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With debate on the stifling nature of inflation
raging inside homes and in the rank and file of
parliamentarians, the outcome appears to be more in
line with the chaos that characterises disorganised
and decentralised trading than the sober attention
to economic fundamentals needed during trying times.
While this is to be expected within informal
settings in which there is unfortunately slim data
with which to responsibly gauge the situation,
confusion amongst the government does not bode well.
What is needed is a firm stance and methodical
policy that can ease the problem of rising costs.
It may at first be tempting to dismiss criticisms of
the economic situation as exaggerating the scope of
inflation’s harm to macroeconomic stability. It is
true that rising food prices in a country where
around 84pc of the population still derives income
from agriculture may be killing household budgets.
Furthermore, the 10pc of the population estimated to
be in the category of low and often fixed income
urbanites probably are disproportionately vocal in a
country where communications and the level of
government accountability to all segments of the
population is lower than desirable.
These facts in no way undermine the fundamental
uncertainty about the Birr’s buying power at both
household and macroeconomic levels, despite
assurances by the government that the economy is
“sound”. There is no way around the fact that
currency insecurity deters investment that lacks
sound profit projections. And with high unemployment
rates hitting around 25pc in the younger segments of
urban populations, wages will be harmfully
depressed, with an increasingly educated but
unemployed labour force waiting at the doorstep of
any business. Workers will surely lack motivation
because of the decreased real earnings.
Despite the impressive double-digit growth of the
past five years, these woes will continue to taint
positive reports and rightfully cause people to
wonder just how important the gross domestic product
(GDP) statistics are for assessing the quality of
life. Tellingly, technocrats across the world,
especially in the holistically concerned European
countries, enabled by high living standards to be
concerned about deeper human indicators (also in
countries like Bhutan which use comprehensive
statistical approaches) are beginning to emphasise
other aspects of economic well-being beyond the GDP
reports that seem abstract at the microeconomic
level.
But past all the nuanced strategies that the new
generation of economists are employing, the hard
truth remains that productivity is the most reliable
determination of the real state of the economy and
the best measure of economic growth is
sustainability. Unfortunately, although it is
difficult to reliably estimate in a place where data
is slim, this was not the crux of the lively debate
in Parliament that followed Prime Minister Meles
Zenawi’s brief report on the state of the economy.
It is contentious exactly what has been the engine
to the growth of inflation. A few things are clear:
the construction boom funded both privately with
unprecedented extensions of credit and publicly
through huge infrastructure undertakings is rather
speculative. Commercial buildings being erected at
break-neck speed are successful only in so far as
they continue to be occupied by tenants, businesses
generating income, such as the copious road
projects, will only be useful for the government
that is funding them if commercial activities are
heightened as a result and future public revenues
are increased to repay the deficit spending that is
occurring.
What is troublingly absent from the stream of upbeat
reports about revenue generations is a trend of
technological enhancement or streamlining of
production processes that demonstrates investments
being made to produce more at lower costs. When the
labour intensive supply chains are made more
efficient such that one hour of work yields a higher
volume of quality products, only then will wages
also increase and economic growth be sustainable.
To the government’s credit, it is beginning to hit
the mark with a few policies that should work
towards hitting at the root causes of inflation
while spending (although probably an unsustainable
amount, particularly on fuel) to ease the immediate
burden.
The lifting of taxes on imported grain, though
Ethiopia’s production continues to hit the market at
prices below international levels, and the raising
of the reserve requirement to slow the 16pc credit
growth are both commendable, even if seemingly a
drop in the ocean. The latter policy, aimed at
something that has surprised this administration -
though it should not if it is a keen observer - is
right in spirit but should have come a long time ago
in the form of a series of small incremental
adjustments that would have produced an expectation
effect allowing banks to self-correct credit
extension levels with the feeling that the future
will not be conducive to lending.
While the opposition’s
statements on the inflation issue range from the
overblown calls for resignation to stretches of the
imagination in blaming climate change represent the
same disorganisation and lack of research backing;
they do raise the need for a more comprehensive
response to the problem. Mentioning the potential
detriments of the distressing reports of food
insecurity in many regions as well as the delay of
the belg rains should have beefed up a
stunted briefing.
The public, that is losing patience and ability to
deal with inflation, needs to have its fears
addressed in a more complete manner just as much as
this government requires a solution to the problem
in order to be remembered for the growth of the
economy, not for the growing pains.
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