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Unwise Throwing of Good Money after Bad to Serve Populist Purposes Results in Greece




The business of governing much is too often about making difficult choices from public policy menus, as the Revolutionary Democrats discovered during their rule of two decades. Managing an economy, which suffers from several structural inadequacies, as Ethiopiaís, is all the more a perennial challenge. A determined focus in realising growth could fuel the economy, and turn out to be inflationary, as much as failure to stir growth in a predestined course could mean decline and, inevitably, the collapse of the national economy.

Political groupings of all colours and flavours emerge in a society subscribing to their preferred ideologies on how the state machinery in control of national resources is deployed to achieve their declared policy objectives. In a constitutional democracy, where the political process should be competitive to allow the existence of multiple political parties which offer their respective policies on the marketplace of ideas, the electorate is meant to have wider choices to pick from, provided that there is a free and fair election.

Sadly, the Ethiopian political landscape is deprived of such choices in policies. Consequently, the electorate appears to be condemned to a salvo of slogans and expression of faith, whether for love or hate. This is depressingly more evident when it comes to economic policy matters; nearly all opposition parties in this country hardly nip on the heels of the Revolutionary Democrats, which have a rather impressive command on the centre-left policy platform they have been pushing for a decade now.

Nonetheless, there is an exception in the congregation of opposition politicking.

The Ethiopian Democratic Party (EDP), led by Lidetu Ayalew, the rather black-and-blue politician, has one feature to be proud of: that is despite all its flaws. It is perhaps the only opposition party that produces position papers on public policies, stating where it stands on political, economic, and social issues.

When the EDP had its MPs in the federal Parliament, it had the luxury of airing these policy statements with however few minutes it was allotted on the floor. Now that it can no longer claim those few minutes that came along with free airtime on national TV, it is forced to depend on press releases, like the one released on December 16, 2010.

In the one and half page press release, EDPís leaders call for swift policy action on the current burning economic issues facing the country, including inflation that is eating up the purchasing power of those on the lower rungs of society, particularly the urbanities with low fixed income. In a leap away from their rightist views, they proposed that the government subsidise gasoline and diesel prices and called for government regulation on businesses that are allegedly overinflating prices.

However, the irony lies not in its propositions per se, but with the self acclaimed liberal bloc that otherwise claims to be an alternative to the ruling EPRDF, whose position on the political scale remains a clear centre-left. As a party with ideological inclination closest to the social democrats, the EPRDF not only insists on policing the country, and arbitrating prices on anything from a quintal of cement to a kilogramme of sugar, but it also uses fiscal policy instruments to manage the economy at the macro level, hoping that it could bring growth and prosperity to an otherwise impoverished nation.

The EDP leaders should have gone far in their dissent from major state interference in the economic affairs of the country.

As leaders of a liberal party, they are expected to accept the role of the state in applying macroeconomic policy instruments to stimulate growth, generate employment and keep inflation at bay, but the use of fiscal policy instrument is only to be reserved until absolutely necessary. They ought to hold the view that the stateís dominance should cease and desist at law crafting and enforcing, maintaining the nationís security and sovereignty, as well as raising just enough taxes to make these possible.

The EDPís positions on the political scale were seriously questioned, if not derided, by those who listened to their publicly pronounced policy statements, whether when they were in Parliament or outside. These announcements usually call for immediate policy actions for the suffering poor whose purchasing power has been frayed to nearly nothing. They often urge the state to subsidise prices on utilities, increase salaries to public service employees, and adjust pensions.

Last week, again, the party included seven plans of action, two of which had to do with the reduction of the ever burdensome and sometimes doppelganger effects of VAT. It also called for the easing of constraints placed on supply side, and the reduction of government spending which would, at least temporarily, relieve the effects of inflation.

While the tax issue is always a welcome topic for discussion, and the civil servants having been sorted out, governmentís spending remains to be seen.

It is the first and last items in the press release that are out of character for a party that asserts its liberalism. The call for government regulation on businesses with allegedly inflationary practices goes against the grain, as does the call for subsidies on petroleum products.

