When “White Capitalism” Turns Grey

Ethiopia has yet to adopt democracy, just as it has to embrace economic liberalism in its truest sense. At best, it is flirting with both; defaulting so much with its experiment in democratisation, and meddling in its attempt of liberalization.

Take, for instance, the headline news of Addis Lisan, an Amharic tabloid published by the city administration of Addis Abeba. Wednesday’s edition told readers how nine kebeles in Addis Ketema District are supplying sugar to residents at a cost of 5.20 Br to save them from “being exploited by businesses”.

Here it goes; your typical capitalism being a captive of an old habit introduced by a defunct command economy. Distributing sugar to consumers on the basis of quota and a fixed price smells like the beginning of an era in which the state intervenes in the function of the economy where it should have hardly any business.

The excuse? To protect the public from the “blood sucking and greedy” businesses who are now being accused of taking advantage of circumstances to maximize their profits. Unfortunately, there is some troubling thinking behind this demonization of businesses that threatens fundamental economic policies this country has sworn to follow. 

One would have thought the days when business people are found guilty of making profits were over. However, the issue surrounding the distribution and shortage of sugar prompts one to think that those days when the state blamed “speculators and enemies of the revolution” and severely dealt with them for their alleged sabotage during periodic shortages are still around the corner.

Ethiopia should be an exception in the world family in accusing its businesses of greed in making profit. The nightmare of the past when the whole environment was rather intimidating for businesses is creeping its way back in, it appears. Read newspapers and listen to the statements from officials: it is convenient to blame a businessperson who is acting “evil” in hoarding sugar to maximize profit.

After all, there is still a regime – and its proponents - that barely looks at its own policy shortcomings, which led to the monopoly of production and distribution by the state itself.

Nowhere is this more evident than in the state’s handling of sugar distribution that led to the recent sharp price increases, despite no dramatic growth in demand or a relative fall in output. Shockingly, the gap between the state’s wholesale price for a kilo of sugar (4.90 Br) and what a consumer is paying at the end of the supply chain, between 8.50 Br and nine Birr, is huge. Availability has increasingly become an issue.

Whatever is going wrong with the sugar business has little to do with businesses hoarding and speculating, and being driven by the profit motive.

The real problem is strongly related to the state’s lack of judgment in intervening in the production, distribution and retail of commodities, predominantly sugar and fertilizer, but also increasingly grains.  

Since the 1990s this administration has sworn by the bible of the free market economy. No doubt, it represents a radical advance over the previous regime in terms of policy orientation. To its credit, it has gone a long way to implement market-driven reforms and done away with the central planning system, putting an end to the notorious habit of fixing commodity prices to suit production plans.

On the other hand, it is also struggling with the hangover of the past, and sometimes brandishes communist-like policies. Under the Derg, state owned corporations (including that of sugar) dominated the production and distribution of most basic consumer items. Rationing was introduced to camouflage the periodic shortfall in output largely due to poor management or politically motivated manipulations of demand and supply.

Sugar was one of those commodities dear to household consumption. Up until five years ago, there were only two factories, founded by the Dutch – Wonji and Metehara – that produced sugar. Fincha was added but demand remains unmet by an average of three million quintals a year.

Immediately after the collapse of the previous government’s lousy centrally planned economy the two factories got the freedom to sell their products to whoever asked for them, including the state owned Merchandise Wholesale and Trade Enterprise (MWTE).

A few years down the line, and the old corporation showed a comeback. The state felt the factories needed a central body to organize their procurement, production capability, and management system to save costs from redundant purchases and ensure efficiency. The Ethiopian Sugar Industries Support Centre Share Company was born in 1998, and added to the list of the board of directors of each factory and the authority that supervises state owned enterprises. 

The excuse was soon expanded to include the need to centrally organize their marketing. All three factories were made to sell their products through this new monster. A quasi-open sales system was introduced in which businesses could bid in public auctions, so long as they had the money to buy a minimum of five quintals at a time. The supply, distribution and sales of sugar went reasonably well – although not as good as a genuinely free system would have it – with prices maintained well below four Birr a kilo in the shops.

Then came the corruption saga. Many major businesspeople participating in the auctions, and those managing the Centre, were arrested and accused of business malpractices. Several of them were acquitted later on by a court of law, but not before spending a couple of years in prison. The aftershock brought the auction system to an end, only to be replaced with a more centralized distribution system.

The state owned MWTE, once a weak competitor in the auction system, now enjoys a complete monopoly over the distribution chain, while the Centre provides it with 80,000 quintals of sugar a week at 450 Br per quintal. It gives four kilos of sugar to every household – regardless of demand - through the kebele channel and its outlets, while large sugar consuming businesses – cafes’, tej bets, hotels - must show their licences to buy a minimum of three quintals. MWTE employees are entitled to a quota of 10kg.

The real irony of the situation is not the 100pc price difference between what MWTE sells and the eventual shelf price, but that Ethiopia has exported sugar to Europe for the last few years, while domestic prices have increased unabated. The state is now trying to “stabilise” prices by importing 30,000tn of sugar from abroad. It will be the second import following the 30,000tn, bought in February 2005 from Olam Trading, Singapore, at a price of 195 dollars per tonne.

The present mess in the sugar industry and the ensuing rise in prices have their roots in self-contradictory policies the state follows in managing the economy. It actually started with the creation of the Ethiopian Sugar Industries Support Centre, which is an imperfect replica of the former corporations. It should not be allowed to survive in a free enterprise system when competition, not monopoly, is the rule of engagement.

The administration’s rhetoric for maintaining its grip on sugar distribution is to protect consumers from alleged speculators. It believes massive intervention in the market through administrative control stabilises prices.

Unfortunately, both these claims have already been proved untenable, given the more than 100-fold increase in price in the last year alone. The authorities have apparently ignored the laws of demand and supply that regulate prices in a free market economy. They are committing a cardinal mistake.

The larger economic policy this country follows opposes restrictions on economic activities and favours unhampered growth of private enterprise. This requires minimalist state intervention. After 230 years, the world has seen little to disprove Adam Smith, who believed that the “invisible hand” of competition can act as an economic regulator, and an economy based on private enterprise is the best stimulus to equitable distribution of wealth.

When Prime Minister Meles Zenawi made public statements that his version of Revolutionary Democracy is designed to build “white capitalism”, there should be no doubt that he meant to create a free-market economy in which the state’s function is limited to providing “public goods”, and performing a regulatory role in certain situations; principally defence, law and order, infrastructure, health and education.

It is also the state’s responsibility to protect private property, enforce contracts, and regulate certain economic activities. The latter includes regulating monopolies in utilities or rail services by a single provider which could take advantage of its position in the market to make excessive profits.

The three sugar factories, although all owned by the state, should compete among themselves to sell their outputs instead of offering uniform prices that do not reflect demand and supply.

Are not state owned textile, beer and printing enterprises allowed to compete among themselves and sell their products freely to whoever is willing to buy? Why should the sugar industry be crippled with a system of distribution that has miserably failed to serve consumers or business interests?