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Ethiopia: Engaging the Private Sector in Development

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02/25/11

  11:32:03 pm, by admin, 1185 words  
Categories: Ethiopia

Ethiopia: Engaging the Private Sector in Development

Ethiopia: Engaging the Private Sector in Development

By Berihu Assefa

nazret.com -
The long-term policy challenge of the Ethiopian government is to help the now weak private sector to be the engine of the economy. Capital formation (or new investment), the main source of growth, is largely and sustainably supplied by the private sector. Then, the big question is: how can policy makers help the private sector graduate to vibrancy and take the lead in the economy? In this article, I would like to argue that the best way to help the private sector flourish is to institutionalize Public-Private Dialogue (hereafter PPD), a forum for continuous consultation between the government and businesses, to solve business obstacles on a continuous basis. Attempt is made to explain the basic economic rationales for PPD in light of the developmental state model Ethiopia adheres to, and how it addresses the “long-term” policy challenge of the Ethiopian economy.

The Ethiopian industrial policy, which was drafted in 2002, clearly aims at making the private sector the backbone of the economy. However, a forum (or institution) that brings both the government and business owners to a constructive dialogue in an effort to achieve the goal of creating vibrant businesses has not been institutionalized until very recently. Due to the absence of such institutionalized joint-forum that properly addresses their business obstacles (related to loans, infrastructure, property rights, tax and land policies and regulations); we regularly see the business community demanding a direct talk with the PM himself. As a result, PM Meles held some rounds of discussions with them recently. But how often can the PM attend all their problems on a continuous basis? From institutional and practical point of view, this isn’t totally feasible.

It is only in the beginning of 2011 that the government and the representative of the business community signed a memorandum of understanding to officially start the joint-consultative forum right away. This is highly encouraging but it isn’t an end in and of itself. The government and the businesses should be quite clear that such joint discourses are mutually beneficial.

There are at least 3 solid rationales for why institutionalizing PPD is so important. First, I argue that PPD serves as a crucial mechanism to maintain a proper balance between the role of the state and the market. One of the commonly asked questions about state intervention is how the government cures ills of the market without compromising the position and viability of the private sector. Their territories (roles) can best be demarcated through joint-consultation. The discussions in the PPD offer an important opportunity to both the government and businesses. On the one hand, businesses can access information about investment opportunities and incentives and can discuss obstacles to their business with the government on timely basis at lower transaction cost. On the other hand, the government elicits information from businesses that helps it commit (or direct) its limited resources efficiently (or with minimal government failure) on productive economic activities. Without PPD, the government is likely to make more mistakes than more rights, in which case successes may not more than pay failures. In the language of economics, PPD may be viewed as an equilibrating factor that determines the proper (if not optimal) ‘state-market’ mix. If the state has to assume an active role in the development process, it has to get its actions right most of the times; and definitely the PPD helps to do that.

Second, PPD also plays an important role in matching skills; i.e. it offers a crucial opportunity for the government to know what industrial skills are demanded by the industrialists, and accordingly produce these skills in universities, colleges and TVETs. In other words, the PPD helps the industry-academia linkage to work well, which will help universities and TVETs to produce what is demanded by the industrial sector.

Third, the interaction between businesses and government for mutual benefits requires continuity and regularity. Government information requirement and business requests and problems related to loans, services, infrastructures, tax and land vary with time. This requires continuous engagement – hence, PPD.

I visited some selected Korean Ministries and Public Think-Tanks in November 2010 to study the methodology of policy making in the country since the 1960s. Before the miracle happened on the Han River in the last 50 years, Korea then looked more like contemporary Ethiopia. One of the questions I asked to the officials of the Ministry of Knowledge Economy (MKE), counterpart of the Ministry of Industry (MOI) in Ethiopia, is that how they communicate with the private sector. They explained to me that there are three direct channels businesses can discuss with the government. First, government holds regular talks with associations representing businesses. Second, the government has a separate window that helps it to listen to and analyze individual businesses’ diverse requests and problems case by case. Third, there is wider forum that consists of government officials, businesses, researchers and academia that discusses when the government enacts new laws, regulations and policies.

As I argued above, done appropriately and committed, PPD will definitely create business friendly environment by aggressively tackling the business obstacles. Similar to the Korean case mentioned above, the government needs to have a separate window to address individual business’s diverse requests on a case by case basis.

