Can EPRDF Privatize Ethiopia out of the Current Economic Conundrum?
By Getachew T. Alemu, June 8, 2018
Addis Abeba, June 08, 2018 (Addis Standard) – It takes a simple scanning of daily headlines to learn that Ethiopia is changing. The country of 100 million people, third largest in Africa, hosting African Union, UNECA, the third largest diplomatic core in the world and regional offices of various organizations, is witnessing a sea of changes in sectors as varied as economy and security.
Latest headlines are all about promotion and demotion, recruitment and retirement, and installment and abandonment. It looks like the country is embarking on a new wave of holistic reforms, although there is serious uncertainty on the path and the end goal.
At the center of this whole process, including the surprises, sits the young and relatively less experienced new chairman of the ruling front, Abiy Ahmed (PhD). An ethnic Oromo and a member of the Oromo Peoples Democratic Organization (OPDO), Abiy is the face of the ongoing change. Although many of the reform plans have already been in the kitchen of the ruling coalition, which has been monopolizing both political power and discourse for the past 27 years, it took three years of volatility (especially in two of the largest regions Oromia and Amhara, and to a lesser extent the Southern regional state) and considerable internal bickering for them to translate into decisions. And the seal comes to be that of Abiy’s.
Abiy’s ascendance to power is a convergence of multiple factors. None would, however, equate, in both magnitude and urgency, with the pressure coming from the economy.
Ethiopia’s is an economy that has been witnessing a Gross Domestic Product (GDP) growth rate averaging 10.1% over the past 13 years, according to the World Bank. This growth has been mainly driven by public-investment. According to the Bank, Ethiopian public investment to GDP ratio is second in the world. As backdrops to the growth, the country has been witnessing expansion of key infrastructures including power lines, railways, roads, schools, health centers, farmer training centers, water supply lines and so on.
As a result, poverty index has been seeing decline. Latest government figures are that it stands at 23%. Per capita income has reached 511 dollars, in PPP terms, in 2016. While primary school enrollment increased to a national average of 85%, primary healthcare coverage has seen improvement, with mortality in 1,000 people reduced to 240. The distance to all-weather road has been reduced to 5 Km, while infant mortality has declined to 59 per 1,000.
It was not all good, however. Behind this widely caroled song of GDP expansion sit structural fault lines, inequalities and shortcomings that led to widespread public disgruntlement, and hence three years of anti-government protests in many parts of the country.
At its base, the growth of the economy has largely been a jobless one. The mismatch between jobs created by the economy and the size of the labor force entering the market has been huge. Although finding accurate figures about the labor market is challenging, some estimates show that the gap could range between two to three million.
For a country with 74% of the population being young and 40% being working age, such a lackluster performance mean huge unemployment, sizable underemployment, push to informal sector and massive migration. From Libya to Lampedusa, the corpse of young Ethiopians who died on their way to run out of this grim economic reality remains symptomatic.
So much as local resource mobilization stood low, the growth was credit-driven. Unabated thirst of the leadership for external loan increased the debt stock of the country through the roof, with latest figures standing at 47 billion dollars (60% of GDP), sending the country down the hills of a debt distress risk. Poorly performing export, with considerable disincentive from contraband trade, mean the trade balance was in the reds and widening.
Illicit financial outflow and ripe parallel market, complemented with overvalued currency, brought about a decline in the nation foreign exchange reserve, with unconfirmed latest figures showing that it reached to a historic low of 2 weeks of import. Expanding monetary space, with rising Basemoney (B2), and wasteful fiscal space added to the burden of the economy at the macro level, leading to figuratively growing but functionally lumbering macroeconomy.
Furthering the economic fissures are the latent and measurable inequalities in the economy. Latently, the economy remained commandeered by patronage networks (see here for example). Expanding from the capital, Addis Abeba, to the rural areas, these networks control each and every edge of the economy to an extent that vertical mobility has become impossible without them. As their flagellates extend from the public to private sectors, their power to maneuver has been growing over time.
Unfortunately, politics has fallen victim to them. And the ruling party stood a key player in the creation and development of these networks. Especially after 2004, in the lead to the historic competitive election held a year after, membership in the ruling party became the sole means to personal enrichment. Legislative and executive power, which were meant to serve the purpose of improving the livelihood of the people, become instruments of inculcating patronage networks, misappropriation of public funds, misuse of productive resources and enrichment
As a result, it became common to see overnight billionaires and officials-turned-businessmen. This happened while the double digit inflation, which remained in the horizon for the past 10 years, constantly eats the purchasing power of fixed-incomers and people working in seasonal jobs, not to mention the large smallholder farming community dependent on the rains.
Measurably, the Gini coefficient (at 0.34), low by any standard, has seen slight rise over the past years (from 0.3 in 2000). Urban areas proved to host higher inequalities than rural areas, as they witnessed increased economic monetization. But even that does not reflect the actual inequality existent in the economy. A growing section of nouveau riche seen driving luxury cars on the publicly-funded roads of urban centers, including regional cities, while the majority is suffering from depreciating income, evidences how the data is unrepresentative.
