IMF and Ethiopia’s Economic Growth
By Dr. Daniel Teferra*
December 3, 2013
In 2005-2009, the Ethiopian economy grew at an annual average rate of 8 percent net, after a 2.6% population increase per year. This was a significant growth compared to previous periods. In 1990-1994, the economy grew by -2.9 percent; 1995-1999 by 1.8 percent and in 2000-2004 by 2.9 percent net.
The surge in economic growth in 2005-2009 was the result of an unprecedented increase in government spending on infrastructure, which was financed through borrowing and foreign aid. The contribution of foreign direct investment to growth was negligible while net export was negative—evidence that government spending did not transform domestic production. Instead, it leaked mostly to the outside world.
The government, obviously, did not partner with the private sector in its growth strategy. Thus, the major beneficiaries of government spending were public enterprises, Chinese state-owned companies and few other foreign firms. There was some contribution to growth during this period from a modest increase in personal consumption spending.
Ethiopia’s annual income per capita (per person) in 2005-2009 increased to $255 (the average for the poorest African countries was $319) compared to only $124 in 2000-2004. The increase in per capita income continued after 2009. In 2008-2011, the per capita income was $320. However, in 2008-2011, the real income per capita (income after inflation based on year 2000 prices), which is used to measure standard of living, was only $131. In comparison, in pre-growth 1991-1994, real income per capita was $295.
Yet, the IMF report asserts that Ethiopia’s economic growth was accompanied by a significantly improved standard of living. Further, it says, “The proportion of people living below the poverty line of $1.25 a day has gone down from 60.5 percent in 1995 to 30.7 percent in 2011; and Ethiopia has outperformed many sub-Saharan African countries regarding poverty reduction.”
Ethiopia is rich potentially and can do better than a poverty line of $1.25 (birr24), which cannot even cover the daily cost of adequate food supply for one person, let alone a family of four. Astronomical prices of food staples and basic necessities have made life unbearable for the majority of Ethiopians. Teff flour costs birr18 a kilo, shiro birr25 per kilo, cooking oil birr45 a liter, butter birr180 a kilo, beef birr170 a kilo, one chicken birr180, and the list goes on.
The very low per capita income and declining living standard during the growth period were rooted in Ethiopia’s semi-famine, subsistence economy. Ethiopia’s production base was too small to feed a rapidly growing population. Ethiopia’s production per capita was half of Kenya’s, but Ethiopia was three times larger in surface area and labor force. South Africa’s agricultural productivity, thanks to commercial farming, was sixteen times higher than Ethiopia’s. During the so-called growth period, some 13 million people depended on some degree of food aid from the outside world. The worst manifestations of famine were avoided because of the generous assistances provided by the United States and others.
There was another tragedy of Ethiopia’s subsistence economy. The economy was too weak to respond favorably to repeated devaluations of the birr. In 1992, the government adopted the IMF program and devalued the birr by 59 percent against the US dollar. This was considered a necessary measure by the government and the IMF to make Ethiopia’s economy and prices competitive globally; and thereby, to improve the country’s trade deficit. The value of the birr has since been adjusted downward periodically. In September 2010, the Ethiopian National Bank devalued the birr by 17 percent, the third time it had done this in just a 14 month period.
However, Ethiopia’s undeveloped and rigid production capability was unable to take advantage of the challenges and opportunities that were presented by the devaluation of the birr. Consequently, there was not any noticeable improvement in domestic production and exports. The trade deficit continued to widen. In 1992-1996, the annual average deficit-to-GDP ratio was 7 percent and by 2006-2010, it increased to 19 per cent.
The devaluation of the birr simply resulted in runaway inflation, which made imports very expensive in terms of the domestic currency. In 2009 alone, Ethiopia’s inflation rate was 36.4 percent, the second highest in Africa, after Congo’s 39.2 percent.
The IMF devaluation program has a problem of its own. It views economic problems from the standpoint of an overvalued currency, which hampers export earnings and debt financing potential. When the IMF devaluation program began in Africa and Latin America in the 1980s, two-thirds of the countries in the two continents implemented the program. Between 1980 and 1985, the IMF lent about $4.6 billion to Sub-Saharan Africa to support the program. During this period, the African countries cut their imports by about 20 percent.
However, their current account deficits did not improve; it was $7 billion for 1980 and 1985, and worse for the intervening years. They continued to experience increasing poverty, declining standard of living and worsening current account deficit. After a painful experience with the IMF prescription, the late Prime Minister Michael Manley of Jamaica rightly concluded that the problem in poor countries is not the search for market for sophisticated wheat farmers, already capable of a high level of productivity, but how to get a simple peasant to become an efficient producer in the first place.
Currency devaluation works favorably in a market economy rather than in a subsistence economy. This is because a market economy, unlike a subsistence economy, has a large number of responsive entrepreneurs, local ownership of industry, sophisticated commercial farmers, large number of export commodities, a well-developed capital market, a mobile and highly educated labor force and an average income substantially above subsistence.
The IMF report says that an economic structure has evolved in Ethiopia, called a developmental state, “whereby the government leads development, state ownership is widespread in economic activities and the private sector is oriented to support the development goals of the government.” But, this is not a new idea. The so-called developmental state is the modern child of socialism.
Economic development cannot be based on other than the free market system. Economic development is inherent to the free market. In a free market system, the profit motive compels continuous technological advances and economic development. Socialism does not possess such internal mechanism of development. Only a transition to a free market economy and democracy will enable Ethiopia to achieve economic development and a cohesive society.
Ethiopia’s potential surplus for food and industrialization lies in earnings from its agricultural sector. Thus, the first task of the transition is to privatize land so that a market-based capitalization process of Ethiopia’s subsistence agriculture, which has been abandoned since 1975, can resume. The current government, however, is not going to willingly privatize land because this will diminish its power.
It is worthwhile to mention why Ethiopia, twenty-two years after the collapse of the Soviet system, has not privatized land and transitioned to a market economy and democracy. When the Soviet system collapsed in 1991, Ethiopia was still a Marxist-Leninist state. But, unlike in Eastern Europe, an alliance of anti-capitalist, powerful secessionist forces emerged in Ethiopia from its Marxist-Leninist state, unchecked by a democratic alliance. As a result, the opportunity to embark on a genuine transition to a free market economy and democracy escaped Ethiopia. Thus, what we are witnessing in Ethiopia today is the same anti-capitalist, command growth system, which continues to stifle the private sector and the economy through state ownership of the means of production and economic activities.
The IMF report overlooks the real issues of Ethiopian development, which deserve thorough investigation. It does not reflect a complete picture of poverty and standard of living in Ethiopia.
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