Ethiopian government officials show Keen interest in learning the East Asian economic model. Particularly, the experience of Korea is much chanted in Ethiopia. The East Asian model is well established as an alternative to the neoliberal model of development. When developing countries emulate this model, much emphasis is given only to the degree of customization needed in order to fit the local conditions. Yes, customization is important; but there is another subtle concern which is equally important: complementarity.

Many of the policy tools of a certain model are complementary to one another; and hence would bring better results when applied together. Therefore, all the good experiences need to be adapted as a cluster. For example, one of the prominent policy tools learned from East Asia is directing credit to productive industries by the government. To do that, the government needs PPD and lower interest rate policy. In Asia, the Iron Triangle, a profound relationship between government, business and banking, led to the success of the directed credit policy. At the heart of the Iron Triangle is the PPD.

In conclusion, yes, institutionalizing the PPD should be among the priorities, but at the same time allotting a separate window (may be in the MOI) for a case by case treatment of business requests will make Ethiopia’s effort to engage the private sector in development robust and complete. Especially, the fact that Ethiopia adheres to the ‘developmental state model’ and the fact that the current industrial policy that expanded from supporting only exports to adding import substitutes to the existing policy menu makes the PPD a priority. Only then will the private sector wake up and assume the engine of the Ethiopian economy; and the long-term policy challenge of the Ethiopian economy would be adequately addressed.

Berihu Assefa is a PhD candidate in Development Economics in GRIPS, Tokyo and a contributor to nazret.com

28 comments

Comment from: Sodo [Visitor]
Sodo

Everything should be privatized. Start with the media.

02/26/11 @ 00:15
Comment from: Thank You [Visitor]
Thank You

Nazretoch,
Thank You for posting such a magnificent & refreshing read. Shame on those who are bombarding us with their nonsense Arab type revolutionary chaos. We are sick and tired of those mad dogs of DIASPORAS who are salivating to shed blood of innocent Ethiopians. Say NO to the educated illiterates of the Diasporas. Not on our blood. Not on our dead body!

Dr. Berihu Assefa,
Thank You! Thank You! Thank You sir! The government is keen to talk and discuses in reducing poverty. Time declare revolution on poverty & a revolution against the chaotic Diasporas. They have leave Ethiopian people alone.

The Diaspora activities lost & blew up their chance in 2005. We do not have time to deal with run away mad dogs anymore.

Peace, love and development for Ethiopia!

02/26/11 @ 00:34
Comment from: Yoni [Visitor]
Yoni

Nazret

This is like adding nutritious greens to your usual beefed up menus.

Hhhmmmmm yami.


02/26/11 @ 01:09
Comment from: Ethiopia [Visitor]
Ethiopia

It is nice to read this kind of articles once in while.I bet the usual cry babies Diasporas won’t even read it once they see the title.they allergic with the word development.

02/26/11 @ 03:42
Comment from: Werner2010 [Visitor]
Werner2010

Thank you for the informative piece.

