If anything is to come out of Ethiopia as a result of the current global financial meltdown and the subsequent economic crises, it is a vindication of the centre left line the Revolutionary Democrats have been following over the past nearly two decades, but more strongly since early 2000. Many of them now feel what is engulfing the world, and the desperate effort by leaders of the 20 big economies is evidence to what they have been arguing: Neo-liberal economic prescriptions have reached a dead-end!

In the midst of this global crisis, the chief ideologue of the Revolutionary Democrats, Meles Zenawi, produced a 38-page policy paper in February 2009, believed to have been presented to the council members of the EPRDF who met recently.

To his disciples within the rank and file and supporters outside, Meles’s paper is one that is politically comforting; to his critics and opponents, it is ideologically challenging; and to the academia, if at all there is any left meaningfully active, it is indeed intellectually stimulating. It is also interesting to note that his is a lone policy paper to come out of this country to date; no other entity or political party has yet produced and made publicly available papers analysing the global economic recession and how it would affect Ethiopia.

Meles says not significantly, though, that there would be limited impacts both negative and positive.

The Chief Priest of the Revolutionary Democrats superbly analyses - in the most ordinary fashion possible - where, how and why the current global economic crisis began. It all began in the United States with the collapse of the real estate market due to what is known as “sub-prime mortgages.” It is a loan product that evolved over the years in the United States where highly liquid banks were in desperate search of markets for their products.

In complete disregard to borrowers’ ability to service debts, banks were financing real estate firms, even when they sold houses to those who were not making down-payments and did not have the income to pay back their mortgages. The house buyers, on the other hand, got into a type of commitment they knew they could not sustain, gambling to sell their houses for more and make the difference.

Selling debts to others was not limited to individual home buyers, though. The banks themselves were in the habit of registering these debts as assets on paper in order to sell and resell to various other groups in the financial market inside the United States and outside, such as in Europe. They were known as derivatives when they were bought and resold by insurance firms. Add to these a complete lack of regulatory oversight by authorities to ensure the health of the financial sector.

First victims of the crises were semi-state owned mortgage firms in the US, such as FannieMae and FreddieMac, which had a combined capital of 1.8 trillion dollars. Together, they had guaranteed 5.2 trillion dollars worth of mortgages. 

The result was too horrific for the world to contemplate. The American banks, with a history of paying billions of dollars in bonuses to their executives, were swarmed in what the industry came to describe as “toxic debts” worth 700 billion dollars. The contagion continued unabated and killed a mega investment bank in the United States - Lehman Brothers. American policymakers were too stunned, overwhelmed and uncertain to act, thus saw one of their monumental financial institution go into abyss.

They did not let this happen again. After injecting close to 84 billion dollars of public funds, with a punitive interest rate, they had saved the almighty American Insurance Group (AIG), backed with one trillion dollars in assets, from a complete collapse.

What they did not save is the world economy from the financial contagion and the credit crunch that followed. There is now a global recession of the deepest kind ever seen since the American Depression of the 1930s. What followed was a shrinking of global increase in GDP to 1.5pc, a decline of global trade never seen in 80 years, and the unemployment of close to 57 million people worldwide. In the United States, a country that exported all the trouble, more than 600,000 people are added every month to the jobless number of 5.1 million, constituting 8.5pc of unemployment, the highest in 25 years.

No amounts of interest rate adjustment to 0.25pc or even below zero, or hundreds of billions of dollars injections into their respective economies in a bid to spur activities have bailed them out from the trouble. To date, rich countries are believed to have spent close to seven trillion dollars as an economic stimuli package to rescue the global economy from deep waters.

This turn of global economic events is well-documented and persuasively argued in the paper produced by Meles.

But he goes further in examining the structural shift in the global economic order. He analyses what it means to the various forces and actors active in the global economy. So is the impact on poor countries well laid out in his paper.

Though they share no blame for the current crisis originated from the United States and Europe, the populous in 60 countries of the world’s poor, also known as the bottom million, are sliding back to poverty as a result. The International Monetary Fund (IMF) was forced to reconsider its growth forecast for Sub-Saharan Africa to 3.3pc, and cut back from its original estimate of 6.7pc.

