The TPLF party parastatals are a myriad of companies owned and run by the TPLF party members and their families. These party owned business conglomerates under the Endowment Fund for the Rehabilitation of Tigray (EFFORT) enjoy preferential access to capital, contracts, physical infrastructure, administrative services, tax breaks and other politically motivated support and privilege. For example, in 2003, the U.S. based international accounting firm, KPMG, audited the Commercial Bank of Ethiopia (CBE) and reported a huge non-performing loans (NPL’s) linked to EFFORT, which basically means EFFORT borrowed a huge capital (>3 billion birr) and never paid back a penny.
As indicated in our economic statement last week, the TPLF business empire has a large number of companies that operate in different strategic sectors of the economy. To see the list of TPLF companies click here.
At the start of the 21st Century, Ethiopia is confronted with the fierce urgency of a crisis that links the country’s present to its future. The crisis is political, economic, ethnic. As hard working and as resourceful as Ethiopians are these crises are still preventable. The question is when, who, and how? When a network of ethnic plutocrats controls the economy, and when land and other important economic resources are owned and run by an ethnocratic state, anyone who adheres to the myth that Ethiopia can join the exclusive club of middle income nations by 2025 is an absolute psychopath. The boldly heralded 18 years of GDP growth story of the TPLF regime has definitely created millionaire party and government officials, but the life of the majority of Ethiopians hasn’t changed from where it was in 1974.
In poor nations like Ethiopia, development strategies must be designed to effectively change the life of poor farmers, artisans, and the urban working class. No matter what the GDP grows rate is, and no matter how many skyscrapers are built, at the end of the day, if more than half of the population can’t put bread on its table, there is a serious problem in the strategy. In the case of Ethiopia, this is more than just a problem; it is a failed strategy from the get go which is put together to benefit the ruling elites of a single ethnic group. The Ethiopian economy has severely suffered under the personal rule of the ‘ethnocrats’ who use their power to transfer a large fraction of society’s resources to their ethnic empire.
No issue merits more urgent attention—or more immediate action than changing the political and economic realities of one of Africa’s oldest country. Ethiopia, the cradle of civilization and the birthplace of the African Union, has been torn apart by seventeen years of military dictatorship and eighteen years of ethnic kleptocracy. When the rest of the world is talking about the prospects of space tourism; most Ethiopians are talking about the possibility of the next meal. Evidently, time is not running out for Ethiopia, but it may be too late if the correction doesn’t start today.
As anxious as we are, sometimes our impatience might compel us to cry out desperately for time to pause in her passage, but the very secret of life is enjoying the passage of time. Obviously, we should never regret for wasted time, for doing so is wasting more time, however, in this unfolding riddle of evil and good, existence and extinction, and progress and regress, there is this pathetic word known as “Too Late”.
The 1950 World Bank’s first country report on Ethiopia cited its “industrious and intelligent” people and believed that “the possibilities for the country’s further economic growth are significant” Observers have long noted the achievements of the Ethiopian Diaspora around the world. Despite these hopes, Ethiopia has had one of the lowest growth rates in the world over the past half-century and as a result remains one of the least developed nations in the world. This poor nation has tried various types of regimes, from monarchy to Marxist-Leninist and now to an ethnic dictatorship, but economic development has been mediocre to poor under all of them.
In the last 10 years the TPLF regime has claimed a sustained 10% GDP growth rate while the Ethiopian people have continuously asked –Where is the bread?
Any reasonable person who watched the “10% Growth” vs “No Growth” parliamentary debate between PM Meles Zenawi and the Honorable Temesgen Zewde can easily tell where the bread went. Even if we blindly believe TPLF’s claim of 10% GDP growth rate, GDP is nothing more than the measure of monetary transactions for all final goods and services in a country without any regard as to who receives that money. In a country where the government’s primary objective is to benefit its own ethnic group, answering the question- who benefits from Ethiopia’s GDP “growth” is trivial.
Let’s go further and ‘trust’ the regime’s policy of providing tax cuts or other benefits to party businesses and rich individuals is intended to benefit the broad population (trickle-down economics). Well, even if this is the case, nothing is trickling down in Ethiopia except the fact that the rich are getting richer and the poor getting poorer. Between 2001 and 2008, as the GDP grew at double digit rate, so did the inflation rate [40% IMF, 2008], gobbling up the hard earned savings of millions of poor farmers and working class Ethiopians.
Recent academic studies of poverty-profile estimates have indicated that the incidence of poverty in Ethiopia is virtually as high in urban areas as it is in the rural areas. Unlike many African countries, in Ethiopia, poverty is not just a rural problem. Ethiopia’s urban economy has not been very dynamic; as a result, incomes in many urban areas are very low. However, in the last 10 years, urban income levels have grown at a relatively faster rate than rural income levels. This discrepancy is explained by parastatal activities in the construction, service, and manufacturing sectors.
The current economic paradox of Ethiopia, which is economic growth and acute poverty [poverty among plenty], is fully explained by the symbiotic relationship of the Ethiopian state and the TPLF party parastatals. In simple layman terms, the Ethiopian economy that absorbs a large sum of donor capital benefits only the few, not just the ordinary few, but the ethnically selected very few.
An increase in Ethiopia’s growth potential would require addressing the poor quality of institutions, the low level of openness to trade, and the low degree of structural transformation of the economy. Most importantly, since there is a direct correlation between governance and prosperity, Ethiopia needs a systemic change of governance. Building a true democracy in Ethiopia is an absolute necessity not just for economic prosperity, but for the viability of Ethiopia’s survival as a nation.
Ginbot 7 strongly believes that it is not too late for Ethiopia to change its course, but as in the words of Martin Luther King Jr., where does Ethiopia go from here: chaos or community? The choice is ours. We may sometimes be forced to avoid making choices by doing nothing, but even that is a choice.
Ginbot 7 and the Ethiopian people strongly agree that choice is ours. The less choices that we are allowed to make, the less we are aware of our freedom to choose. This time we will make sure we will have as many choices as our people wish to have. Our choices are freedom, justice, democracy, peace and prosperity.