02/26/11 @ 03:45
Comment from: Imperial Body Guard [Visitor]
Imperial Body Guard

The so-called PM and government are illegitimate in Ethiopia at present, they are not interested in the development to benefit all Ethiopians, but are concerned more with their grip on power and personal gain. Anyone investing with the neo-colonial regime is wasting their time and money for soon their divide and rule policies will end up in the scrap heap. I and I will invest in farming on in rural areas with a community spirit through co-operative enterprise teaching the people their land rights and human rights which are guaranteed through the Constitutional Monarchy which will stand the test of time regardless of what alien puppets may desire.
Self-sufficiency for Ethiopia must be the common goal for all agricultural produce alongside proper land administration respecting the declaration made by the Emperor,"For those of you who possess the land and labour but lack capital, We have made credit available at low interest. For those of you who have the necessary capital but do not possess land to work on, We have, in accordance with Our proclamation which entitled every Ethiopian to ownership of land, established offices in every province through which you may be able to acquire land. Those who have neither land nor money will be granted land and a financial loan at low interest. For those of you who possess land, who have financial resources and manpower, We have made experts available to furnish you with the necessary guidance and advice in your undertakings.” Selected Speeches of His Imperial Majesty Haile Selassie I, page 486
“Ethiopia cannot, as some would suggest, look to industry for these funds. Without agricultural expansion, industrial growth is impossible. Great strides, it is true, have been made in introducing industries into Ethiopia in recent years. But in any less-developed agrarian country, possessing only limited possibilities for selling the products of its factories in the world export markets, industry can grow only if there exists an increasingly prosperous rural consumer population. Industrialisation is not an alternative to the development of agriculture; rather, the development of agriculture is the essential pre-condition to the growth of industry.
The fundamental obstacle to the realisation of the full measure of Ethiopia’s agricultural potential has been, simply stated lack of security in the land. The fruits of the farmer’s labour must be enjoyed by him whose toil has produced the crop.” Selected speeches of HIM Negus Haile Selassie I, pages 492-3
“Those personalities who believe in freeing a country by secession are selfish and prey to outsiders. We will not accept their motives.” Selected Speeches of HIM Negus Haile Selassie I, page 426
Long Live the Constitutional Monarchy!
Long live the Kebra Negast!
Fire burn down the alien imposed federation of the witchcraft star of secession
Rise with the Lion of Judah!
Gasha for Ethiopians!
Long live Independent Ethiopia!

02/26/11 @ 05:11
Comment from: Andinet [Visitor]
Andinet

We need more reasonable discussions such as this. We don’t all have to agree all the time. But we should always be reasonable, offer well-thought out opinions and respect others. Thanks Ato Assefa.

02/26/11 @ 05:15
Comment from: Andinet [Visitor]
Andinet

There is one other thing I think we should discuss. The author has noted that Korea about 50-60 years ago looked like modern Ethiopia does. The question is how much democracy did they actually have and what role does democracy have in building economic institutions?

02/26/11 @ 05:17
Comment from: ABEBE [Visitor]
ABEBE

UNLESS YOU DISMANTLE THE SUFFOCATING BEAUROCRACY AND LACK OF ACCOUNTABILITY, NO FOREIGN INVESTOR IN HIS/HER RIGHT MIND WILL WASTE INFINATE TIME AND MONEY TRYING TO GET A SINGLE PIECE OF PAPER STAMPED BY AUTHORITIES.

02/26/11 @ 05:37
Comment from: addiszemen [Member]  

For the dooms day wishers diaspora loosers, this kind of constractive article is unacceptable and they are allergic to it. We can see how they distanced themselves and stayed away from commenting here. If it was some thing negative about Ethiopia, hundreds of them would have jumped on the band wagon by now. Wow!! Is this obsesssion of negativety hereditary deficeincy, or a brain malfunctioning disease?

02/26/11 @ 06:40
Comment from: Bobtnur [Visitor]
Bobtnur

Great Article!!!
ya, i need to see civilized and developed country. Really, it is brightful plan. Thanks EPRDF.
Note that: Not all diasphoras are sick to see ethiopia’s development.

peace and wealth to all ethiopians throughout the Glob.

02/26/11 @ 07:54
Comment from: Awetash [Visitor]
Awetash

WOYANE WILL ROB EVERY PRIVATELY OWNED PROPERTY in Ethiopia . WHICH ETHIOPIAN IN THE RIGHT MIND WILL INVEST IN ETHIOPIA WHILE WOYANE IS IN POWER. INVESTING IN ETHIOPIA is the same as sending money to Azeb Mesfin’s private bank account. SOONER OR Later Azeb Mesfin wife of the prime minster will demand and as we all know she gets whatever she demands , Let the famous athlete Haile Gebreselassie’s experience be a lesson to all . Donot thrust this invest in Ethiopia propoganda.

02/26/11 @ 08:24
Comment from: Voiceout [Visitor]
Voiceout

Good to see an article different than the recent articles that mostly focused on revolution. This creates a balance in the reports that Nazret publishes in its pages.