Interventions meant to create jobs and economic opportunities for the youth, such as Universal Rural Roads Access Program (URRAP), SME Development and Public Housing Schemes become hosts of favoritism, corruption and misuse of public funds. Problematic design, inflexible implementation, poor management and entanglement with partisan politics drove what could have been valuable job creation schemes into schemes of incentivizing and maintaining party loyalists. Lack of effective accountability system means that the funds spent on them got lost in thin air.
Regional inequalities in infrastructure provision, poor performance of flagship projects (such as hospitals), unlawful displacement of farmers, lack of rule of law, absence of civil society forums and lack of vibrant media have all contributed to the boiling of public disappointment and hence the unrest. Looking at the situation, EPRDF has little choice than either shaping up or shipping out. After months of internal bickering, the shaping up camp, led by OPDO and ANDM, got the upper hand, appointing Abiy as chairman and prime minister.
Ever since, the ruling party is seen trying to morph into its new equilibrium, with cabinet reshuffle, reconciliation meetings, release of political prisoners and activists, retirement of key political and military figures, appointment of new people, promulgation of new laws and so on. One of the decisions, which surprised both the expert circle and the public, came amid the latest executive committee meeting of the ruling party, the first since the appointment of Abiy. And this has to do with the decision to privatize key state-owned enterprises, including Ethiopian Airlines, ethio teleom, ESLSE, rail ways, power plants, industrial parks, sugar factories, hotels and other assets.
For a ruling party that has been proclaiming to keep these key assets under firm government grip, the decision was an economic earthquake. It shocked the whole market that it became part of the global trading headlines of the day. Multiple questions have been asked, including where is this coming from? What are the pros and cons of the decision? Can it solve the problem?
Attempting to answer all the questions through an article would be a futile task. But addressing the core of it is important as it will instigate public discussion.
Where is it coming from?
It has been a while since the ruling elite were advised to shift the gear of the growth from the public sector to the private sector. Pressure intensified since the institution of GTP I as the limits of state-driven growth become glaringly visible. With wide-ranging inefficiency and corruption, key state-driven projects begun to incur huge liability and failed to produce jobs. These include irrigation schemes, sugar factories, housing projects, air ports, stadiums and so on. It all happened while the private sector remained small, capital-constrained and legislatively burdened. Thus, it could be perceived that some sort of reform is inevitable. But little was there that the reform would be in the form of privatizing key SOEs.
More importantly, the worsening foreign exchange reserve standing of the nation was urgent. The high debt distress rating of the nation, coupled with the rather cautious stance of key lenders, including IDA, China Development Fund and China EX-IM Bank, showed that the window of comfort was closing down on the leadership. This, of course, is not to mention the ever increasing cost of repaying the existing debt stock.
It is important to note that this is not the time that global capital is in search of high-risk return frontier market opportunities. Improved global growth projection, coupled with enhanced global aggregate demand, led to increase interest rate and hence high cost of capital for developing economies. Thus, accessing foreign exchange remained a daunting task for the leadership.
To a lesser extent, one could see that by taking the path of privatizing part and whole of key SOEs, the ruling elite wants to signal to the market that it is up for change. Reading between the lines, one could take that the new leadership is announcing that the rules of the game are no more the same.
What are the pros and cons?
Privatization is just one of the many reforms that governments undertake to change the structure of their economies. Yet, it should be clear that it does not stand in its own. It often happens as part of bigger economic changes. Its pros and cons, therefore, are largely related to how it is done and whether it is done as a means to an end or an end in itself.
There are tons of stories and researches on the failure, chaos and economic crises resulting from ill-advised privatizations done in developing countries from Asia to Latin America. To mention some examples: Great Britain saw chaos after the government of Margaret Thatcher privatized telecommunications, gas, electricity and water establishments. The attempt cause increased rates and deteriorated quality, as natural monopolies got abused. Privatization led to over 80% layoff in Argentina in rail, oil and steel sectors. Bangladesh was brought to social crises following privatization between 1990 and 1993. Brazil suffered from the outcomes of its privatization attempt in 1996, with huge lay off, unemployment and homelessness. Bolivia was bought to its hills with privatization between 1995 and 2000. Guinea’s attempt of privatization in 1989 was also socially costly. The list goes on. But generally speaking, as Joseph Stieglitz, a Nobel Prize economist, noted in his bestselling book, “Globalization and Its Discontents”, most of the privatizations of the 1980s and 90s were socially costly, economically bleeding and financially unviable. And this has largely to do with the manipulative power of the multinational companies.
But history has also records of the benefits that orderly privatization could bring to economies. Examples include: privatization in Mozambique and Pakistan, for instance, led to better job security for employees and increased employment. Sir Lanka’s privatization attempt was also orderly and brought about changes in productivity, and so was Malaysia’s. But it is also well-researched that privatization brings positive change in productivity, employment and output in industries that suffered from backlogs and underinvestment.
