The Voodoo Economics of TPLF/EPRDF in Ethiopia": (Some Comments)
Original Article: by Ejigu Demissie, University of Maryland, USA
Follow up and Comment: by Minga Negash, Ph.D.,
Rhodes University, South Africa
Professor Ejigu Demissie (ED) has brought to this year's EEDN conference a short and an enlightening paper entitled " The Voodoo Economics of TPLF/EPRDF in Ethiopia". In a follow up to that paper, below some of the points raised by ED about the economics of the "transition period" are discussed. Opening new debate on the modalities or on theoretical issues of development is not the objective of this note. The evaluation of ED's paper whether it "adds value to our understanding of Ethiopian economics"; the buzz phrase of reviewers of articles, is not the objective of this note. Our aim is to enhance our understanding of central issues than initiating new debates. It is to enrich the ideas documented on ED's work and if possible to identify areas which need further research. Specific policy issues on the each sector of the economy requires a closer analysis; with empirical observations. Further, it is also a territory exclusively reserved to students of main stream economics.
This paper has three parts. The introduction is followed by a section that raises seven points. Nearly all the subheadings of the section are drawn from ED's paper. They are outlined as follows: defining a nation' development objectives, the relation between development and democracy, macroeconomic control issues and statistics, the implications of the monetary union between Ethiopia and Eritrea, aid flow and regional favouritism, and finally on the on going privatization. The last part contains overall remarks and conclusions.
II. The "Voodoo" Economics of TPLF
(a) On Development Objectives
In paragraph two (p.1), ED discusses about the objectives or goals of a "democratic" government's economic policies. However, designing economic policy is like designing a collective (social and political) activity. And social and political policies, whether democratic or not, are always dictated by those who are powerful; possibly at the expense of other (weaker) groups. Accordingly, the result of "voodoo Economics" should be just that. In other words, during the four year time, the policy architects of the "transitional period" have achieved their objectives. ED has correctly identified the results of such social contracts but the term "voodoo", (with meaning that has something to do with Caribbean magic) is less descriptive of the situation. Rather "voodoo economics" is a well planned and efficiently implemented wealth and political power control in Ethiopia by the new state (Eritrea).
Moreover, economic planning is a "hands on policy matter" and various development policies can be designed depending the objectives of the dominant political thought of the period. Stress on the maximization or redistribution is a question of ideology. Once the political ideology of the ruling group and its priorities are known, then the technocrats design specific programmes. TPLF's political and economic programme tries to promote Tigreans. And this is not a secret! It is declared openly (see for instance the various issues of Woyenne). If a sectarian group heads/dominates the command and control centers of the economic institutions of a multi-ethnic state, then it should not be a surprise to see those belonging to that sector taking the lion share.
On the same note, employment creation, education, health objectives have been identified the as the goals of ED 's ideal democratic government. However, it is sad to note that such programmes have been undermined by SAP. Examining policy documents and even theoretical basis of SAP (see IMF 1987 for example) reveal that ED's goals are not in the priority agenda of these institutions. Thus, whether such goals would ever be achieved is debatable. Even the highly politicized alternative programme of ECA (Adei Deje 1987) did not take off the ground. We should be eager to learn new alternatives.
(b) On Democracy and Development
Let me start by telling the reader my encounter some twenty years ago. By 1975, I had been living with one relative of mine who just came from the country side to Addis; in search of a better life. One day he went out to town and started politicking about socialism. He came back and told me how socialism is nice. One example he sighted was how it is possible to go to another office and do your work if you are unable to reach on time to your regular office! Our current concept of democracy, I am afraid is not something better than what my relative had understood about socialism.
On the issue of governance, the governance system does not have to be "democratic" (what ever it means) but it should be fair, stable and accommodating if the objective is achieving economic growth. The current discourse (in Ethiopian circles) on the relation between democracy and development (D& D) seems to have reached a point of nihility. If we start assuming a strong and causal relation between the two variables, we will go into a vicious circle. The circle leads us to the following belief. If no democracy, then no peace, if no peace then no development.