02/26/11 @ 10:38
Comment from: Brgedeow [Visitor]  
Brgedeow

To Nazert.com and to the article writer: I am very pleased has enjoyed reading this. Hopefully such this articles will give nazert. com website a dignity. Articles from people who knows the truth on the ground, who enlightens the heart and mind of readers is highly appreciable. Such people are those who have healthy mindset, the do also loves their country the people of Ethiopia. Thank you very much Berihu Assefa for your sound article and contribution to the Nazert website, which is mostly flooded with negative article against the country development and the well being of the people of Ethiopia. Such articles will bring more people to visit the nazert website and will motivate other people to write such healthy and full of realities and content articles. I my self also promise you to write articles with substantial realities in the country without any sympathy or antipathy against any party or group of people, neither against or sympathizing the government.

02/26/11 @ 11:05
Comment from: Ethiopiawi [Visitor]
Ethiopiawi

What is wrong with Nazret? Usually if it is not a slam on Ethiopia and the government they won’t post anything positive. Nazret and the rest of the diaspora so called “media” out lets are nothing but a platform to propgrate hate and mistrust amongst Ethiopians. They don’t have anything positive and will not have anything positives to say about Ethiopia. This is just a slip up of bandwidth. We Ethiopians we will not trust you!!!

02/26/11 @ 13:52
Comment from: hagos [Visitor]
hagos

it has, all, been said years ago ,but the woyane turned deaf ears and never shown the slightest interest in allowing the private sector to engage in the bussiness because of woyanes greediness and insatiated desire to grab the entire Ethiopian resources alone. It is a waste of time ,paper and energy to scribble about this and similar issues .His time is over.Now woyane is pissing on his pants because people’s uprising is in the making in Ethiopia heralding the down fall of this mafiosos minority Melese-Azeb-Berket
regime.No amount of Agazis will save you .

02/26/11 @ 15:16
Comment from: Relatively Sane [Visitor]
Relatively Sane

It is my hope that Nazret will continue to post more well-intended, optimistic articles focused on development; at least for the sake of resembling a balanced and unbiased reporting agency.

As for naysayers, they will continue to doubt progress and the willful nature of the Ethiopian people and try to hold progressive forums hostage, we cannot continue to allow them to do that. I promised myself I will challenge every naysayer with factual and academic data– two things they have not been accustomed two.

Thank you Mr. Assefa

02/26/11 @ 16:05
Comment from: Jacob [Visitor]
Jacob

Dear writer, you shouldn’t have sent this presumably useful article to this site where racism, chauvinism, narrow nationalism, illiteracy, narrow mindedness prevail. You should have sent it to other more serious and balanced sites so that people who do not come to Nazret.com to avoid seeing annoying articles could be able to read it.I am sure that your article will bring a tangible knowledge to some economists.

02/26/11 @ 16:24
Comment from: Monde [Visitor]
Monde

The author has raised some important points regarding the need to initiate and maintain a dynamic PPD between businesses and government authorities. While such argument sounds appealing on the surface, it, however, ignores a number of relevant issues that are critical for private sector development. For instance, the writer assumes the PM to be open-minded; capable and willing to accept criticisms and ready to change, which is nothing more than a wishful thinking. While Meles Zenawi might have conducted a few discussions with business representatives, the process is replete with the usual rant, intimidation and “will cut hands” type of arrogant cheap talk, which instills more fear and insecurity than confidence among the business community.

The most blatant and self-serving aspect of the article is that it does not say a word about the numerous party controlled and operated businesses which have been the major impediment to private sector development in Ethiopia. These party run businesses disguised as private companies have spread their tentacles in each and every sector of the Ethiopian economy, from exports and imports to banking and insurance, from construction and agribusiness to wholesale and trans-regional transportation. They export coffee, sesame, incense, beef and import key capital goods for domestic production. They get loans from Ethiopian commercial and development banks without offering collateral and never payback either interest or original loans. In fact the greatest proportion of Non-Performing Loans accrued to government banks in Ethiopia is due to massive default records of these ethnically-branded mafia business conglomerates. It is simply a joke to imply that a dynamic “PPD” will entail greater private sector participation when the economic playing field has been overwhelmingly infested and congested by mafia-style entities run by the blessing of the ethnic minority junta (aka TPLF).

The bottom line: there is no room for private sector development in present day Ethiopia. The solution is not PPD but FRWTD (First Remove Woyane, Then Dialogue).

