No. 2 -- < An Occasional Column on the Ethiopian Economy> -- 1995

EDITOR'S NOTE: After a long hiatus, here is the second issue of EconTalk. In this issue, I present four important economic principles (laws?) for you to ponder. Comments and guest columns are welcome. Enjoy!


MURHY'S LAW OF ECONOMIC POLICY (A. Blinder): "Economists have the least influence on policy where they know the most and are most agreed; they have the most influence on policy where they know the least and disagree most vehemently." This creative application of the insight of Murphy (i.e., if anything can go wrong, it will), aptly captures the little impact respected Ethiopian economists have had on the formulation of government economic policy. Its corollary, Gresham's law of economics, states that bad economics drives good economics out of public circulation. Isn't this an apt metaphor for the relationship between the residents of Negus Menilik's ghibi and those of Ras Mekonnen's palace (AAU)?

The propensity of politicians to listen to "bad" advice from quacks does have three (not so mutually exclusive) explanations. Let us call them the three "I's": ignorance, ideology, and interests. Ignorance of the long-term economic consequences of a policy package is one obvious reason, not least of which is due to the failure of professional economists to promote economic literacy. Who has not complained about the propensity of economists to mask crass and stylized ideas in less than intelligible language?

Ideology is unarguably a major culprit for bad policy in Ethiopia, especially in the past twenty years. One can hardly distinguish the economic vision of the Derg and that of the opposition since they all shared the same paternalistic (and yet self-serving) ideology of Ethiopian socialism. It was a populist ideology, indeed. But then again, isn't the road to economic hell paved with good intentions!

The major explanation is probably the undue influences of interest groups (which, by the way, may not necessarily decline under a democratic system): the salariat, the urbanite, the ethnocrat, the sharpshooter, the regionalist, the foreigner, and the like. What is sensible for the nation is not necessarily good for those interest groups with the most political clout. There is a silver lining here: as Amartya Sen argues, poor citizens do not die of mass starvation in a democracy. Sectarian interests are, of course, cloaked by propagandists with the most noble of widely-shared goals: peace, prosperity, and social justice.

THE 'IRON LAW' OF LIVING STANDARDS: The rate of growth of the median income in a country, rich or poor, depends almost entirely on the growth rate of its overall productivity. Productivity growth (and level), of course, depends on a whole host of factors including the quality of labor and capital, work ethic, diffusion of modern technology, good policy, and such societal factors as social peace. When things go right, a virtuous spiral of accumulation and productivity growth make the national dream a reality. If not, the process of cumulative causation works in reverse to produce a vicious trap of self-reinforcing forces. The result is a nasty distributional struggle over the existing pie among groups mobilized along sectarian interests (class, ethnicity, region, religion, urban residence, etc.) which at its extreme may threaten the viability of the socio-political fabric.

Parenthetically, it would also be useful to remember the daunting nature of the arithmetic of catch- up. How fast does Ethiopian per capita income (US$200) have to grow in order to reach that of S. Korea (US$7,000) in ten years time?

Answer: With a population growth rate of 3%, it would take an annual growth rate of 45% or a doubling every 1.5 years! Lost decades are incredibly costly.

KAUTSKY'S LAW OF LAND REFORM: The Left supports land reform not because of what it would do FOR the landless peasantry, but because of what the reform would do TO the landed classes. I leave it to the reader to substantiate Kautsky's insight in the Ethiopian context.

THE LAW OF INDIRECT ECONOMIC INCENTIVES: People are basically rational, and they respond best to economic incentives where the rules of the game are transparent and fair, where the link between individual productivity and reward is close, and where there is a sense of security about the future to commit one's resources to the future. Where material incentives are perverse and accountability ambiguous, one gets secretaries who type a page per hour, the boss who shows up to open and close shop, the ministry asking for more employees than it needs, the administrator who treats the public purse as semi-private property, the farmer who dreams of being a soldier instead of a perpetual victim, and the office culture that ostracizes the few who take their responsibilities seriously.

Bad incentives produce inefficiency, not to mention unfair income inequality. However, good incentives are necessary but not sufficient: they must be complemented with resources to enable individuals and groups to realize their potential. So far, competitive markets and decent social contracts have produced the most prosperous and just societies known to man. Anecdotal proof: how many of us contemplated asking for asylum in socialist countries?!

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EconTalk's Stat Clipboard: Recent Macroeconomic Indicators for Ethiopia

Indicator (%) --------------------- 91/92 --------- 92/93 ------- 93/94 ------ 94/95

Real Growth Rate of GDP*.....-3.2 .............. 7.6-12.3** ....... 1.3 ................. 5.5

Rate of Inflation ...................... 21.0 ...................10.0 .............1.2 ................10.0

Debt/GDP Ratio .......................13.3 ................... 10.8 ............ 9.6 ..................n.a.

Real Gross Investment ...........10.4 ..................... 9.0 .............n.a. .................n.a.

(*): Comparable figures for 1965-73=4.0%; and 1974-90=2.0%.

(**): First figure from World Bank; Second from IMF (latter figure is considered overstated according to many observers).

Source: IMF Survey, 1995.

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