Celebrating 50 Years of
African Independence: A Presentation made for the First Round Table Discussion
held at the Embassy of Ethiopia in Washington D.C. August 21, 2010
Michael Mered PhD
Associate Economic
Advisor
Prime Minister’s
Office
FDRE
I would like to
congratulate all the African countries who gained their independence 50 years
ago this year from colonial rule.
A decade ago, in
Africa economic prospects were not very encouraging, corruption is rampant,
infrastructure is poor, and there was very little social transformation in
terms of health, education, and the transfer of skills ( the discussion here
largely concerns the 48 sub-Saharan Africa countries).
However, in the
recent 5 years there have been encouraging signs in Africa. Many countries have
registered economic growth rates exceeding 5 percent; there have been some
serious attempts to improve governance; and democratic elections have been held
in a number of countries.
What happened in the
last 5 years in Africa from an
Economic Perspective ?
Well, first, the
surge in world commodity prices – oil, copper, gold, and foodstuffs has
benefited African economies. African exports have increased significantly and
revenues have helped finance the development gap. Second, thanks to the
market based policies instituted in the 1980s, African countries have also
become adept at managing macroeconomic fundamentals – prudent monetary and
fiscal policies and exchange rate policies helped control inflation while
encouraging economic growth in many economies. We have also seen some
improvements in social indicators – for example, declining HIV prevalence rates
and improved mortality rates. Third, the practice of holding democratic
elections and the decline in perceived corruption seems to have improved the
investment climate. Stock and bond markets have improved and we have seen
increased flows of foreign direct investment into Africa.
However, notwithstanding
these important recent strides in the macro economy and the political landscape,
our continent continues to face difficult challenges.
·
At an average per capita income of less than $1,000 for some 800 million
people, Africa remains the poorest region in the world. Half of the African
population lives on less than a dollar a day.
·
For purposes of comparison, Korea’s real
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Over past decades, social indicators such as life expectancy and adult
literacy have not improved much. Only very few countries in Africa are expected
to reach the United Nations Millennium Development Goals by 2015.
·
As the well known book by the Zambian economist, Dambisa
Moyo, “Dead Aid”, puts it -- over the 50 years of
independence sub-Sahara Africa has received over a trillion dollars from the
West with very little to show for it !
·
What Africa needs is good governance first and foremost. It needs
governments with a vision for their countries and a specific development agenda
not necessarily copied from the multilateral institutions like the World Bank
and the IMF.
·
It is in this context that I would like to present Ethiopia’s
development agenda as prescribed by our government – a democratically elected
government. While my government is a strong believer in the market mechanism as
the way forward for economic growth and poverty alleviation, we believe
government, as the elected representative of the people, should be able to
guide the country’s growth trajectory by correcting imperfections in the
market, by providing the necessary public goods such as education, health,
power, telecommunications, and transport infrastructures, and by ensuring
sustainable but also equitable economic growth.
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By way of introduction ---
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Ethiopia has a population of around 80 million, the second most populous
state on the continent and covers about 1.1 million square kilometers – about
twice the size of the state of Texas.
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Ethiopia is the only country in Africa that has never been actually
colonized. Ethiopian patriots soundly defeated the Italians at the Battle of
Adwa in 1896. Mussolini’s armies came back to invade Ethiopia 40 years later,
however, the Italian occupation was short lived between 1936 and 1941 when the
Italians were again defeated with the help of the British.
·
From an economic perspective, however, Ethiopia remained a feudal
economy for much of the 20th century until the establishment of a
socialist state in 1974 -- by a military junta called the Derg.
In 1991, the EPRDF a coalition of rebels toppled the socialist state and
established a multi-party democracy and a federal state.
·
During the period until 1991, economic development was largely on hold
and the only statistics which was growing was the population. Productive forces
were held down by a feudal land tenure system and later by the inefficiencies
of central planning resulting in widespread drought and declining
productivity.
·
With the end of totalitarian rule and the establishment of a
transitional government in 1991, government was faced with the Herculean task
of economic reform and guiding the economy from a centrally planned one to an
economy based on market forces. At the same time, a social transformation of
the nation was in process as the federal system was established.
·
Much of the 1990s was a period of lifting domestic price controls,
privatizing government enterprises, liberalizing trade and investment, and, at
the same time, aiming for equitable and sustained economic growth with limited
inflation.
