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Notwithstanding the persistent pro-poor policies for the last two
decades, Ethiopian society is still divided into a
very small high earning and highly influential elite
that is mostly educated, while a large segment of
the population is poor and uneducated. In between
these two segments of the population, a middle class
of significant size and clout is emerging. These
divisions are apparent in the private and public
sectors, rural and urban communities, as well as the
manufacturing and service activities.
A constitutional government presides over this division, and the
leadership applies a highly discretionary economic
policy to coalesce the society into a single
economic and political community. In a way, as a
governing party, EPRDF has recently commenced a
three pronged viable economic campaign; GTP,
Disinflation and the Millennium Bond. Any fair
development debate should be based on a fair
understanding of each of these components, and a
detailed analysis of whether the different sections
of the society have contending interests.
The ongoing five year development plan, dubbed as the GTP, intends to
make structural changes to the political economy of
the country. It plans to achieve MDG targets on
scheduled. By doubling the size of the economy in
the next five years, it would serve as a platform to
launch the nation’s pursuit in attaining middle
income status. It would also remove most of the
entrenched disadvantages of trade and development
through massive social and infrastructure investment
across the country.
On the other side, inflation, the general increase in price levels as
declared by the authorities, has been the source of
disagreement amongst the elite. There is no
consensus on its very nature, causality or
magnitude. Many in the debate argue that inflation
is the Achilles heel of the transformation plan. It
is necessary to raise the issue of the Millennium
Bond because it obviously underpins the whole growth
endeavour. Everybody is buying or talking about
bonds, a financial instrument barely mentioned in
the market until the advent of the Great Renaissance
Dam, the launch of the GTP, and the removal of the
lending cap in return for investment in government
bonds amounting to 27pc of all commercial bank
loans.
Noting that the three issues are central for the future of the nation,
the key question would be how the three classes of
the Ethiopian society understand and respond to the
issues.
Certainly, a particular view of an issue stems from the magnitude of
the impact on a given class. On the issue of the GTP,
the society more or less agrees on the goals but
questions at what cost these goals can be achieved.
The main goal of the GTP, at least for the
government, is to induce equitable growth for
progressive national prosperity. For the upper
class, this poses an opportunity of getting even
richer. This would be synonymous with the poetic
expression of “A stitch in time saves twenty
stitches. Give the rich, to please them, more
riches.”
Nevertheless, there is a threat to the status quo in general. Although
it may only be a threat of increased competition or
attrition of wealth for the rich, it may be an
opportunity or a threat for the middle class
depending on their current economic position. Hence,
the GTP is a double edged sword for the middle class
as many may find themselves “structurally” employed
or unemployed during the transformation.
The transformation would change the society’s needs for certain skills,
some skills will be obsolete, while other skills
will become in high demand, and this will have a
positive or negative impact on real income. For
instance, the new emphasis on encouraging local
manufacturing to increase import substitution may
negatively impact highly leveraged exports and
service industries in the long run.
There is also the threat that the disadvantaged poor may become
disadvantaged from the transformation. In what
Stefan Dercon, an economist at Oxford University,
calls “a dichotomy across the poor,” in his research
on Ethiopian challenges for economic integration
across national regions; structural reforms might
bring divergent status amongst the poor. In
retrospect, he affirms that, “The experience during
the first, serious wave of market reform in
Ethiopia, up to the mid-1990s, is documented with an
emphasis on its impact on rural poverty. The
communities studied experienced, on average, strong
positive effects from this reform, and poverty
declined.”
“But a dichotomy emerges across the poor. One group of poor, with
reasonably good endowments in terms of labour,
infrastructure and geography, took full advantage
and moved out of poverty; another group, with poorer
labour and geographical endowments remained at the
same, desperately low, welfare levels, and these
households are in risk of becoming increasingly
marginalised,” he claims.
The most unfortunate and disturbing thing about this poverty trap is
its tenacious persistence to date. For every poor
household that unchains itself from the shackles of
poverty, there is always another that suffers from
new pressures. If it was not for the transfer
mechanisms set in place such as rural and urban
safety nets, the start of social security as pension
funds, subsidised consumable prices, housings and
health provisions.
This dichotomous arrangement with the attendant middle level wading in
hopes of upward mobility is pervasive throughout all
sections of the society, whether rural or urban,
poor or rich, liberal or revolutionary. And while
transfer payments may have helped reduce the social
impacts on the poorest, one cannot be certain
whether these remedies have not perpetuated the
poverty trap by creating a dependent mass, or by
diminishing the possibilities of the richer from the
burden imposed by the transfer payments.
Consensus on the GTP, however, is in the interests of all in order to
address the concerns of all three sections of
society. The government, the private sector, and
civil society, must find stepping stones to build
confidence and avoid pitfalls. One such pitfall is
inflation; specifically, monetary inflation.
Society rarely agrees on the subject of inflation. When it occurs, it
is either out of hand, like in hyperinflation, or
the economy is in a state of crisis, as in the case
of deflation. Few policy makers, even those armed
with high quality economic data, have the skill,
will or power that is needed to steer an economy to
acceptable levels of inflation that can induce an
appropriate level of economic activity.
In developing countries such as Ethiopia, the situation is even more
difficult. This may partly be because of errors in
reporting from the major economic players, or from a
weak financial market. But clearly, there is a more
serious problem.
With 30pc of the population still below the poverty line, employment
standing at 70pc, and millions living without a bank
in close proximity, we need to inject as much
currency as we can into the economy to facilitate
trade at the lowest markets. Rural markets have
nothing but currency to use as a medium of exchange
or store of value.
In a recent study, the World Bank Group (WBG) has identified that the
Democratic Republic of Congo (DRC), Burundi,
Madagascar, Mauritania and Ethiopia are amongst the
seven countries in the world having fewer than 100
bank accounts per 1,000 adults.
The principal monetary policy objective of price and exchange rate
stability is hardly achievable if the currency in
circulation is reduced so much that neither the
newly employed nor the emerging small local markets
face inadequacy in a medium of exchange. The major
Ethiopian institutional constraints remain to be
access to banks and the lack of a quality
transaction database.
Any debate on monetary policy should, therefore, take into account the
fact that inflation has a widely differing impact on
those who have wealth, those who have a fixed future
income stream and those who have no guarantee of any
income. The Central Bank’s challenge is on how to
contextually deploy recognised monetary policy
instruments within the local economy.
The issuance of the Millennium Bond, on the other hand, presumably is a
grand introduction of open market operations into
the Ethiopian financial arena. It can be appreciated
not only as a financial instrument, but as a binding
factor for the three class divisions present in
society.
Ethiopian policy makers promptly consider open market operations as a
major strategy for achieving monetary targets. While
the financial market remains in its infancy, the
Millennium Bond can help entertain the operation
required for transferring monetary policy impulses
throughout the national economy. It would generate a
positive response to the overall growth strategy of
the country, but it is essential to strike the right
balance between the three strategies to ensure that
the needs of all social classes are met. |
