|
In recent months, there have
been lots of discussions regarding Ethiopia's problem of
foreign exchange shortages. It has become so serious that
Sufian Ahmed, minister of Finance and Economic Development (MoFED),
was quoted by this newspaper, in April 2009, as saying, "Our
weakest link is the foreign exchange . . . So we need
external assistance in the form of foreign currencies".
Digging a little deeper into
the matter reveals that the most important factor behind the
shortage is a huge gap between what the country earns from
its exports and what it pays for its imports. In fact,
Ethiopia imported merchandise worth 5.95b dollars but earned
goods worth slightly over a billion dollars during the first
three quarters of the last Ethiopian fiscal year, according
to a report published by the National Bank of Ethiopia (NBE).
As a result, Ethiopia's trade deficit with the world
economies has reached 4.7b dollars during this period.
One of the policy measures
taken to narrow the gap is a significant devaluation of the
Birr so that imports become expensive and exports become
cheaper in the international market. However, the overall
policy direction that has been proposed and is consistently
being pursued by the administration is export promotion
where devaluation is just one of a set of measures to this
end. The idea behind this policy prescription is that, if
Ethiopia could increase its export of traditional products
such as coffee and 'non-traditional' primary products such
as flowers, it can address the trade deficit problem, hence
the foreign exchange shortage.
But is this move logically
sound and does it address the root causes of the problem?
Historically, all available
data indicate that Ethiopia's foreign trade balance has
basically been in deficit ever since it began meaningful
trade exchange with the developed world. For instance,
Negadras Gebre Hiwot Baykedagn wrote that during the year
1912, Ethiopia imported through the Port of Djibouti,
merchandise worth 7.77m Br and exported merchandise worth
7.58m Br. The trade deficit was around 192,000 Br.
All available data indicates
that, with the exception of years 1973 and 1974, when a
combination of unusually large receipts from sales of
oilseeds and pulses resulted in a surplus, Ethiopia's trade
balance has been in deficit.
Not only has the external trade
been in deficit but also the gap between export earnings and
import expenditures has been consistently widening over the
three successive governments. Specifically, in the 1950s,
imports were relatively low but started to grow steadily
with economic expansion. The value of merchandise imports
increased at an annual average of 10.07pc while that of
exports increased at 8.94pc between 1962 - 1974. During the
military regime, the growth rate of imports averaged about
16.4pc while the figure for exports was a minuscule 0.98pc.
As a result, the trade deficit
kept on widening over the whole period. Similarly, since
1991, the trade deficit has been continually growing. For
instance, trade deficit as a percentage of Gross Domestic
Product (GDP) widened from 12.4pc in 1991-92 to around
15.1pc in 2007-08.
Therefore, even though
Ethiopia's export growth for the past several years has been
healthy and high by any standard, this positive development
has been over-shadowed by an even more robust growth in the
value of the country's imports. Export growth has
consistently failed to solve the problem of trade deficit
and hence the problem of foreign currency shortages.
Successive Ethiopian governments have been financing the
trade deficit from foreign aid and credit leading to the
country becoming increasingly dependent on foreign aid and
loans to cover its imports.
I do not see Minister Sufian's
plea for assistance as either the first of its kind and or
likely to be the last to come from the Ethiopian government.
Since the deficit is widening
rather than narrowing, all debt relief initiatives including
the Highly Indebted Poor Countries' Initiative (HIPIC) would
provide only a short-term relief rather than a cure to the
problem. This is because the country will automatically
begin accumulating another round of debt right after its old
debt is canceled. This is the more likely scenario as most
of the foreign assistance comes in the form of loans rather
than grants.
To rephrase the prophetic words
of Gebrehiwot Baykedagn, unless things drastically change
for the better, the coming generations might be held hostage
for the debt of their fathers; and unless their productive
capabilities (knowledge) are increased and they are able to
pay their fathers' debts, they face an imminent danger of
perishing in abject poverty or migrating to the developed
countries from which Ethiopia had been importing.
Why has the trade deficit kept
on widening despite the fact that the efforts to increase
exports and export earnings have borne results in terms of
increasing the volume of exports and, to an extent, export
earnings?
Ethiopia's balance of trade
deficit can be largely explained by the unequal terms of
trade between agricultural commodities such as coffee and
all manufactured goods including capital goods which are
Ethiopia's major imports.
International markets accord a
higher price to products that are manufactured - or
"value-added" - than to those that are in their raw form.
There is also a well-known problem of structural decline in
terms of trade between primary commodities and value added
ones.
In addition to the terms of
trade issue, most of such countries, including Ethiopia,
have extensively liberalized their external trade regimes
mostly due to external pressure. However, studies undertaken
to measure the impact of trade liberalization on imports,
exports and the overall trade balance of developing
countries have found that liberalization stimulated export
growth raised import growth, leading to a worsening of the
overall trade balance.
A glance at the recent trend in
the import-export data of Ethiopia confirms this finding.
Recognizing the uneven terms of
international trade, many countries, including Ethiopia,
pursued policies of protectionism throughout the 1960s and
1970s to develop national industrial capacity or
import-substitution. The record on such efforts has been
mixed: In many cases they failed; for others, however, such
as the economies of Southeast Asia, the policies were more
successful.
In the case of Ethiopia, the
imperial regime attempted the import substitution policy and
export. However, the plans were not properly implemented.
Overall, the drive for import substitution during this
period was inadequately planned and executed. The overall
efforts were half-hearted at best.
The military regime had also
tried to address the issue with the aim, "… to expand
foreign exchange earnings, to diversify exports, to
accelerate the socialization of foreign trade and to promote
import substitution."