Calling for state largess that is not meant to support the socially vulnerable, as well as the economically disadvantaged and marginalised, and subsidising social services in health, education, and welfare without due consideration for the burden on the national budget is a clear demonstration of fiscal irresponsibility. Neither is it possible to determine whether leaders of the EDP have put forth a well considered recommendation, for the little over a page press release is too slogan riddled to make any economic sense.

They have generally argued that whenever the price of petroleum goes up, everything else follows, bringing about imported inflation.

The debate here is hardly whether or not the increase in the global oil market, which is inching closer to reaching 100 dollars per barrel, has an adverse impact on the national economy. An increase in the international oil price has direct and indirect impacts on the Ethiopian economy.
The direct impact is inflation. In an economy where 60pc of the Consumer Price Index (CPI) comprises household spending on food, research showed that a one per cent increase in fuel prices results in 0.12pc food inflation; the ratio of increase on fuel prices to inflation shows a 0.1pc rise in the general CPI.

The indirect impact on the economy is the build-up of costs on the supply chain. This component largely comprises transport and energy. It is the poor majority who are most dependent on kerosene, which is subsidised, to cook their meals, or farmers use it for lanterns.

The debate should rather be about how wise it is to pump state subsidies into consumption with no prospect for returns on spending, which only serves populist purposes. It is also incongruous to see the EPRDFites with a bent to social democracy become more fiscally conservative and do what is right. Their political opponents with a liberal fascination seem enthusiastic about the government handing out cash in the form of subsidies and urge them to do what might be popular.

Subsidising fuel comes at a serious cost to macroeconomic stability and risk eroding the governmentís fiscal situation.

Before they stopped the bleeding of the budget three years ago, the federal government did just that and spent 1.6 billion Br on subsiding oil prices. With a little research, the EDP leaders would have found that out, and perhaps shared the view that to do the same today would cost the government nine billion Birr - almost 12pc of this yearís budget.

Ethiopiaís import bill of oil has shown an incredible increase from 5.3 billion Br, five years ago, to 30 billion Br in the previous fiscal year, constituting 7.8pc of the GDP. With the increasing trend of oil prices in the international market, the prospect for this figure increasing is alarmingly high.
The disturbing consequence of such state largess is the risk posed to the budget.

If the EDP leaders, the liberal democrats, were to be in power with their determination to spend nine billion Birr on subsidising oil prices, they would have a budget deficit of 3.14pc of the GDP, from the 2.42pc the EPRDFites have managed to maintain during the previous fiscal year. The latter have shown an impressive performance in this respect, for the size of the budget deficit was 0.52 percentage points lower than the three per cent deficit 16-member countries of the Eurozone agreed to maintain in 1997, in Maastricht, The Netherlands.

The administration of Prime Minister Meles Zenawi, in spite of all its programmes of massive public expenditures, is determined to reduce the ratio of the budget deficit to the GDP to 2.1pc this fiscal year. If he were to listen to the recommendations made by the EDP, his administration would have been compelled to increase its domestic borrowing to 13.38 billion Br, from the 4.38 billion Br it has already planned.

Greece serves as an ideal example of what a lack of fiscal discipline does to a countryís economy. A country that stands tall and above other economies of the Eurozone in its generosity to its citizens, successive governments since the mid-1970s have paid tremendously to keep jobs in the public sector, please pensioners, and cover vast social benefits to appease the disenfranchised segment of the left.

These governments appeared to consciously run large deficits to buy political stability. The result is a country that is not only bankrupt, but also with a government that is no longer able to continue with its largess.

The EDPís leaders appear to suggest that the government take funds away from capital expenditure, which comprises 70pc of this yearís budget, to finance their proposed fuel subsidy. This is like taking something away from long-term benefits in order to get short-term relief; it is very ill-advised.

The EDP may very well gain popularity with this prevalent view, but a leader must mull over not only the popular but that which is right. Had the EDP been a centre-left party like the EPRDF, its policy would at least have been in keeping with political ideology.

As a liberal party, its best bet would have been to stick to addressing the issues on the supply side, both in manufacturing, industrial, and services sectors and asking for the easing of constraints which is choking supply. For a political party whose conviction is to limit the role of the state in the economy, arguing that the government has to dole itself unrestrained simply shows that the EDP may not know what it is getting itself into.





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