02/26/11 @ 17:01
Comment from: efrem [Visitor]
efrem

Just shut up and read what in the articeland analize what is in it. Stop accusing the Diaspora. do you know offically 14 % of the population is fed and looked after by the money sent to Ethiopia by the Diaspora. The diaspora are the back bone of the Ethiopian Economy..stop accusing us. We are Ethiopians too. The diffrence between you and me is location. The hate mongring is witin and out of Ethiopia. From what I can see from some of you have an addiction for an insult and you are asking for it.

02/26/11 @ 18:15
Comment from: Sam [Visitor]
Sam

Berihu the private sector investors are cautious by nature. They have to be. They want a law they trust. They want a government which is predictable. EPDRF is not. Today EPDRF is in bed with the West. Come tommorow if some criticism about human rights in Ethiopia is coming from the West suddenly EPDRF begins worshipping China. One cannot invest hard earned capital in Ethiopia because the government changes political color more than a chamelon changes its skin color. Why the Ethiopian government lacks consistency? Because always they see the party’s interest first and the country’s interest second. This fact might not be lost to many people with capital. Let me be blunt, Berihu. In a country where the rule of law is not working, asking investors to trust the Ethiopian government might not yield result. Many Ethiopians, especially here in the diaspora, believe unless the country becomes democratic the business community would shy away from engaging in business activity. I really do not agree with that assumption. There are so many countries which are not democratic, but investors have nothing to worry about. Those countries might have been ruled by dictators, but still they leave the private sector alone. They are tiger only when their legitimacy to power is questioned. EPDRF is a political entity as well as a business entity. If one has paid attention for the last twenty plus years, EPDRF’s desire being everything might not be a suprise . In order for private business to flourish in Ethiopia, there should be a multi-party system. It is not in name only. The different partys should have more or less equal chance to win based on their vision. Not based on how they are able to divide the nation inorder to rule. No matter how many persuasions were tried to lure private investors in Ethiopia, they still are unwilling to part with their capital. I do not blame them.

02/26/11 @ 18:26
Comment from: Bigg Dee [Visitor]
Bigg Dee

Just positive vibe is better than all the crap that’s around this days.

02/26/11 @ 18:50
Comment from: Edget [Visitor]
Edget

we have to find our own nich for development, while it doesn’t hurt to look at what took place else where, we have to do it in our way using our own talent and unique ways. No two countries are the alike. South Korea was heavily export driven and this was one way that the country made a huge turn. We have a huge disparity in Ethiopia, few are too wealth while majority can’t food to eat. This is a major issue that needs attention etc….

02/26/11 @ 19:35
Comment from: addiszemen [Member]  

Edget,..

You are right we cannot duplicate other countries success to import as it is. Ofcourse Ethiopia and S.Korea are diffrent countries. S.Korea has gone in a big war just because of ideology diffrences more than fifty years ago, then after that they had a certain difficulties to feed and adminster themselves. But thanks to America and the rest of western countries, they managed to stand on their own feet. Mind you they don’t have to worry about ethnic conflicts or religious diffrences. All they do is start from scratch. Then the rest is history. Slowly but surely, after 50 years of stable and peacfull journey they are where they are now.
Ethiopia is complitelly a diffrent case. One thing which makes us common is our goal to become stable and developed nation elimnating poverty and hinderance.
For us Ethiopians it is a long way. Our enemys, alshebab from the east, shabia from the north, olf from the south and so on, are wishing to devour us if they get any chance. Not to mention the inside and outside opposition groups with their crocodile tears and foul cry, with their only hunger of power and trying to quench their thirst with the price of innocent citizens’ lives. Ethiopian govt doesn’t have the luxiery of rest for one minute. If they do everything they worked hard for will crumble in overnight.
No country in the world has been built in an overnight. It takes time. All this developed countries we see today had their own share of difficulties before they get here.
By their account, I believe our difficulties are more compicated and tough one. Eventhough the hard working EPRDF govt makes it look like easy for us who sit outside and think it is as easy as siting in front of a computer key board and complain, complain and complain. Ruling a country is not about power, but responsiblity.
“SILTAN SIYAYUT YAMIR, SIYEZUT YADENAGIR”

