Favouring State Enterprises Detrimental to Growth [opinion]

It seems that there is a disconnect between the global policy sphere and that of the local one. Much of the debate in the global policy sphere relates to possible ways of improving government transparency reducing the disruptive role of the state in the market through policy actions, such as tapering monetary expansion and collaborating on the fiscal impact of tax havens.

Locally, however, the discussion in the economic policymaking has largely to do with traditional issues, such as inflation targeting and effective fiscal execution. As if to show the long overdue monopolisation of the policy sphere by the ruling EPRDFites, the voice that is being heard loudly is that of expansionism.

There is even little change in the nature of excuses extended for policy failures. It has become customary to see officials of the ruling party attributing almost all of their failures to expanding rent-seeking behaviour. This goes to the extent of disfiguring the textbook meaning of rent seeking – an economic concept meant to suggest slicing a bigger chunk of the cake, rather than making it bigger.

A large part of the disconnect could be described by differences in economic development. Global policy is still dominated by countries with both the economic and political power to set agendas. International institutions, because of both their structure and responsibility, also invest much of their attention to finding solutions for the problems faced by the global rich.

Closer, however, the whole policy making process is focused on local problems. Contextualisation of policy is not a common practice. Creating an effective linkage between local and international policymaking is seldom practiced. It is as if the country is isolated from the influential powers of the global economy.

Not the entire local trend emerges from economic concerns, however. A significant proportion of the disconnect emerges from the inherent enmity between the dominant approach to economic policymaking across the world and the one preferred by the ruling Revolutionary Democrats.

The ruling Revolutionary Democrats live by the principles of contemporary developmentalism. And they take the state as the key stirrer of economic growth.

If growth has to be inclusive, they argue, it ought to be driven by aggressive public investment. A state empowered with both political and economic resources is instrumental in realising such a growth. By virtue of the base from which the nation started its growth story and the very demand this path puts out, therefore, the state needs to be the dominant economic player.

Under this thesis, there is no limit to the instrument the state would be using to fan the fire of economic growth, as an end in its own and as a means to realise other related developmental results. All monetary and fiscal instruments will be directed to this end, regardless of externality.

Structurally speaking, both bureaucratic and market vehicles would be deployed to fulfil this policy. This involves local government units, parastatals, state owned enterprises (SOEs), trust funds, policy banks and so on. Each cycle of the journey is, therefore, measured on the marginal input it adds to the envisioned gross domestic product (GDP) expansion rate.

What often seems to be forgotten, however, is the impact of the structural instruments deployed by the state as a means of achieving a certain amount of GDP expansion on the very structure of the economy. One such case relates to the competitive impact of SOEs in the market place.

According to a recent study by the Ethiopian Chamber of Commerce amp Sectoral Associations (ECCSA), a private sector aocacy, the privileges being provided for SOEs in many edges of the local policy sphere is hampering the growth of the infant private sector in the country. Areas identified by the research as limiting to the private sector include access to credit, foreign exchange, land and investment incentives. In all these aspects, the research shows that the SOEs are in better standing when compared to the private sector.

Using SOEs as structural instruments of facilitating growth is not new. History books are rich with this experience. But the way states use SOEs in economies differ with the difference in the ideologies they subscribe to. In cases of free market economies, SOEs are employed as instruments of correcting market failures. For heavily centralised economies, however, these enterprises are used as vehicles of aancing the economic hegemony of the state.

It seems that the ruling Revolutionary Democrats are following the template employed by the centralised economies. The SOEs they run, from logistic providers to merchandise trading agencies, operate under directed privileges in the market. It is so easy for such enterprises to access credit and foreign exchange, even under the heavy capital and foreign exchange constraint the economy lives in. Accessing land – a resource that is becoming scarcer with each day, especially in urban centres – and optimising investment incentives is also not such a challenge for the sanctified entities.

It all happens while the private sector is facing a huge challenge in accessing all these essential resources. What makes things worse is the fact that the SOEs run by the state under the EPRDFites are not established to correct market failures, but to fulfil the resource demands of the Developmental State. There seems to be no end to this demand of the state and hence to the outreach of the entities.

Evidently, this trend is hindering the growth of the private sector. So much as the SOEs are being the preferred children of the economic system, they are crowding out private enterprises. A resultant output of the trend is a private sector that is being dwarfed by SOEs in almost every aspect of the economic activity in the country.

It is saddening to see a policy sphere that is slowly turning anaemic to a vibrant private sector. The attention being given to innovative and positive economic potential of the private sector is dwindling with each day. Even when there is little attention, it is seen getting twisted through regulatory actions to serve the interests of SOEs. A case in point is directing all trade transactions made with China through the Commercial Bank of Ethiopia (CBE).

If one is to go by global evidence, though, it is clear that economies with lesser dominance of SOEs in their marketplace develop better than those with huge SOEs dominance. This has a lot to do with the entrepreneurial spirit, innovation and competitiveness of enterprises operating under the rules of the market. Such is also the trend for developmental results, such as job creation, literacy, lifespan and freedom.

If anything, the structural bias the Revolutionary Democrats are allowing to run needs to be contained for the sake of the long-term growth of the economy. Learning from the predominant evidence in the global policy sphere, they ought to shift their policy on SOEs – from its current trend of paternalism to the one aimed at rectifying market failures.

What might help them in doing so, however, is creating an effective linkage between their localised policy attitudes to global experiences. Contextualising the local economic problems and their alternative solutions will also help them in picking the right mix of instruments.

Putting the issue of SOEs in the right context will, therefore, show that they are needed only where the market is unable to operate effectively. Everywhere else, their disruptive impact is more than their benefits.

Source : Addis Fortune

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