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The government’s development policies were based on a specific strategy
called Agriculture led Industrialization. The primary focus of this
strategy was to develop agriculture as the backbone of Ethiopian development.
By raising productivity and incomes in the rural areas (where over 85 percent
of the population lives and works), it was expected that a strong market for
industry could be developed. In addition, Ethiopia would have the comparative
advantage to develop agro-based industries.
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From 1991 on Ethiopia invested significant resources in both education
and health. The groundwork was also laid for the building of roads, power, and
telecommunication facilities.
·
Let me now point out to some statistics that has been verified by
both the world bank and the IMF comparing the earlier years around 1991
with the more recent years:
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In 1995, 61 percent of the population was below the poverty line meaning
people survived on $1.25 or less a day – this figure has now declined to 39
percent by 2007 and has continued to decline.
·
Life expectancy is up from 47 to 58 years and the infant mortality rate
has been cut by more than half from 210 per 1000 births to 77 per 1000 births.
Access to safe water has tripled and 60 percent of the population have
benefited.
·
In the area of education, primary school completion has reached 76
percent. There are now 22 institutions of higher learning compared to only 2 in
1998. Student enrollment in higher education has reached 250,000 compared to
only 45,000 a decade ago.
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Power generation has increased from a tiny 380MW to around 2,000MW
through the use of hydro power generation.
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Road building has also registered amazing results in Ethiopia in the
past two decades. Road density over a period of 15 years has more than doubled
from 21km to 45 km per 1000 square kilometers. The government, together with
the World Bank and other donors, has invested billions of dollars for road
building; over 50,000 miles of roads both rural and urban have already been
constructed.
·
Similarly, in the area of governance, much work has already been done. A
civil service college has been established and has graduated hundreds of
competent government bureaucrats some of whom are actually diplomats here in
the embassy. The judiciary has been overhauled and its independence guaranteed
by the Constitution. The restructuring of the bureaucracy with the aim of
capacity building and the streamlining of work processes is well underway. BPR – business process re-engineering has been
implemented in many government offices and enterprises. Nonetheless, much more
remains to be done in this area.
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In 2001, in the World Bank’s “Investment Climate Assessment “ a range of
obstacles were reported – poor infrastructure, regulatory barriers,
administrative obstacles, and difficulties in accessing land and financing. By
2007 most of these issues have been resolved as noted by the second WB ICA.
Nonetheless, private investment remains at low levels in Ethiopia at around 8
percent of GDP.
·
Trade; on the other hand, as a percent of
·
While problems of drought continue to plague the Ethiopian economy, one
must also take note that the population has more than doubled during the past
two decades. Nonetheless, gains in agricultural productivity have limited the
impact of the droughts on the population, and less people are suffering from
drought-related food shortages despite the significant increase in population.
·
Similarly, with high economic growth, the risk of an overheating economy
is inevitable. As our economy grew by double digits, world oil and food prices
suddenly surged in 2008 and 2009, and the Ethiopian economy was subjected to
external shocks resulting in high inflation and balance of payments problems.
Inflation exceeded 50 percent and foreign exchange reserves were dangerously depleted
to around 4 weeks of import coverage.
·
BUT, by end-2009, in a relatively short time span, controls were placed
on both fiscal and monetary policies; and, the Government was able to lower
inflation to around 7 percent and raise foreign exchange reserves to USD 2.0
billion covering 8-10 weeks of imports. Even as the world was experiencing an
unprecedented level of global recession, economic growth in Ethiopia continued
and reached 9.9 percent in 2009 -- the Government expects growth to exceed 10
percent also in 2010.
·
In the next five years by 2015, the government has committed to meet the millennium development goals
and cut poverty by half. It is also committed to doubling agricultural
production to once and for all remove the food security problem in Ethiopia.
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During this period, government also aims to increase hydro power and
other energy sources; electricity generation is projected to reach an
unprecedented 10,000 MW with the ability to export electricity to neighboring
countries. Over 2,000 km of railroad tracks are planned to be built. Road building
which has now reached practically every corner of the nation will also be
further enhanced. Airport expansions and telecommunication advances are also
planned.
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Over the coming 5 years, economic growth projections are expected to
reach an average of 11 percent every year for a baseline scenario. But in an
optimistic case scenario (assuming smooth implementation and adequate donor
financing) economic growth is expected to reach 14.9 percent every year. I
would presume actual economic growth to be somewhere in between.