02/27/11 @ 06:49
Comment from: addis meraf [Visitor]
addis meraf

This is what I been waiting for, a well written, constructive article, a brilliant suggestion to the Ethiopian government. I hope many Ethiopia lovers enjoy to read such a wonderful thing on this forum. I am tired of the repeatitive words such as, “looting, dictator, racist, woyane and so on..” These words don’t help to build Ethiopia. Most hate mongers don’t want to see this kind of article. All they want to hear is about killing, looting, and the like. U Ethiopia haters are claiming “Ethiopia is not one any more, woyane dismantle our country, looting..” U guys said this twenty years ago! However, I don’t divided Ethiopia so far. U call for uprising! Then you will see a very divided Ethiopia. Since when Ethiopians stand up for Somalia? Did you guys forget the 1977-78 war with Somalia? with ziad barre? Since when Ethiopians want to be colonialized by foreigners? Do you know Eritrea and extrimist Somalis are ready to take over Ethiopia by the help of some diaspora politicians? That is when you will see Ethiopia in different peices. This is not a treat used by the current government of Ethiopia and its supporters to keep the people from uprising but it is the fact. We do not need a trash article which are not supported by evidence that will harm the people of Ethiopia. We all know no previous governments tried to improve the development of the country. Look at the young generation in Ethiopia working hard without degrading any occupation than the previous generation, go and look the creativity of the young, look the roads..schools build in every corner of the country, look different ethnic groups speak..develop their language without shame! look the festivals they enjoy in every region! Let us give credit for all these good things. Did u know more rular ppl in Ethiopia know what electricity is and drink clean water from the tap? Know tell me which former Ethiopia government do all these things except for stealing ppl money and driving war? Just shut up and join for development not for the sake of EPRDF but primarilly for future Ethiopia if u really love ur country.

02/27/11 @ 09:37
Comment from: ME [Visitor]
ME

Are you saying the government need to establish another body of puppets to control the market the same way election board controlled the election process? Is that waht you are trying to promote? Mr author, please do not regergitate what the PM said. Post an article if you have your own idea. The PM is said in one of his recent specches that the private sector should move to development-based investiment rather than tit-for-tat tyoe of money making investiment. Now you are echoing that concept. Here is what the PM and now you missing: the concept of free society and free market. Remebemr, we have tried socialistic economy and did not work.

At any rate, they were in power for 20+ years, we haven’t seen a viable economic improvement leading to better quality of life. It is already high time for change. Meles andhis arogancy have to go. Do not try to buy them additional 20 years by suggesting something fishy like this.

02/28/11 @ 23:18
Comment from: Anonymous [Visitor]
Anonymous

The Ethiopian business community is stunned and outraged. In its most recent meeting with Prime Minister Meles Zenawi and his senior officials, the government announced arbitrary price controls, leading to a complete rupture in government-business relations.

The interest of business and the interests of the government, which were really never the same, are now even less aligned than before. During the meeting, businessmen could not hide their frustration.

The biggest source of tension between the two is the government’s habit of humiliating businesses, dictating terms, and issuing edicts without careful consideration of the consequences. As if they are not key players, business leaders are not consulted on important commercial and national issues, and the government’s go-it-alone approach has alienated both small and big business.

However, it is in the interest of both to turn a new page, accommodate each other, establish regular contacts, and take a second look at things. Since the challenges they face are huge, they must move forward together, or not at all.

The first move should be made by the leader of the nation, the Prime Minister. He should make his government more business friendly, take a string of pro-business steps, and, emulating US President Barack Obama, name a high profile business executive as his chief business adviser.

A business council should also be established by him to serve as a sounding board for ideas and true partnership between government and business. Confidence would be injected, tension defused, and the ugliness that has come to dominate many of their dealings, would be reduced by such a move.

The government needs a strong and balanced relationship with businesses; its GTP depends on the expansion of business and healthy tax collections. Businesses pay tax as well as provide goods and services in addition to creating jobs, which are all crucial for the expansion of the economy.

Yet, if businesses are harassed, discouraged, and crippled, where is the economic base of taxation to come from?

The price caps decreed at random and with haste have been game changing. The government is strongly believed to be anti-business by the overwhelming majority of businesspeople. They are frustrated. They feel prosecuted, haunted, lectured to, and antagonised. This will lead to a further breakdown of trust wherein investments will dry up, jobs will not be created, and economic paralysis will result.

The economy is heading in the wrong direction.