First of all, to merge the concepts of D& D with Ethiopia is to fall into the trap. D& D are concepts, thoughts, idealogies and paths of growth models while Ethiopia is an entity; physically tangible! Hence, Ethiopia and Ethiopians can and will exist with or without democracy and/or development. The search for an evidence for this does not require us to go far. Eritrea is undemocratic and underdeveloped, yet it is a political entity. In contrast, what we are being told (by their cousins) is that Ethiopia can not exist without (their version of) democracy. So the argument goes, if we give democracy to the people (including secession), there will not be war and Ethiopia will exist without problems.
Keeping aside the issue of nationhood, it should be easier to show that the association between D& D is insignificant. Fuji Mory's Peru, Swaharto's Indonesia, Penuche's Chili, the generals and South Korea, Deng and China, Mahatir and Malaysia do not support the assertion that there is an association between western liberal democracy and development/growth.
Whether measured by per capita or United Nations' human development index, Ethiopia ranks near the bottom. And Ethiopians know not only their poverty but even the problems. Ask a typical farmer what his problems are: land scarcity, low land productivity, certainty in his planning horizon, the shrinking of income, high input costs and government intervention and property right to the land. Several writers including (Desalegn Rahmeto 1991:1994, Mesfin Wolde Mariam 1993, Bezzabeh 1992) have documented these problems and have called for land reform. Main proposal suggested in the reform is the granting of property right to the small farmers in order to build truest and credibility; the ABC's of development.
Against all the calls, the current constitution makes land a state property. Moreover, land is seen as a priceless commodity. To support their actions TPLF men argue as follows. If land becomes tradable, the farmer will sell his holdings and comes to towns in search of work. Some other analysts (see for instance Tenkir Bonger 1994) also note that what should be saleable are the improvements to land; not the land itself.
Keeping aside the debate, policy oriented research has not come out with clear facts that tell us the rate at which per capita land is shrinking (as a result of the population growth and density) in various parts of the country. Moreover, the traditional land holding and inheritance systems (Guelte, reste, welba, traditions of land sharing at the time of divorce or death, etc.) need re-examination. Government writers have equated such systems as evils. As a result, it has been used by successive governments to prosecute people who are endowed with such traditions. ED's paper would have been complete had it raised land policy issues in analyzing the (voodoos of) TPLF's economics.
(c) On Macroeconomic Parameters
Planning and even following up of the "success stories" of EPRDF government is difficult on several grounds. First the information that comes out of the public offices are unreliable. The statistics being told may not have any thing to do with what has been actually happening. To use the words of Ato Dawit Yohannes, some of their numbers have been "wild guesses". Further, statistics is also used to support a political position. For instance, when an important official gives annual address on the state of the nation, to support a claim that the country has grown during the past year, he tells us the number of people who have applied to engage in manufacturing activities.
This "new tradition" has become worse during the "transition period". It can be explained by one of the following two hypothesises. First, on accounts of genuine information aggregation (capacitation) problems. Second, a deliberate disinformation. It is difficult to separate which is which in the current Ethiopian situation. Disinformation is a political problem while capacitation is a developmental issue.
Ceteris paribus the above, we have two statistics, and then conclusions about the economics of the transition period. The prime minister's office says GDP has grown on the average (at least) by about 4% per year. Eshetu Chole (1994) notes that the state of the economy is by far in a bad shape now even when compared to 1991 data (where Mengistu left it). On the same note, ED also tells us the following (p.3)."...in fact the economic performance of Ethiopia since the SAP has been worse, even by the standard macroeconomic indicators favoured by international financial institutions such as IMF and world bank, than what was observed under previous governments".
