The changing world of politics has become so complex that governing has become a knife-edge play, at least in democracies. Every edge cuts, and every cut bleeds. The imperceptibility of wounds is always weighed against approval ratings, while scores of achievements are scrutinised by public opinion.

So long as political correctness remains the principal venture, penitence is often too feeble to be noticed.

Conferring with major business players on Monday, May 23, 2011, Prime Minister Meles Zenawi latently admitted that the recent market policy rendezvous was costly, at least politically. Aimed at rectifying the troubled consumables supply chain, tax system irregularities and customs corruption were discussed at the meeting.

Meles audaciously stated that a competitive market system is the only sustainable framework, while he underlined that government also has limits. As rare as it is, the U-turn in form, if not in substance, signalled that the Revolutionary Democrats have learned lessons, albeit painfully.    

By adopting price controls, the state has transcended its conventional policy boundary to dispirit businesses, argued analysts. Rebuilding business confidence would be so costly that reducing barriers to competition is the only way out, they proclaimed.

The Dergesque approach of managing inflation and commodity supply shock showed that Revolutionary Democracy, at times, could spare the market for a populist agenda, claimed the political opposition. Price fixing has spiralled inflation up, eating people’s income while causing market turmoil, and it is too late for Meles to admit the policy bedlam, they claimed.

Rampant monopolistic behaviour in the consumables market has driven dominantly structural food inflation up, forcing the Revolutionary Democrats to cap retail prices of 18 commodities in January 2011. As a result, basic consumer goods vanished from shelves.

Disgusted by the predetermined profit margin, businesses refrained from importing, wholesaling, and retailing. So shocked have businesspeople been about the direct price controls that they reacted passively by hoarding, substitution, and shifting.

Since 2005, inflation has picked up momentum. General inflation continued to steadily increase from 6.8pc in 2005 to 29.5pc in April 2011. Growing by an average annual rate of 16pc, it continued to challenge macroeconomic stability. Although it sharply declined from 36.4pc in 2009, to three per cent in 2010, it instantly regained momentum to rise up to 10.6pc in October 2010, another double digit hoist.     

Food inflation, which disproportionally impacts on the bottom 20pc of the income structure, has also gone awry since 2005. Witnessing an average annual increment of over 100pc, it increased from 7.7pc in 2005 to 44.3pc in 2008.

Reinforced by a bumper harvest and stringent monetary policy, such as a lending cap and an increase in reserve requirement, it declined to five points below zero in 2009. Yet, it suddenly jumped to 19.8pc in April 2010. A year later, it stood at 32.2pc, three times more than in 2005.

Uncoordinated tax system reforms, initiated in 2003, saw the introduction of VAT to replace repetitive sales taxes.

This is responsible for the fission reaction of policy unpredictability, confidence erosion, and inflation, claimed analysts.

Tax evasion was prevalent, and the new system created temporary instability while fomenting new loopholes with its strict enforcement since 2005.

In adapting to the new system without narrowing their marginal profit, businesses added all costs on base prices, driving general prices up. However, the reform was so uncoordinated that it instigated a disproportional price increment. Whereas the price of cereals increased progressively, consumables such as edible oil, sugar, soap, and milk powder have gone missing.

Worse, the government seized all edible oil from wholesalers and took control of the distribution through consumer associations. The same was done with sugar, sending people to queue for an average of two hours to purchase goods, if they were ever available.  

Speculation has delved the market into chaos, in which opportunistic greed preaches scarcity, claimed the Revolutionary Democrats.

The market was haunted by the unrealistic price cap, ever-increasing global prices, and high operational costs, claimed businesspeople.

Suspicion prevailed while frank and bold conversations were rare - until last Monday.

In stating that competition is the only means to ensure accelerated economic growth, Meles set the record straight. Seeing that the problem is structural, causing resources to shift from productive to unproductive sectors, the solution should also be systemic, he affirmed.

Neither powerless nor omniscient, government has its limits, he admitted.

Creating competitive markets is easier said than done. It demands concrete steps to build business confidence. It would not materialise through one-shot one-sector measures.

Ethiopian market processes are plagued with oligopoly, an indistinct supply chain, and high transaction costs.

As limited as the market operators in each sector are, so ubiquitous is information asymmetry. The market is also impermeable for new entrants.

With big players abusing the market power, they even established a firewall of loyal bureaucracy and soldiers of public rent seekers. Pushing the cost of doing business up, this has crowded out many small players that would have mainstreamed competition in the veins of the market.                         

The overhaul of such a patrimonial market structure demands instilling incentives to promote competition. The century old banking system of the nation, in which opening a deposit account used to take months and required some bribery, has been changed through competition.

With 14 private commercial banks operating in the market, with a total deposit mobilisation of 38.3 billion Br and market share of 40pc in 2010, customers now have choices. The situation even forced the oldest state owned bank, Commercial Bank of Ethiopia (CBE), to restructure its service delivery and automate its operations.

The scope of the Ethiopian market is also limited. Operators compete for a narrow market niche. As marginal profits are larger in urban areas than rural areas, horizontal contestability is highly restrained. With the market lacking choices in items and brands, vertical contestability is even worse.

Within such a structure, price based competition could not exist, exposing consumers to inflated prices.

As monopoly limits innovation, it reduces productive capacity. The deplorable service provision in the telecommunications sector, signified by sporadic mobile network and abhorrent Internet connectivity, all prove the downside of monopoly.

Lacking a competitive element, the telecoms sector is marred with high prices, poor service quality, and a lack of accountability.

Notwithstanding heavy state intervention, the commodity market in Ethiopia lacks minimal openness. So long as it remains closed, speculation would reign.

Rectifying the structural problems of the market, calls for incorporating competition at every possible juncture. From consumables to telecommunications and airlines, the state should promote competition. Taking lessons from the present market chaos, protectionism should be avoided at all cost.

The way out of the inflation crisis is competitive pricing, and the state should dismantle price controls and let the market operate naturally.

Channelling private sector resources into productive sectors such as manufacturing could only materialise through policy incentives in the form of tax exemption, export benefits, duty-free imports, lease and financing arrangements tailored to priority productive sectors.    

Limiting the overstretched hand of the state would also be imperative to mainstream competition in the market.

Cognisant that a lack of transparency complemented the troubled waters of the consumables market, instituting predictability should accompany efforts of establishing a competitive market.   

So long as they understand the problem, as Meles articulated, what remains for the Revolutionary Democrats is to walk the talk. With the beast being inflation, the saviour is competition!