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In my view, going forward, the main challenges for policy makers in
Ethiopia are as follows :
Ø Maintaining domestic
political stability and the foreign policy competence to maneuver the many
dangers that exist in that part of the world;
Ø The ability to choose
an optimal growth path which can be both sustainable and non-inflationary. This
means exemplary macroeconomic management.
Ø The ability to
pre-empt the possible adverse impact of external shocks such as oil price
increases, shortages in donor financing, and inclement weather.
Ø Ensuring private
sector growth by implementing policies encouraging investment and enabling the
creation of jobs.
Ø Resolving once and
for all the issue of hunger and drought in Ethiopia. For this to happen -- Ethiopian
farmers must benefit from irrigation schemes from the Blue Nile and other
rivers; second, we must correct the distorted policies of food aid from the US
and other donors, which tend to destabilize local markets while subsidizing US
farmers in places like Iowa and Idaho; third, we must expand the support
farmers need to produce and market their products.
Ø and, last but not
least of course,
Ø We must effectively
persuade donors including the Chinese to endorse our economic strategy and
assist in the financing effort.
·
As articulate and as powerful as Dr. Moyo’s
book is, we may yet prove her wrong in Ethiopia – with the right government
aid can be an effective development instrument.
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In this connection, I would
like to raise the issue of what makes development effective. For the
countries in Africa where institution building is still in its infancy and
markets of goods and services, financial markets, and even labor and land
markets remain undeveloped – perhaps with the exception of South Africa and to
some extent Nigeria – a strong popular government with a specific development
agenda and the commitment to implement this is simply indispensable.
·
In the past 50 years, we have seen African countries religiously
following the development strategies of the “Washington consensus” as
emphasized by the IMF and the World Bank. However, we do not have much to show
for it. Structural adjustment reforms, stabilization, and trade liberalization
are all good policies based on sound economic theory. Also there cannot be any
arguments about the efficiency of the free market mechanism as the best and
fastest conduit to deliver prosperity and economic growth. However, it is the
nuances or the “small print” that really matter.
·
For example, African countries cannot simply liberalize trade and
focus on commodity exports when developed countries are spending hundreds
of billions of dollars to subsidize their own agricultural sectors. The result
will be an elitist African society surrounded by poverty and happily importing
western consumer goods. Another example is the liberalization of the banking
sector. While it is true that countries can benefit from know how and technological transfers as foreign banks set
up shop, these banks are also likely to repatriate the surplus profits back to
the West. We would like to keep these profits in the country and expand banking
into the rural areas and use these resources for development financing. I
remember in the 1990s as an IMF fiscal economist assigned to Uganda and later
Tanzania, banks such as Standard Chartered and Lloyds would work in Kampala
financing the government deficit and providing short term export credits at
exorbitant rates – I have not seen them expanding into the rural areas as real
financial intermediaries !
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Finally, economics teaches us that markets are never perfect – information can be
scarce and collusion can exist among producers and traders. Because of
externalities the private sector cannot provide public goods such as roads and
hospitals especially in developing countries. Also markets must be regulated if
we are to avoid the undesirable effects of excessive pollution, inequity, and
other negative externalities.
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The global financial crisis followed by the worst post-war recession is a result of regulatory weakness
on the one hand and the excessive greed of financial market participants. To
this day we are suffering an unemployment rate of 9.5 percent in this country;
and, commercial banks with weak balance sheets and toxic assets remain
unwilling to lend to commercial and productive activities continuing to stifle
the US economy.
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Therefore, in Ethiopia, we are following a modified economic strategy
applicable to the developmental state. The East Asian economies from Japan to
Korea and China have achieved success following these particular policies.
Careful intervention of the State to guide the development path of an economy
is critical – in particular, where institutions are still in a rudimentary
state and markets have not yet developed.
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To conclude, Ethiopia’s transformation is both economic and social. A
nation is being re-built based on strong democratic and federal principles;
where the identity and integrity of all nationalities are respected. In time,
given the free mobility of capital and labor across the nation, I would
presume, federalism on an ethnic basis may be a thing of the past. We are
already witnessing strong economic and demographic integration between the
regional states of Ethiopia.
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The economic transformation has also begun. Over the next five years,
there will be a strong focus on developing industry and manufacturing. The
unemployed or the under employed in agriculture is expected to be absorbed by
the growing industrial and service sectors. Already, our latest