Private Sector Prominence Essential for Sustaining Growth

For the administration of Prime Minister Hailemariam Desalegn, which takes many of its policy tricks from the compendium of policy books authored by the late Meles Zenawi, macroeconomy has been the beneficiary of little or no innovation. Referring back to the basic books of Melesnomics has been the common trend for the macroeconomic policymakers.

As much as Hailemariam is, slowly but surely, consolidating his power, his influence on macroeconomic policymaking remains limited. Of course, this does not mean that he does not leverage any power in the sphere of assumptions, projections and iterations. It rather means that his guidance of the process is limited when compared to his predecessor.

If there is anything that Hailemariam has inherited from Meles, it is the ambition for fast growth. In the parlance of the ruling EPRDFites, this growth ought to be equivalent to the speed of a person running away from a sudden landslide. It is only if the speed of the person, the explanation goes, is greater than the speed of the landslide that the person could survive.

From such rhetoric emanates the popular proclamation of double digit growth. If one is to go by the books of economics, this involves pushing the lower threshold of the widely recommended seven percent growth rate – officiated by the United Nations Millennium Declaration – crucial for the significant reduction of poverty. Hence, every statement by the ruling Revolutionary Democrats continues to highlight the growth story.

Viewed under the prism of double digit growth, therefore, the latest approval of the Macroeconomic amp Fiscal Framework (MEFF), extending from 2015 to 2019, could be taken simply as a natural extension of this trend. By enabling the framework to serve as an official document for macroeconomic management, the Council of Ministers (CoM) – the highest executive body of the state – seems to enjoy seeing economic expansion being provided with the utmost attention.

Under the latest MEFF, the Ethiopian economy is foreseen to grow at 11pc through to 2019. Public investment will continue to be the major driver of the economy. And roads, power, education and healthcare development will be the major areas for public investment.

Surely, this framework is another document that shows the comfort the EPRDFites are fetching from the heavy state push of the economy. It also shows that they are committed towards extending the various dividends they are obtaining from their long overdue economic model.

Economically speaking, however, the latest shape of the framework shows that the state will continue to be the dominant player within the Ethiopian economy for yet another five-year period and there will not major policy shift in this term. As a result, the Ethiopian private sector will continue to be sidelined to the less strategic periphery of merchandise trade, where it continues to enjoy a relatively better standing. Everything else will be under the direct ownership, or close scrutiny, of the ever-growing state.

Tracing back to the early days of the Revolutionary Democrats, one can see that most of the governmental declarations were relatively liberal in stating that the private sector is the engine of economic development that they want to bring to the nation. Their economic policies, from ending the wholesome export quota to reforming business registration, were also supportive of their statements.

It is as a result of their policies that a large part of the existing private sector came into existence. This, certainly, was assisted with the change in the global power dynamics. The prosperity of the West, the downfall of the Soviet Union and the adoption of market-based economic policies by the rising China have all played their own role in the matrix. None would, however, compare with the role of the commitment from the side of the governing elite.

It started to change with time, though. Instead of giving the private sector the rightful role it needs to play within the economy, the Revolutionary Democrats made the state the predominant player. Whereas the state sees the light of the days, the private sector got pushed into the shadows of marginalisation.

According to latest reports by the World Bank, this bias has grown so big that the public investment of the Ethiopian state is the second largest in the world. Out of the total investment the nation’s economy witnessed in 2013, a little over 80pc was undertaken by the state. This leaves only about 20pc to the private sector. Adding to this is the 85pc stake of the state in the aggregate consumption in the same year.

Contrary to these very policies, however, Hailemariam’s administration envisions bringing about a structural transformation in the economy. If one is to go by the science of economics, this vision involves shifting the majority of the total output of the economy, employment and capital formation not only from the agricultural sector to the industry, but also from the public sector to the private sector.

There is almost no country that has achieved economic transformation without this essential shift. Even the East Asian countries that the ruling EPRDFites take by example have gone through this essential shift – although the pace at which the shift was realised differs between countries.

It is this same contradiction that the latest MEFF embraces. It looks to sustain the growth momentum of the economy, but it also wants to keep the state at the helm. It is as if the state wants to have its cake and eat it.

As it stands, the Ethiopian economy hosts a serious imbalance between the public and private sectors. This imbalance is a serious threat to the sustainable growth of the economy.

Sustainable growth can only be achieved if the private sector is provided with sufficient operational space and when the state is limited to functioning where it is most efficient – regulating the market. A bias in favour of the state will certainly hinder the growth of the economy and its job creation potential.

That is what has been witnessed over the past decade. The 10.5pc gross domestic product (GDP) growth rate of the past decade was not able to produce enough jobs to the increasingly young population of the nation. Hence, unemployment remains a major headache to policymakers.

Many countries, from Asia to Sub-Saharan Africa, have managed to translate their growth to real-time jobs by giving the private sector the essential priority in their economy. Their trick is simple – the better the incentive for the profit-oriented sector, the higher the absorption capacity it creates.

No different could the case be for the policy gurus of Hailemariam’s administration. If they want to sustain double digit growth and job creation, then they must pay due tribute to the sleeping giant – the private sector. No statist policy could replace this, at least not in a sustainable manner.

Source : Addis Fortune

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