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
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,
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 peopleís 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
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
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
Uncoordinated tax system reforms, initiated in 2003, saw the
introduction of VAT to replace repetitive
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
Speculation has delved the market into chaos, in which opportunistic
greed preaches scarcity, claimed the
The market was haunted by the unrealistic price cap, ever-increasing
global prices, and high operational costs,
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
Neither powerless nor omniscient, government has its limits, he
Creating competitive markets is easier said than done. It demands
concrete steps to build business confidence.
It would not materialise through one-shot
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
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!