2018-07-02

The current democratic movement that has now engulfed Ethiopia must be supported by economic reforms. Democracy and economic progress are intimately connected, that you can’t have one without the others. Democracy is the best form of government for economic progress. But if the economy is not improving the flag-bearers of democracy among the populace will make u turn. The Ethiopian youth do not “eat democracy”; at the end of democracy they need job, income, food and housing for themselves and their dependents.

What can the Ethiopian government do to solve its current economic problems and power economic growth? What are the economic policy tools? Policymakers have a number of ways to try to fix them, depending on what is wrong. In the short-term, economists advice measures related to short run macro policy (fiscal/monetary policy, helping markets work efficiently, raising/lowering interest rates, etc.). Stabilization policies such as the current debate on privatization of public enterprises are important in the short run. But stabilization policies do not make a country’s resources more productive.

The economic problems of Ethiopia are deeper and longer lasting. My view is that the government must address problem of structural changes and this involve the core issue of industrialization. Structural transformation in Ethiopia is trapped in self-reinforcing process of lower-productivity activities: high consumption, low investment, low human capital development, low labor productivity, annual population growth, and massive scarcity. Industrialization is one of the most important missions the Ethiopian Government had to pursue to improve aggregate supply side of the economy.

In practice there are different approaches on how can one best industrialize Ethiopia. At risk of simplification, I can say that there are three different approaches used to industrialize a given country. The first approach advocates free market roles in industrialization. The pro-market approach is based on neoliberal theories, which advocates the intensification and expansion of the market.  Since industrial policy is about “picking winners”, the free market-center approach claims that government is ill-placed to assess chances of commercial success more effectively than the market. Government intervention in “picking winners and saving losers” involves not only risks of misjudgment (distorting competition); it also expose the state to be captured by the interests that benefit from its intervention. Instead, the market can select industries and firms and ensure efficient allocation of resources.

The second approach emphasis the significance of state intervention in the design and implementation of industrial policy. The argument in favor of state-center approach is based on the notion of market failures, whereby a competitive market system does not yield the socially efficient outcome. Individuals’ pursuit for self-interest and firms for profit leads to results that are not efficient, often leading to a net social welfare loss. Market failures can be corrected through various government interventions.

The third theory is based on the idea of local economic transformation and growth. This place-center perspective tries to synthesis state and market approaches at local level.  The starting point of this approach is that the causes of industrial non-development lie at the regional and/or local level. Industrialization unfolds in space and produces space, and it can take place both in urban and rural areas in parallel. The context and role of different places should therefore be taken into account in industrial policy design and modeling. There is uneven spatial distribution of economic shortages, surplus labor and concentration of economic activities. State and market centered approach are blind to these spatial heterogeneity, dependency, and uneven distribution.

Of the three alternative approaches to industrialization, Ethiopia used the theoretical assumption and justification state intervention. This approach focus on a significant expansion of the role of the state in the allocation of resources among sectors and appropriate choice of efficiency techniques. But the motivation for state intervention in Ethiopia was not related to market failure (existence of well-functioning markets but with low welfare outcomes). Basically, the factor markets were missing for most of the time: exchange was stifled by subsistence households, market-making institution were less developed, property rights were not clearly defined and there was a lack of public infrastructure that make exchange feasible. Ethiopian governments intervene due to lack of or in the name of creating an enabling environment for industrialization (ensure macroeconomic stability, development friendly financial sector, providing reliable infrastructure services, building efficient administration, etc.)

State-led industrialization in Ethiopia has gone through different phases and priorities since the late 1950s. The industrial development policies can be decomposed into four periods over the past six decades. The first is the period between 1961-1974, when industrial policy focused on the development of light consumer goods catering to the domestic market. The second period belonged to the military socialist government, 1974-1991. The military government nationalized most of the medium and large manufacturing enterprises and declared ‘a socialist economic policy’. Industrial activities were reserved exclusively for the state, which own and operate medium- and large-scale manufacturing activities. There was a systematic restriction on private sector involvement in small-scale manufacturing activities.

The third phase of industrialization belonged to the early period of government change, liberalization, reforming and recovery of the economy by EPRDF. In 1994 the government endorsed agriculture-led industrialization for the purpose of transforming the smallholder agriculture and use their productivity and output as base for industrialization. The policy of agriculture-led industrialization seeks to leverage the country’s existing endowment structure.

The fourth phase of industrialization began when the government development strategy started to show preference to export-led labor-intensive industrialization. The government aimed to add value to the raw materials it exports and planned manufacturing to take the lead in the economy. The focus is mainly on sectoral or targeted industrial policy, designed to improve the performance of particular industries. Among the favored sub-sectors are textile and garment; flower industry; meat and leather products; textile, and agro-processing industries (e.g. sugar and sugar related industries).

According to the World Bank data, the manufacturing sector in Ethiopia is nascent despite sixty years of state intervention. Industry value added is on the average only about 5 percent of GDP in Ethiopia compared to more than 20 percent in Sub Saharan African countries. Industry is not a source of dynamism for the economy and has weak inter-sectoral and intra-sectoral linkages. In a country like Ethiopia, where employment generation is one of the key policy issues, manufacturing sector has a multiplier effect of job creation. However, on the employment side, the total employment growth in Ethiopia is largely affected by the agriculture sector not by the manufacturing sector. Sixty years of experience show that state-led industrialization has failed in Ethiopia. We still find manufacturing at the same level for the past sixty years despite avowed policy declaration, barrage of improvement suggestion and extensive investment interventions.

Past performance experience and 3D economic taxonomy approach convinced me to stop believing in the positive role of the state in promoting industrialization. There is path dependency, namely growth of the economy controlled by the state for the state. Industrialization is used as a means for growth of state economy. Industrial policy recommendation and improvement suggestion matters; but it doesn’t if it is more of the same actor (a predator state where you have a systemic political and bureaucratic corruption).

Industrialization is the engine for job creation, but there is a question of how best to industrialize the country. From where should one start (initial step and condition) to industrialize the country and why there. Which party should be responsible for choice of policy objectives and selection of reform bundles: economic policy makers (central planners and managers), economists, private sector and/or local governments? Who should allocate resources and make decisions on which activities or sectors be accorded priority? Can youth participation change the design and combination of the various instruments (institutional support systems, trade, finance and price instruments) and strategies (vertical, horizontal and functional interventions) and why? We have to go beyond more of the same approach in order to create more and better jobs for the Ethiopian youth. The sooner we can come up with an alternative industrialization approach, the better things will be for the youth. Democracy alone is not enough. The Ethiopian youth don’t eat democracy.