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Surely, economics is the most divisive of the social
sciences. The complexity of the issues at stake is
partly to blame, as are the uncertainty of the
results that are found and the causes that are said
to explain them. But economics is also political and
herein lays a large part of the problem. To any
academic economist, the biggest hindrance to
economic progress is often political. This is true
to any inclination, left, right or centre.
At a conference held at the United Nations Economic
Commission for Africa (UNECA) in late June, called,
"Accelerating Private Sector-led Growth in
Ethiopia", a wealth of valuable discussions were
held in the open. The event was largely spurred by
the 2006 Ethiopian Investment Climate Survey (ICS),
by the World Bank, and reflections on Ethiopia's
Industrial Development Strategy. Let us be clear
that conference participants were not all on the
same page regarding the best solutions for promoting
private sector growth. Of course, they did all
kindly listen to one another.
The four years since 2002 have been years of
successive growth, of large public investments and
have seen both agreement on PASDEP and the
implementation of key reforms.
Total factor productivity has increased in a key
sector: agriculture. Unfortunately, productivity in
this sector still remains far below the average
among comparable economies. Worse, some sectors have
actually seen a decline in productivity. The most
notable of these was the garment sector, where it
declined by nearly a third.
Of all sectors, manufacturing has the highest value
added per worker. But despite its better performance
relative to other sectors, value added in the
Ethiopian manufacturing sector remains very low
compared with similar economies. Essentially,
Ethiopian manufacturing is not competitive.
The ICS has identified a real amelioration of
constraints to private sector development in the
four years between 2002 and 2006. Tax rates are not
viewed as such a hindrance, nor is tax
administration. Interestingly, competition from the
informal sector has risen to the top spot as the
largest constraint to formal private sector
activity, according to the 600 firms surveyed.
Let us acknowledge that the government has done some
good things in facilitating the expansion of the
private sector. The relatively straightforward
business of removing legal obstacles to private
sector development is well underway. But the murkier
challenges of promoting growth are still largely
untouched. This aspect of the Ethiopian Industrial
Development Strategy (IDS) is far less well defined.
The IDS, presented at the conference by Tadesse
Haile, state minister for Trade and Industry, is
both a strong confirmation of the Administration's
determination to promote private sector growth and a
disappointing demonstration of an elitist obsession
with control.
As it should, the IDS is clear about the importance
of the private sector as an engine of growth. Some
of its other priorities however, may do a lot of
harm to the cause of private sector development. The
IDS gives the government far too much responsibility
to intervene in the development of the private
sector.
The IDS is strong in its recognition of the value of
the private sector, while it simultaneously
overemphasises the need for government to "correct
market failures". Markets do fail, but not in the
ways the IDS implies. Governments are responsible
for the delivery of essential services, not for the
quantity of socks produced by local manufacturers.
Broadly citing the East Asian experience, the IDS
talks of successful examples of government
intervention in the private sector. It goes on to
say that the government could "rally efforts by the
entire population for a carefully planned
development campaign whereby the whole country
operates like a single corporation".
Who are we kidding here? Are we talking about
private sector development, or of finding a way to
harness the private sector to meet the government's
objectives?
Consider that the biggest obstacle to private sector
growth may actually be the very policy being
suggested. The primary value of a strong private
sector is in its efficiency. Yet, Ethiopian firms
have abysmal records in this regard and it is
precisely the result of excessive government
intervention.
The ICS partly explains this. The 2006 ICS shows
that constraints to private sector growth have
improved, but that growth is still not forthcoming.
The main problem it identifies is in competition.
The lack of it in the formal private sector has
impacted its ability to compete with the informal
sector, allowing this one to take a progressively
larger share of the economy. Ethiopian manufacturing
and industry is not competitive because private and
public-owned firms offer similar services. The
latter distort the competitive process.
There may be opposing views between economists. But
it is sad to see the economists at the head of this
country contradict themselves in defining policies.
Promote private sector growth, certainly, but do not
try to control it.
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