However, what was meant by
diversification of exports was not as such focused on value
addition ('vertical diversification') per se but
promoting other primary products such as minerals
(horizontal diversification). As is the case with almost all
of its development policies, the 'import substitution' drive
of the Derg also failed to bring about any
significant change in the structure of the economy for
various reasons.
With the current
administration, the tendency has been to try and increase
the volume of traditional exports such as coffee and hides
and skins as well as non-traditional exports such as
flowers. However, even though there are initiatives to
increase exports of lower end manufactured products such as
textiles, there appears to be a bias towards horizontal
diversification. It appears that the country has given up on
the issue of addressing the other side of the equation
related to trade deficit problem; reducing and substituting
imports.
But this flies in the face of
some important historical facts about economic development
such as the issue of secular terms of trade deterioration
mentioned above. I believe it is naïve to expect the terms
of trade between, say, Ethiopian coffee and Japanese
automobiles to remain constant or to improve over time. This
is for the simple reason that today's Japanese automobiles
are qualitatively and technologically far superior to those
of, say, the 1950s while Ethiopian coffee has been more or
less the same in terms of quality and technological
complexity over the whole period.
The 'unequal exchange' between
primary products on the one hand and knowledge intensive,
finished products on the other hand, is not the result of
some conspiracy on the part of developed countries. It is
prominently due to the superiority in terms of knowledge and
technology intensity of the latter.
Ethiopia's trade deficit and
the related foreign exchange problems are symptoms and
reflections of deeper problems of productivity stagnation,
absence of structural transformation and technological
advancement. And these are the root causes of the 'unequal
exchange'; and which is why horizontal diversification and
currency devaluation will not solve the problem.
It also seems why
developmentalist thinkers down the ages such as Antonio
Serra of Naples (in 1613), Friedrich List of Germany (in
1841) and Gebrehiwot Baykedagn of Ethiopia (in 1922)
declared the futility of trying to solve the problem by
horizontal diversification or increasing the volume of
primary exports, and staunchly advocated structural
transformation and technological advancement as the only
lasting solutions. Their advocated development path would
require addressing the root problem from both sides of the
equation.
From the export side, it
implies a systematic, gradual and relentless drive to move
away from production and export of primary commodities and "commodified"
manufactures. It would also require well-studied, selective
and dynamic import control and substitution policy which has
become unfashionable these days but have amply paid
dividends to those countries that applied it properly. The
approach advocates a dynamic mix of export promotion and
import substitution.
In Ethiopia's case, import
substitution does not necessarily mean trying to set up
overnight complex industries that require frontier
technology. Initially, it may simply mean an incisive push
and support to straightforward areas such as production of
barley for breweries which is currently imported, or
substitution of wheat imports from Italy for the purpose of
making pasta. It may imply controlling the import of apples
and powdered milk from New Zealand, and producing them
within the country.
In a more substantive instance,
the strategy might require assessing how much of the
indispensable medicine and medical imports could be produced
in Ethiopia by way of catalytic and substantial incentives
to attract foreign technology, foreign direct investment and
joint ventures.
It could also imply a thorough
assessment and comprehensive intervention to kick-start
domestic production of most of the construction materials
that are currently being imported and that are eating away
the miniscule foreign currency reserves.
It implies that spending the
meagre hard currency, earned the hard way either from export
of the unreliable agricultural products or through foreign
aid, on non-essential items such as toothpicks, ordinary
tables and chairs would make the nation a squanderer and
profligate.
In passing, one might also ask:
Would it not make sense to ration the scarce foreign
exchange in a well-planned manner to priority imports rather
than allowing blanket access during relatively 'sunny days'
and blanket access denial during 'rainy days'? Is it not
sensible to pre-plan and use hard currency rationing as a
tool for controlling imports?
One notable feature of the
external trade of the country is that trade in services has
more or less always been in surplus even though the surplus
has not been large enough to cover the deficit in the
merchandise trade. Oddly, little attention is given to this
positive element whenever ways and means are proposed to
address the problem of trade deficit. Ethiopia's
policymakers and implementers ought to consider promotion of
trade in services as an important and arguably easier avenue
for tackling the trade deficit.
If Ethiopia's trade deficit and
the related foreign exchange problems are symptoms and
reflections of deeper problems of productivity stagnation,
absence of structural transformation and technological
advancement, then all the development efforts in the country
should be planned and geared in this perspective; and all
the development debates in the country should centre around
these challenges. The key to international competitiveness
and hence economic development is improving knowledge, skill
and technology intensity of production and service delivery.
Of course, this does not mean
that other issues such as reduction of transportation costs
and financial sector development should be ignored.
Such an understanding of the
matter would thrust aside the long-standing policy squabbles
related to selecting a champion sector that can serve as a
linchpin to all economic development problems of the
country. Specifically, this approach to national development
would shift the debate and the policy focus away from both
the agricultural and industry sectors. It also advocates a
more nuanced (in terms of geography and product) highly
differentiated approach with the overarching objective of
tackling the root problems mentioned above.
For instance, agricultural
development interventions in one locality may entail
provision of targeted, tailor-made support for production of
apples by small-holder farmers. In another locality, it may
entail doing the same for large scale producers of
high-value agricultural products in an agglomerated manner.
In the case of the industrial
sector, the approach may, for instance, mean focus on
promoting and developing large and occasionally specialized
industrial zones in selected priority locations (say
adjacent to the export routes) instead of the current
tendency where each major town is attempting to setup one of
its own. |