Imposing controls resulted from a mistaken diagnosis of the problems, and it will not solve the inflationary troubles. Price controls have not given the country what it really hungers for: Ethiopia needs clear economic vision, balanced macroeconomic policy, responsible bureaucracy, an accountable civil service, a climate of fair play, and competition, instead of micromanagement.
The government has its own views.

It has returned to the discredited and ineffective command-and-control economic regime of the time of the Derg, it disputes. Inflation is largely due to “speculation,” “hoarding,” and “monopoly” caused by “unethical” businessmen and women, it believes. It has no choice but to drive down the cost of living with price controls to appease an alarmed and frustrated public, it feels.

For now, the psychological and political impact on consumers has been positive, although it has been proven time and again that caps and controls do not work. The initiative, while rich in symbolism, is already relatively shallow in its impact, and it will bring no relief to the millions of low-income citizens.

Hoarding, price gouging, and monopolies are dangerous to the fabric of an economy. Consumers, especially the destitute, cannot be left to the whims of “greedy” traders. To that extent, price controls on a few essential commodities are in the interest of the public, although a public subsidy would have been the preferred option.

The provision of a safety net and the reduction of poverty are also hugely important. No one is against the strong, progressive economic prospects for the country, but this cannot be achieved through price controls and micromanaging the market. There are other ways.

It is illogical and asymmetrical to impose a penalty of 15 years imprisonment to punish hoarders. Imprisoning merchants and businesspeople on a technicality is expensive. Besides, it encourages a culture of fear and uncertainty.

There is also the issue of ethics.

The way price controls have been dealt with by the administration is duplicitous. While traders, retailers, and wholesalers are accused by it of “ethical lapses” and “exploitation,” it forces them to sell their products at a loss. This would be akin to making a restaurant sell injera and doro wot for less than the price of only the injera.

What is the point of talking about business ethics if public officials do not offer a positive ethical example for society to follow?

Residential plots have been reclaimed from citizens by city authorities and leased at a profit, although city dwellers have sufficient funds to construct buildings on their property, as required by municipal bylaws.

The reality is that the officials are just like the businessmen they accuse of unscrupulous behaviour. They have tasted unelected office and have joined “the dark side.” Ethical misconduct, corruption, and theft imperil the common good, irrespective of who commits them.

Price controls distort the allocation of resources. When products are fixed below market level, they tend to disappear from the market, leading to shortages and the emergence of underground markets. Prices rise because the amount demanded exceeds the amount supplied at existing prices; it is simple supply and demand dynamics.

Goods and services are expensive because of increased government regulatory regimes as well as high taxes and tariffs imposed on businesses. Price controls will lead to rampant bribery and concentration of power in the hands of corrupt price controllers. The policy is also bound to fail as foreign exchange dynamics and the prices foreign companies charge for imported commodities, including energy and raw materials, cannot be controlled.

The repercussions of this policy will therefore be worse than the problem it aims to solve. If the economy was a machine, the unintended consequences could be avoided; however, an economy is a complex web that does not always function as planned. The government will eventually be forced to introduce controls across the board, creating more inefficiency in the economy.

While not perfect, a free and competitive market is elegant, effective, and efficient. Supply and demand are at the core of a market economy, which this administration professes to follow; they should determine the price of goods and services.

The decision imposed on the market is rather more political than motivated by economic concerns. Regardless of its irresistible public appeal, it should be scrapped.


03/01/11 @ 01:14
Comment from: C.Fitzgerald [Visitor]  
C.Fitzgerald

Thank you for the article Berihu.

You have some good ideas and I do agree that a wider conversation needs to be enabled.

Coming from a perspective of the West I can tell you that there is an interest in investing in Ethiopia.

What is lacking are the means by which to invest. There is no easy access to your market as there is almost everywhere else in the developed world.

Ethiopia needs a stock exchange, first and foremost and an expanded financial market.It needs an avenue for companies there to engage more of the available capital from all over the world and to attract a fair share of foreign direct investment.

There is a growing interest in Africa. Ethiopia is on the radar too. But without easy access then free flows of capital will remain inhibited and your country will remain economically isolated.

Money is ready, willing and able. It is just waiting for signs of an more open economy. What is taking so long?

03/01/11 @ 23:22

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