Opinion

Letter #3 to Ethiopia’s Prime Minister, Meles Zenawi

Dear Obbo Mallasaa:

This is a supplement to letter #2, in which I attempted to convince you that your current path leads to a dead end. In this one, I try making a somewhat detailed case why your grand vision of an EPRDF-dominated Ethiopia is destined for failure. “It’s the economy, stupid.”[1]

Your dream of transforming Ethiopia into a middle-income country in five years notwithstanding, it will take a while to alleviate the deep-rooted economic problems of the country under the best of circumstances. Even with the appropriate and well-targeted policy prescriptions, serious heavy lifting is needed to create the institutions required to begin to address the myriad economic malaise (famine, malnutrition, severe structural unemployment, high inflation, lack of proper housing, lack of economic security, disease etc.) the country has become infamous for. It is believable that Ethiopia’s GDP has been expanding phenomenally in the last few years as claimed.

However, even if it is possible to sustain similar rates of economic growth in the coming years (highly unlikely), it will take another eight or nine years for the country to make it to the bottom of the World Bank’s list of low-middle income countries. I’m sure you understand the huge gulf that exists between the rate of economic growth and the level of economic development, but you often seem to intentionally confuse the two distinct concepts, confusing the general public. The purpose is clear: you are sending a subtle message to the average Joe, who is struggling to put food on the table, to wait patiently because help is just around the corner.  Since hunger and absolute deprivation can’t wait, however, you will have to continue to feed the hungry through food aid; thus your much publicized Growth and Transformation Plan will be revealed as nothing more than a propaganda tool.

Let us suppose the country will continue to grow at the exceptional rates of the last few years as has been promised, and will manage to make it to the bottom of the list of low-middle income countries by the end of this decade. Even that will not lift the masses out of their abject poverty. Unless you have something up your sleeve no one is aware of, Ethiopia is not about to buck the natural tendency of increasing income disparity in the early stages of economic development. There is generally an inescapable trade-off between the desirable goals of faster economic growth and fairer income distribution when a country is developing.

This is to say that the economic status of a significant plurality of Ethiopians will at best be stagnant when a few will manage to amass wealth. Even in countries run by well-intentioned and competent policy makers, it is difficult to achieve fairer income distribution with rapid economic growth in the early phases of development. There is nothing to suggest that you are pursuing well considered policies that soften the adverse distributional effects of economic growth in the early stages; instead, you are by design selecting undeserving winners at the expense of the truly ingenious and hard working, creating a parasitical class indulging on conspicuous consumption, thus exacerbating the gulf between the haves and the have-nots.

You have been heard waxing poetic about the negative effects of rent seeking behavior, but your government is actively promoting such behavior at all levels. Your adoption of patron-client systems as a political strategy is in direct conflict with your poorly constructed slogan of achieving economic transformation in five years. With the masses alienated from the economic mainstream, it is thus going to be impossible to sell the EPRDF as the savior of the country.

To make matters worse, the extraordinary economic growth rates of the last few years have come with inflationary pressures on the economy, eroding any gains that might have been made. Some of the upward tick in inflation is a natural consequence of an overheating economy, but most of it is due to bad policy making. Let me explain: High inflation generally results when unemployment is less than the Non-Accelerating Inflation Rate of Unemployment (NAIRU), and/or there is a supply shock, and/or inflation is expected to be higher than run-of-the-mill variety. In a country where half the GDP comes from rain fed agriculture and around three quarters of the family budget is spent on food, supply shocks are likely the main culprits for the painfully high cost of living for many. The recent economic expansion, which partly resulted from the expansionary monetary and fiscal policies you have been pursuing, must have had the unwelcome, if anticipated, effect of raising inflation as well.

A good bit of the inflationary pressure is, however, self-inflicted and caused by dumb policy making on your part. One does not fight inflation with price controls: I don’t know where you got the idea that price controls are solutions to inflation. There are ample empirical evidences showing that price controls exacerbate the problem, rather than solve it. I wonder if you have not already regretted your ill advised move, as the general price level is currently much higher than what it was when you decided to fix prices of essentials. According to your own statistical authority, inflation jumped from the upper single digits to 16% to 25% in a matter of a few months. This is dangerous territory because such a rise in inflation will lead people to expect higher inflation in the future, whether expectations are formed adaptively or rationally, causing further increases in inflation.

Your policy options of fighting accelerating inflation are dismal. Since neither you nor your Central Bank has any credibility, you can not address the expectations triggered part of the inflation. You don’t have a Paul Volker whom the public trusts will commit to impose some needed discipline on the market; even if you did, the Central Bank is not independent of your machinations or whimsical desires.  Hence, the expectations caused part of the inflation is here to stay for the foreseeable future.

You may reduce the monetary base and cut government expenditure, but that would be painful to some (they will lose their jobs) and it has the effect of slowing down economic growth, denying you the bragging rights of double digit growth. However, it does not appear that you are willing to pursue these tough but needed economic policies. With your most recent announcement that you are going to increase defense expenditure, you seem to be signaling otherwise. You may also revalue the Birr to fight inflation at the expense of reducing foreign demand for domestically produced goods.  In short, none of your options are appealing, suggesting that times are going to be tougher than they have been for the majority of the population.

You see “economies are wild and dangerous.”[2] They require serious training and expertise to handle. While you are thinking of dinner, they make a lunch out of you if you are not careful. They do not care how powerful, persistent, or politically astute you are.

Sincerely,

Malkaa Guutuu

 

Previous Letters:

 


[1] A phrase popularized by Bill Clinton’s first presidential campaign in 1992. It was effectively used against a sitting president – George H.W. Bush, who seemed incapable of addressing the pressing economic issues at the time.

 

[2] The quote is attributed to a certain famous economist whose name escapes me at the moment

* The author, Malkaa Guutuu can be reached at < malkaa.guutuu@gmail.com > for comments.

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