Ethiopia: Inflationary Growth and Food Deficiency
By Daniel Teferra* (PhD)
June 9, 2014
The Ethiopian government claims that the economy will grow by 11.3 percent this year. Western governments and agencies also speak highly of the Ethiopian economy. They say it is the fastest growing economy in the world.
The World Bank tells us that Ethiopia will join middle income countries (whose income per capita is between $1,035 and $4,085) by 2020. However, Ethiopia’s current per capital income is only $455, which is less than the average income per capita of all low income countries. So, in six years, according to The World Bank, Ethiopia’s income per capita will increase at least six fold.
This is unrealistic and misleading. It took, even the United States of America, one hundred years (from 1907 to 2007) to increase real income per capita six fold. Economic growth is a gradual process and real income per capita grows a few percent per year. From 1907 to 2007, real income per capita in the U. S. increased 1.8 percent on average each year.
The International Monetary Fund (IMF) on its part reported that the inflation rate in Ethiopia has dropped to 9.1 percent recently. But this does not accurately reflect the actual condition on the ground.
In 2009 alone, the inflation rate was 36.4 percent, the second highest in Africa after Congo’s 39.2 percent. In 2011, Ethiopia’s general price index was an alarming 317 percent. Thus, unless it happens by miracle, inflation rates do not decline precipitously.
In the 1970s and 1980s, exaggerated growth stories used to come out of Ethiopia. Western governments and agencies rightly challenged the falsehoods then. While fabricating unrealistic growth figures, the Stalinist regime of Mengistu Hailemariam was exposed by a devastating famine in 1984-1985, worse than the one ten years ago.
Unfortunately, this time, Western governments and agencies are the ones, which are spreading Ethiopia’s unrealistic growth stories rather than scrutinizing them carefully. In actuality, Ethiopia is experiencing inflationary growth; and consequently, real income has declined (see fig. below).
Incomes in Ethiopia have lagged far behind price increases because of the rigid and undeveloped subsistence production. With growth rates this high, Ethiopia should grow its own food or buy from abroad to feed its rapidly growing population. This did not happen.
Hence, in January of this year, the Ethiopian government reported that 2.7 million Ethiopians will need food assistance. Just last month, UN World Food Program (WFP) announced that it “plans to assist nearly 6.5 million vulnerable people with food in Ethiopia.”
Ethiopia is a food-deficit country. That means, Ethiopia imports more food than it exports and lacks sufficient foreign exchange to close the deficit by purchasing food on the international market. Since 2007, Ethiopia’s food deficit has increased dramatically (see fig. 2).
Nobody would like to see another famine in Ethiopia. Thus, the food aid given by Western governments and agencies is crucial to stave off famine. But outside food assistance cannot continue forever; it is not reliable.
The answer to Ethiopia’s food problem is not external food assistance or another food security summit by Western governments and agencies. The answer is transition to a free market economy so that Ethiopia can transform its subsistence agriculture, achieve economic development and be able to feed itself.
In a subsistence economy, output is entirely dependent on natural conditions (adequate rainfall, sunshine and soil). A subsistence system does not have a buffer against starvation and famine in critical times because it lacks modern technology to improve labor productivity and generate surplus. That poor technology of subsistence production in farming and herding dooms a peasant society to starvation in bad years is a function of socioeconomic complications rather than an inevitability of Mother Nature.
A subsistence economy cannot feed a growing population. Worse still, it creates population explosion; Ethiopia is a case in point. This is because, for one, the cost of raising children is much lower in a subsistence system than in an advanced economy.
In the United States of America, for instance, it costs, on average, over $250,000 to raise a child. Therefore, U. S. families are compelled by the opportunity cost of raising a child to limit their sizes.
Family sizes are generally large in Ethiopia. The population continues to grow at an annual rate of 2.5 to 3.0 percent. Forty three percent of the population is under 15 years of age. The infrastructure cost associated with such young population can be daunting even for a developed economy let alone a subsistence one.
In Ethiopia, 85 percent of the population is employed in subsistence agriculture and the peasants scratch a living out of tiny holdings of one hectare or less. Agricultural productivity is among the lowest in Africa. For instance, in South Africa, 5 percent of the population is employed in agriculture. Yet, agricultural productivity in South Africa is 20 times higher than in Ethiopia.
Ethiopia has taken a long time as a subsistence economy, which has been hardened by Marxist-Leninist ideology since 1975. Hence, Ethiopia’s agriculture is severely undercapitalized. In Ethiopia, the absence of a rural middle class, where investment and innovation in agriculture must begin, is primarily responsible for the undercapitalization of agriculture and the age-old subsistence system.
Thus, Ethiopia’s salvation lies in the formation of an enterprising middle class that can successfully carry out the capitalization of agriculture. This process requires privatization of land, tenure security, freedom of work and investment opportunity, and abolition of migratory herding and communal pasture.
The Stalinist regime of Mengistu Hailemariam and the current government, threatened by the formation of an enterprising middle class, held a monopoly over land, thereby living off a backward rural economy. Devastating famines exposed the weaknesses of the previous regimes of Haile Selassie and Mengistu Hailemariam, setting political forces in motion that brought about their downfall. The present regime may not be threatened by famine for now, thanks to food aid from Western governments and agencies.
Natural stresses, such as climatic cycles, are problematic in Ethiopia; and consequently, food deficiency is sure to continue unless there is an effective policy that can privatize land, capitalize agriculture and transform the poor technology of subsistence production. But with the same Marxist-Leninist style of government now in place, there will never be such a modern development, on ideological grounds alone, and Ethiopia will continue to rely on outside food assistance.
However, international food assistance has its own politics. Therefore, western governments and agencies tie food aid to their own self-interest. One cannot fault them for this. The responsibility of freeing Ethiopia from a backward subsistence production and inadequate food supply rests on Ethiopians alone. Nobody will do for Ethiopians what Ethiopians should do for themselves.
Thus, working together through give-and-take cooperation Ethiopians should press hard in unison for land privatization. This will help reform the selfish and restrictive nature of the Ethiopian state, which has monopolized property and power and stifled agricultural transformation and economic development for so long.
Property is the foundation for individual rights. There will be no freedom; there will be no democratic development; there will be no human rights in Ethiopia until land is privatized and property rights are established by law.
*Emeritus Professor of Economics at Ferris State University; (email@example.com) UW-Whitewater.
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