Thus, what we lack is a credible and independent unit that properly accounts (periodically) for economic observations. Until we have that, the controversy on the size of the parameters will continue. The problem is not only of capacity and independence problems. Whatever institutions that were there are seen by the new rulers as evils and not truest worthy. And building or reforming institutions is not an overnight process. Until the heart and minds of the rulers start trusting other Ethiopians (and their institutions), the problem will continue.
(d) On the Devaluation
Even towards the end of the Derge era, we have had policies that attempted to liberalize the private sector of the economy. "Mixed economy" policies were pursued though short lived. The previous government has been preparing to get into serious negotiations with IMF. According to sources closer to the then minister of planning, what Derge did not like was the devaluation.
The short lived (Mengistu's) liberalization programme had brought in the "crowding in" problem. As a result, those who have been successful have made a modest gain; specially in the hotel sector. The new establishments that we have seen under the transition period have been (by and large) plans that were started earlier.
Now there is a seemingly crowding out. Most "companies" which are being formed (see Addis Zemen) do not even specify their business objectives and sectoral activities properly. A higher proportion of the newly formed concerns seem to be prepared to go into the foreign trade sector.
With an improvement on world coffee prices, government had not been short of foreign currency. New credits (IMF's balance of payment support credits) and aid money (American, Italian, etc.) have been available. As a result, imports have increased. Capacity utilization of factories improved significantly (allegedly from 30% to 70%). Even political organizations are engaged in importing businesses. The activities range from second hand cloth trading to heavy machinery import. On the other hand, non-coffee exports were insignificant.
Visitors to the country are wondering about the variety of imported products dumped in the local market. Most of the imports are through young women who frequently travel to and from the Middle East. However, the demand for the imported products has been low; mainly because of disposable income. Another cause is competition, even the factories are not selling their products. Most factories are carrying too much inventories; yet some of them have been declared profitable.
This is not as such a new phenomena which is unique to Ethiopia. The extent however, makes it special in that the inability of traders to sell their imported inventories has been serious. Reasons: first, demand. Second, because of taxes. Third, the existence of a (semi legal) black market. TPLF's ex-combatants and their families are given special permits (say to Afetesa-Dire Dawa-and further) that allows them to engage in smuggling (i.e. bring goods to Addis without paying taxes). One effect of all these is the demand for foreign exchange (to replenish the legally imported inventory) diminishes. Moreover, the difference between the black market rate and the auction rate for the dollar became small (about 13%). That has been a good news for the government. Being relaxed, government increased its allocation to luxury expenditures than importing implements to the agricultural sector. Even embassies budgets were increased (more diplomats posted), medical allowances also increased.
Another effect, the price of the exchange rate has not been eroded as it should be. When the hey day is over (coffee price going down), we have started seeing the problems. Therefore, ED's worry that the devaluation is three fold now (with TPLF government) is only a tip of the ice burg. The trade terms continue to deteriorate and repayments of debt will start soon. Accordingly, the worst is yet to come. Recent reports tell that IMF has asked for another devaluation. Government did not agree and as a result, negotiations have broken down.
(e) On Common Currency
The situation becomes more complicated when two states are using the same currency unit without fulfilling the prerequisites. Let us illustrate the problem by taking examples.
The European Union is still planning to make the ECU a common currency. Hence, full monetary union of the twelve countries may be achieved only by the year two thousand. From the treaty of Rome (1950s) to Maastricht (1992), about forty years have passed. Yet monetary union is not achieved. What is wrong with these Europeans? Why did it take them so long when Ethiopians can do it so easily?
The Rand is used in three countries (South Africa, Lesotho and Swaziland). Namibia minted its own currency just last year. According to the minister of finance, the reason has more to do with nationalism than economics. Before examining the reasons for unions of currencies and its limitations, a total acceptance or rejection of the Ethio-Eritrean case will not be appropriate.