Its Managing Director, Dominique Strauss-Kahn, warned in Tanzania last month that people in poor countries may not be directly affected by the financial meltdown or the economic crisis. But he sees a second wave hitting them that will come belatedly but stay for a while with them.

For many critics of the Revolutionary Democrats, here lies the paradox. When the world economy is shrinking and that of poor economies caught up by the wave, how is it possible that Ethiopian leaders claim to have an economy that is bound to grow unaffected by 11pc? How is it even possible for the economy to expand by 6.2pc as the IMF claims?

For Meles, these critics and sceptics are “domestic rent seeking neo-liberals;” they swallow whatever neo-liberal prescriptions they borrowed without first properly chewing on its merit. They remain stuck with the neo-liberal market fundamentalism even when western countries began to contemplate nationalising their busted banks.

It is clear that Meles used the global situation to fire an ideological assault on his political rivals. He declared not only that the global economic crises would have no fundamental problem in the short or medium terms, but that it also bears witness to the fact that development policies designed and pursued by the Revolutionary Democrats are, “right, powerful, and withstand any turmoil.”

There is a bit of preaching bordering self-righteousness here.

The Ethiopian economy is far from being described as healthy. If not the structural limitations it is besieged by, and begun from an extremely low base, it suffers from a twin paralysis of record high domestic inflation and the foreign exchange crunch, which is now transforming itself into an inflationary factor.  These are now academic or ideological matters for the average man on the street who struggles to make ends meet or a businesswoman who survives on a marginal profit. They are unable to pay for basic needs due to high prices and shops are deserted to the level where medicines are hard to find because they have not been imported, or to where a company sends a close to 1,000 workforce on forced annual leave and shuts down a plant because it cannot import its additives.

 Are these not signs of an economy that is troubled?

Ironically, Prime Minister Meles Zenawi’s administration had been forewarned about all these effects much earlier by the very people he thrashes as neo-liberal rent seekers. Seeing food inflation galloping as high as 60pc and the foreign exchange reserve depilating to as low as 800 million dollars, they are as much vindicated as he would argue he is about his ideological leaning.

Meles has gone to great lengths to argue that what the world needs to do - and perhaps is about to do - is what Revolutionary Democracy has already foreseen in Ethiopia. That Ethiopia is trying to follow a carbon neutral development path; that agricultural led industrialization growth strategy centres around the tens of millions of farmers in rural Ethiopia and small and medium enterprises in urban areas; that there is less disparity between capital and labour; and that its growth strategy is based on renewable energy after investing billions in building hydro electric dams could be all fine.

Nevertheless, the economy remains trapped in a painful cycle of inflation and agonizing volume of foreign exchange reserve. There is every indication of seeing that this will continue, although there is little difference why this is happening.

As he forcefully argues, both problems are a result of growth in consumption. Today, in all corners of Ethiopia are consumers of industrial goods. This has been spurred largely by the sharp increase in public expenditure and the huge appetite for imported merchandise.

The domestic private sector has not grown as fast as the demand created by this phenomenon. Neither the state nor the private sector is producing as much supply as the demand for all kinds of goods. Simply looking at bank financing, it is clear that a large chunk of it (66pc) is concentrated in Addis Abeba, and not where the resources are, such as Gambella, Oromia, Amhara, Tigray, South or Benshangul; all combined do not even take a 30pc share.

The Revolutionary Democrats have hard choices to make. Either they have to continue in the faith that the current crises are caused by growth, thus the answer is found in speedy growth. They have to bear short term pains, for they could not possibly and immediately create a domestic capacity and industrial base that can produce supplies enough to match the demand.

On the other hand, putting a hold on the demand is another alternative that could be pursued until such time that the macro economy is stabilized. And the Revolutionary Democrats are currently doing that on the monetary front by pushing on the market domestic credit crunch and forcing the banks to keep the money in their vaults. The trouble is, and despite liberal bashing, they are not doing enough. They may need to do more on the fiscal front.