The stories and examples mentioned above are signatures to the fact that the privatization is a double-faced reform effort. Much of its outcomes will depend on the political structure, the economic fundamentals, the regulatory framework, the vibrancy of the judicial system, the functionality of the media, the dynamism of civil society and the development of communal accountability structures.
Looking at the situation in Ethiopia, many of the essential factors are either non-existent or loyalist. It is impossible to conduct trustworthy wholesale privatization that could justify the decision. For starters, the political superstructure and the discourse is dominated by a ruling party that disavows alternative ideas. Although change is in the making, it is not yet ripe enough to maintain competitive political establishment. Hence, it is impossible to guarantee that all voices are properly represented within the political discourse.
The economic fundamentals are also so distorted that the nation’s wealth creation matrix sits on huge imbalance. It is such that the few and the connected sit at the top of the matrix, while the majority remain at the bottom. Lack of functioning secondary market means, the existing market structure does not have a means to allow those at the bottom and at the middle of the matrix have access to participate in the privatization process.
Capital is also scarce in the economy. A rather isolated and poorly developed financial sector means that access to capital market is constrained. Hence, the window of opportunity for privatized assets getting controlled by local capital is hugely constrained.
Looking at the regulatory framework in the market, one could see that it is full of loopholes. From the trade laws to the consumer protection laws of the nation, the regulatory regime is filled with wide subjectivities, opaqueness and omissions. Thus, it takes no sophisticated knowledge of business operation to manipulate the system.
Under such a scenario, it would be difficult to make sure that privatization serves the public. To add onto this, we have a judicial system that is forced to serve as guardians of the ruling party, surrendering its essential independence to political loyalty. Complemented with declining professionalism and poor capacity to understand complex business undertakings, the judicial system stands incapable of ensuring public safety by way of infusing the rule of law in the system.
If there is one thing emblematic of the 27 years of leadership of EPRDF, it is its rivalry with the media and the civil society. Things got worse since 2005, with anti-terrorism and civil society laws serving the purpose of silencing dissent. Legislative limits to financing local civil society also hampered communal accountability systems, except those loyalists to the ruling party.
From all this, it could be easily seen that essential factors to conduct transparent, accountable and wholesale privatization of key SOEs does not exist in today’s Ethiopia.
Can it solve the problem?
Looking at the challenges of the economy, it is obvious even for a layman, that the problems are taller, wider and deep-rooted than what can be solved through privatization. Neither is privatization a priority for the economy.
For an economy getting challenged by unabated lust of the state to accumulate political favoritism through unstructured public investment, then, the easy target is limiting that lust. In economic terms, this entails creating a viable public investment framework where only priority projects got implemented and all others are scheduled according to set of standard criteria tailored to the economic realities. Cognizant of the fact that the economy is distorted by an unwise amalgamation of politics and economics, the priority should have been to draw the border line boldly.
Privatization does also little to solve the distortions in the market. Essentially, the distortions are results of cumbersome entry barriers, uneven competitive space, poor skills and knowledge base, undeveloped market infrastructure, lack of market integration, restrained access to resources (including finance), cumbersome bureaucracy and unwise regulation. None of these could be solved through wholesale privatization of SOEs.
If one furthers the analytical framework of the economy to include externalities and linkages, then, there is only a marginal value in privatization. And that relates to the capital to come from it and the knowledge base that would come with it. But even then, the reach is limited to impact an agriculture-based economy of the nation
It, therefore, is clear that the ruling elite is in this for the short-term benefits (cash and foreign exchange). But even that comes at a cost. And the cost is earnings to be lost from the years ahead and lost control over essential edges of the economy.
It should be understood that selling the minority stake of SOEs, before undertaking market reforms (including infusing competition in key sectors such as airlines, shipping and telecommunications), is a recipe for building oligarchy – an oligarchy where opportunistic capitalists and their cronies would be the billionaires, while the dealmakers will be the second tier millionaires. Such an action would only enrich those at the top, who, as mentioned above, got there improperly, while the majority would be suffering from the same inefficiencies inflicted by protective regulations and distorted markets.
Thus, if the new administration, particularly Prime Minister Abiy, is to stand for “inclusive” and “sustainable” growth, then, they ought to embark on market reforms that could avoid the long-overdue distortions, which make the connected few richer and the majority poorer. They have to stand for prudent public investment, lean bureaucracy, transparent rules and accountable government. Inclusive and sustainable growth could only come by making the markets works for the poor, not by short selling SOEs.
And the bottom line is that it is impossible for EPRDF to privatize out of the economic conundrum of the time. The only way out is comprehensive market reform. And that should be where PM Abiy’s priorities should be. Else, both he and his compatriots will be missing the golden opportunity of reform, to eventually vanish into the shadows of a rather resourceful and manipulative status quo.
ED’s Note: Getachew T. Alemu is an investment and development consultant with over 13 years of experience in government and the private sector. He can be reached at firstname.lastname@example.org.