Europeans did not agree because they had been waiting for a time when all member states will have similar economic indicators (inflation, unemployment, output, trade balance, growth, etc.). Moreover the modalities of a pan European central bank still had to be negotiated. It is now realized that even by the year two thousand, it is not possible to have similar economic indicators. Hence, a gradual adoption method was preferred. Germany and France have started it, other will follow when their house is in order.
For South Africa, it was apartheid's strategy to influence the tiny nations. Moreover, South Africa's economy is relatively big and a considerable size of the workforce of the mining industry comes from Lesotho. From the smaller states perspective, having the Rand has many advantages. As an evidence, if one goes to a Lesotho bank and asks money, the teller will normally request the customer to identify preference (Rand or the Loti).
In other words, monetary union requires the coordination of fiscal, interest, inflation and exchange rate policies. How the country (Ethiopia) entered into such "an agreement" is an issue that the current rulers have yet to explain.
From the modus operand of the transition period's economics, one can say that most of exchange control policies are designed in Asmera. Let us take some examples to support our statements. Assume that someone wants to send one American dollar to an Addis resident. It would be wise first to route this money (if one has the right contact) through Asmera. At Asmera the exchange rate to the dollar has always been higher (throughout the last four years) than in Addis. Another situation is the following. Let us assume that a Hamasen man comes say to Wellega and buys coffee or goes to Gojam and buys skin using Birr. Note that these are foreign currency earning products for Ethiopia. He then takes the goods to Asmera, marks it "made in Eritrea" and exports it (to Europe) in dollar.
It is reported that the manufacturing sector (sugar, leather and shoe, iron, etc.) is being robed this way. Foreigners (Hamasenees) are establishing dummy companies through the use of fronts. Even coffee auction participants are coming from "a foreign land" bringing Birr in their pockets. Cumulatively, it means more and more foreign currency is flowing to Asmera instead of to Addis. As long as exchange rates to the foreign currencies are different at the two capitals, and fiscal policies are not integrated, arbitrage opportunities will continue to exist. Beneficiaries of these opportunities are those who are politically and psychologically free to travel between the two cities or those "expatriates" who are working/doing business in Ethiopia.
Politically, the public does not have any information on the details of the so called monetary union agreement. It is also an issue, I am told that government officials (including senior officials of the national bank and ministry of finance) do not want to talk about. Indeed unless there is some magic in the economics, it is difficult to imagine how a sane government goes into such a deal. Because port services are paid in Birr? Because oil refining costs are paid in Birr? Even if both are the reasons, perhaps it would have been better for the government to go into direct deal and arrange some form of bartering or if the worst comes, paying in foreign exchange than face such a level of distortion in the economy.
In summary, if economic planning of a nation is going to take course, then it is essential that we need to administer effectively the command and control institutions. In other words, things as they are now, neither nationalism nor economic persuasion seem to convince the current policy writers that the so called monetary union is unfair to Ethiopia. Hence, to believe that the current government controls its key macroeconomic policy is to be short of transcendental thinking. It is a pity that ED and others (who write on the Ethiopian economy) miss this point.
(f) On Aid Flow
With regard to the foreign aid flow, we should not forget that aid has always some political string. Secondly, one has also to note that the embassies (mainly those in Western Europe) have effectively been turned into REST offices. If the ambassador is not a TPLF man, then the second is sure to be an Adowan.
We know that aid per capita from the west had not been much in the late seventies and early eighties. Ethiopian diplomats in Brussels had been using this point to get more aid from the commission. Now since America's door is open to the new government, despite allegations of massive human right abuses and the emergence of new conflicts in the country, the flow has improved. The flow of aid is/should not be a problem as such.
Those who argue that the provision of aid will strengthen and prolong TPLF's reign may have some plausible points. However, it should also be realized that the converse is not true. If sanctions (no trade and negative aid) had the power to remove regimes, then Sadam Husssen, Castro, the Anatollas of Iran, etc. should have gone. Hence, keeping aside aid, even if there are sanctions on TPLF, whether such things have direct effect in bringing political change in Ethiopia is debatable.
