2018-02-22
The political unrest of the youthful population in Ethiopia reflects the failure of top-down development approach in generating economic transformation and entrepreneurial ability at local level. In the local space there is no manufacturing economy that absorb the surplus labor and an economic sector that can be used for technological catch up. Despite six decade long efforts of top-down development, there is still a glaring lack of entrepreneurs that drive productivity growth and innovations at local levels.
Usually states typically intervene in private transactions in a society when such transactions have the potential to benefit a few at the expense of many. In the case of Ethiopia, the reason for state intervention in the economy was different. It was not related to the need to remedy the failure of the market (not related to the idea of addressing market failure). Rather, it was related to the idea of developing the national economy.
This approach has started since the middle of the 1950s ever since the launching of The First Five-Year Plan (1955-1961). Since then the government prepared and implemented successive plans to transform agricultural and improve industrial productivity, eradicating illiteracy and diseases, and improving living standards for all Ethiopians.
Top-down programs for promoting local development through transforming communities and sub-regions continued after the 1974 revolution. In 1975, the military socialist regime nationalized private companies, banks, insurance companies and other financial institutions. In March l975, the regime nationalized rural land and granted peasants “possessing rights” to parcels of land not to exceed ten hectares per grantee. After 1991, the same approach continues. The difference is that today’s national and local development program directed by the state is extensive, faster and deeper.
Despite good intentions, the hitherto top-down approach to national and local development has failed to bring sustainable economic growth and poverty reduction. There are vast literatures assessing the performance of government policies (choice, design, implementation and outcomes). Using meta-theories, such as the concept of underdevelopment, scholars like the late Professor Eshetu Chole, have examined the nature and characteristics of the national economy during the imperial era, the Derg socialist regime, and the post-Derg period. Despite changes in regimes, Ethiopia remained “underdeveloped”, to borrow the word from the title of his book.
The macro-economic thinking, approach and policy performance of the three regimes have been assessed with a display of erudition by Professor Alemayehu Geda, in his book “Reading the Ethiopian Economy”. According to his study, the economic performance of the country, though varied across the three regimes, is “generally disappointing”. Not only there continues scarcity of goods and services, the country also got into debt as it borrowed money from international institutions, and as in the case of large-scale land acquisitions, resources are taken away from local people. The studies of Professor Eshetu and Alemayehu shows that our approach to economic development matters: top-down thinking state-led development or bottom-up approaches led by market and local actors.
Effects of top-down approach
Often top down thinking and approach is criticized for its reasoning at the aggregate level much to the neglect of micro-economic foundations (rationality of households and firms). In the case of Ethiopia this is not only true but also, as the empirical evidence show, the top down approach has stifled the size and growth of the market forces and self-reinforcing economic development process at the local level. As a result, the size of the market based private economy is the least important part of the national economy.
In Ethiopia the top-down development programs have limited effect on private sector development considering the resources invested, the number of years it has taken, and growing size of the population. If there is any top-down effect it was level effect (raising the slop slowly) and not growth effects (modifying growth path at higher rate) and that too happened during the incumbent government in the early 1990s. As a result of the government’s privatization program, liberalization, foreign investment and donor support, the size of the private sector level increased from 11Pct in the early 1991 to 17Pct in 1995 and has remained unchanged significantly since then and stood at 20Pct, currently.
From my point of view the top down perspective and the macro-economic thinking prevailing in the past six decades did not make a proper inquire into the origins of population and market economic systems running in parallel in the country. Analysis of the effects of rapid population growth and the workings of the market (study of individuals, families, firms or other small homogeneous groups as buyers and sellers) are neglected or received only lip services. Under top-down approach and macroeconomic policy models the government is assumed to have full understanding of the transformation and growth problems of the country. Such type of approach and intervention resulted mainly to the growth of the economy directed by the state. According to 3D system accounting of GDP, the size of the economy controlled by the government has increased from 22Pct in 1992 to 39Pct in 2015. The size of this type economy increased at the expense of the market and the population economies (consisting mainly individuals, households and firms).
Studies by distinguished scholars and my 3D methodology of macro aggregate empirical results shows that we have to change in the style of thought and approach to create more jobs, develop technology, increase investment, accelerate economic growth and improve the standards of living. My view is that the top down and macro-economic approaches, which underline the role of the state have a useful role to play in economic thinking and policy, only if it’s underlying microeconomics are understood. It is under this condition where there private sector reach critical mass/size and where there is unflinching local self-development process that we have the right mix of private and state cooperation as we witnessed in the developed countries. Succinctly stated, the horse has to come before the cart, not vice-versa. I advocate the approach of local and private sector development as panacea to economic problems facing the country.
For an extended version of the article please read “Self-development of Private Sector in Ethiopia”
For comments I can be reached at [email protected]