The problem of aid management rests on the distributors. The distributors are officials of the Relief Society of Tigray. Ato Asmelash/Abadi Zemo is one of TPLF's key men. ED seems to have been surprised only by looking at the extent of regional imbalance that is being created because of regional/ethnic favouritism. There is more to come.
Openly, when REST wants to collect money locally, all the state institutions have to cooperate or cease performing their regular activities. The television has to work extra hours, the national stadium has to cancel other activities, other social groups can not engage in similar activities, etc. According to recent reports, this year's collection was over twenty million Birr. In these fund raising activities, nearly all Tigreans, even those out of the country (as claimed by the organizers) are participating or are members of Tigray Development Organization (TDO-headed by ex-TPLF secretary general Ato Wolde Selassie/Sebhat Nega).
In a recent NGOs meeting held in Addis (called to discuss the so called aid fatigue of the West and on how to build local capacity), the REST representative, sharing his experience to colleagues, advised NGOs from neighbouring countries as follows. He showed an evidence and declared that large finance can be raised locally. In the eyes of the REST fund raisers, the contributors are "Tigreans working in Ethiopia and abroad".
Thus, the aid flow and management issue is not only on what is coming in the name of the 50 million people. Even within the country the amount of fund being collected to develop Tigray (alone), needs not only proper accounting (since it is a regional distortion) but also a policy discourse.
(g) On Privatisation
Truest and credibility of the legal and financial system has been eroded and restoration is the prerequisite of any meaningful development programme. Development programmes require a stable but not necessarily efficient mechanism of human and political interactions (Platteau 1994). In the absence of laws that enforce contracts, in the absence of a security system that protects all citizens and tax payers, it is difficult to implement successful privatisation programmes. Keeping aside private property, even small money donated to human right organisations (EHRCO) are being blocked. The court's decisions, whatever it may worth, are not implemented. To say the least, the contract between the depositor and the banks is interpreted by the latter as it wishes. Note that the bank is government owned and the head is an appointee. The new banks' risk class is yet unknown.
The seventies witnessed nationalization of private assets (75 companies and in 25 firms government became majority share holder). By then the government had no right (political, moral or legal authority) to nationalize. Now the new government is selling public assets to its nomenklatura; evidently with the same powers. Worse, such sales are strengthening private monopoly (e.g. Al-hamudi, if it is his own money) rather than competition. In addition, ethnic favouritism will get a place for its implementations.
The office of the privatisation agency has become another zemecha memria. The agency's tasks are selling nationalized houses and privatising government owned enterprises. Keeping aside the political economy of privatisation, the task in itself is formidable. At the out set, it is important to note that neither East Europeans nor African countries have had much to boast about the achievements of their privatisation agencies.
According to the statistics obtained by the end of 1992, the size of the asset to be privatised was not that much in the manufacturing sector. The ratio of total equities to total assets for one hundred and four factories was only 26%. Long term debt to equities ratio in the textile sector was about 3.29 times. Significant parts of the assets were tied up in inventories and receivables. Capital and labour productivity has been showing declining trends.
The banks despite the reported profit figure must be in a state of a nightmare since the money that they have been pouring to the government enterprises in the past is not yet recovered. It is unclear whether provisions have been made for such uncollectible borrowings when the bank announced its recent (1993) profit figure.
Orderly transformations and ways of privatising the manufacturing sectors have been suggested elsewhere (Minga Negash 1992:1994, Lema Wolde Senbet 1992). Reforming the finance industry and increasing transparency were suggested as points of departures. The dangers and risks associated with privatisation programmes have also been indicated.
EPRDF's earlier economic programme (designed before 1991) was relaxed just before their entry to the capital. Later, the programme became suddenly different. It declared that government will continue to own and administer the profitable sectors of the economy. Hence, those which were supposed to be sold, according to the original intentions became only the bad ones. From this premises, they abolished the state corporations and plants were told to operate on their own.
Hence, the so called "management boards" were created. Favouritism and clique building flourished in these boards. In the confusion, some factories (like wongi-meterhara) got some debt relief but were instructed to supply to specific markets, at predetermined prices. In order to get "good managers", in a typical TPLF style, in one day 98 new cadres were appointed to head the 104 factories (see Industry Newsletter). Today, TPLF is in problem. Its youth cadres could not administer the factories. As a result, some ex-managers have been asked to return and take their posts. The ministry itself has been paralysed since the death of the vice minister (Ato Assefa kebede). Consequently, Ato Assefa Abraha (head of privatisation agency) suddenly told journalists (somewhere in the beginning of the new European year) that government could not administer factories.
What we are seeing now is the following. Resistance to privatisation had been coming from TPLF's own nomenklatura for the last three or so years. Now the resistance either has not worked or the performance of the factories have become too naked to hide. The new strategy for the nomenklatura will be to actively participate in the privatisation programme as in Rumania. Worse in the case of Ethiopia, it is not only normal leveraged buy-outs. According to some reports, government itself is going to guarantee the local and external borrowings of individuals. Another situation is politically beholden organizations (Like TDO) may guarantee so that its members can go and borrow from state owned commercial banks.
ED has done a commendable job in enlightening us when he wrote the following regarding the current privatisation programme:
" ... what is really being done in Ethiopia under TPLF/EPRDF is not privatisation, but expropriation of the country's assets and enterprises (owned and controlled by all Ethiopians), to the Tigrean and Eritrean minorities... instead of the objective being wider distribution, it (TPLF) is blatantly using (it) to satisfy its plan for a rapid Tigrayazation and Eritreanization of Ethiopian Economy " (P5).
III. Concluding Remarks
On balance ED's paper has been useful. Even though issues such as land policy and common currency are not addressed, the paper has served us not only as a basis for developing a dialogue but also informed its audience about the type of privatization programme which is under- way in Ethiopia.
One hopes these issues will also be raised when the Ethiopian Economists Association holds its forthcoming conference in Addis.
Befekadu Deguefe (1990): Profile of the Ethiopian Economy, in the Long Perspective Study of Sub-Sahara Africa, Vol. 1, World Bank.
Ejigu Demissie (1995): The Voodoo economics of TPLF/EPRDF in Ethiopia, Papers of the EEDN Conference, June, 6P.
Eshetu Chole (1994): A Preliminary Appraisal of the Ethiopian Economy, Papers of the 12th International Conference of Ethiopian Studies, MSU, Red Sea Publishers, New Jersey.
IMF (1987):Theoretical Aspects of the Design of Fund Supported Adjustment Programmes, IMF Occasional papers No 55 .
Lema Wolde Senbet (1991): Ethiopian Review Magazine (LA) and Industry Newsletter (Ministry of Industry), Excerpt of a speech Delivered at the ministry of Industry of Ethiopia.
Mesfin Wolde Mariam (1993): Ethiopia From Where to Where, in Amarigna, Guramaele Publishers, Addis Abeba
Minga Negash (1992): Privatising Ethiopian State Owned Enterprises: Problems, Dilemmas and Options, VUBUTGAVEN, Brussels, 65p.-----(1994): Problems and Options in African Privatisation Programmes: A Case Study, Papers of the 12th International Conference on Ethiopian Studies, MSU, 35P.
Platteau J.P. (1994): Behind the Market Stage Where Real Societies Exist Par I: The Role of Public and Private Order Institutions, The Journal of Development Studies Vol. 30 No. 3
Tenkir Bonger (1994): The political Economy of Ethiopia, in Amarigna, "Yezareyitu Iteopia yepoliticana yeikonomi menderderia hasaboch, DaCosta Printers, London.
Transitional government of Ethiopia: economics Policy of the Transitional Period, Addis abeba, November 1991.