Published On  Oct 30,  2011






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Recounting Base Case Scenario as New High Wise; Returning Gov’t Vital




The decades after the Great Depression of the 1930s have brought development to the vanguard of international policy making. With economies focusing on reconstruction and revamping productive capacity, varying models of economic growth were brought into the discourse. From staged linear growth models to export-led ones, the time was ripe for developmental dialogue.

Varying tunes of developmental dance prevailed. Whereas socialist countries attuned to centralized planning, capitalists resorted to market driven laissez-faire. Yet, both had adopted planning as a key instrument for revitalizing growth through their war torn economies. For many countries including India and China, the two emerging giants of the 21st century, five-year economic plans remain essential tools of guiding public investment and regulating markets to this day.

The Ethiopian economy has also been managed by five-year plans ever since the first plan was put in place by the Imperial Regime in 1957. Planning has eventually transcended the ideological boundaries of the two subsequent governments to reach the recent Growth and Transformation Plan (GTP). In what Prime Minister Meles Zenawi has proclaimed to be “ambitious but doable,” in his parliamentary address last week, the government has envisioned to double the agricultural value added and put the economy on a sustained growth trajectory by 2015.

Yet, Meles’ address was not conventional. Unlike in the past year, he was on the defensive arguing about the ambitiousness of the economic plan. A change in tone was visible with the 11.2pc projected base-case growth rate depicted as a possible new high. Meles even contended that no other country in the world has managed to sustain such a growth, and settling would not be a defeat by any measure. He also propounded that the high-case scenario, which envisioned an average growth of 14.9pc annually, is just a test of limits and no more than that.

As less glitzy as it was, the speech could indicate a reviewed stand of the government following a one year implementation grace period and evaluation of capacity. It could show the limits after the test. Nonetheless, it was no more assuring than previous arguments.

The change in tone recounts history signifying declining governmental poise towards the plan, claim skeptics. For apologists, this does not bring anything new into the discourse as it merely involves rephrasing the strategic objectives of the plan. In any case, the speech has set a new tone to the usual transformation rhetoric.

Cognizant that staffs of the Brettonwood institutions presented a comprehensive assessment of the national plan to their Board of Directors in the same week, it would be futile to think that the change in tone is neither deliberate nor noticeable.

Affirmatively, the report acknowledges the strategic objectives of the plan and the boldness of the state. Yet it is also highly critical of some aspects of the plan. It criticizes the fact that the plan is overstretched with no defined means of financing and bashes its heavy reliance on public investment and utter ignorance of the private sector. It was undoubtedly the most detailed evaluation undertaken on the economic plan.

As it appears, the plan envisions instituting prudent monetary and fiscal policies that could ensure rapid and inclusive economic growth. At the base case, it looks to push agriculture forward at an annual rate of 8.6pc whereas industry and services would grow at a rate of 20pc and 10.6pc, respectively. Conversely, the high case would take the grip of agriculture, industry and services at a rate of 14.9pc, 21.3pc and 12.3pc, respectively. Whereas the former sets overall growth rate at 11.2pc, the latter would take it to 14.9pc.          

As deliberate as the change in tone might be, it indicates a moribund of financial optimism. An expanding gulf between expected and actual implementation capacity can supplement the retuning, much less so than local level legitimacy deficit.

Economic planning rightly provides considerable leverage for public mobilization, no different with the GTP. At the outset, the mood was so high that neo-liberal bashing pushed thoughtful critics aside. It is as if poverty can be wiped out so easily that the high-case growth rate was taken as normal. Public mobilization was aggressive and political commitment was seemingly mainstreamed.

As time went by, however, the objective bond between the state and the public began to decline. Arguably, the legitimacy of bureaucrats at the local level started diminishing, which in turn affected public enthusiasm. Short-termism and rampant corruption worsened the case. All of these aspects added up to finally restrain local level implementation capacity.

On the economic front, the challenges are mounting squarely. Outsprinting service sector growth flawed the structure of the economy. With industry taking a share of only 13pc of GDP and the service sector bulging beyond 43pc, the gap between aggregate demand and supply grows rapidly. As the current rate of inflation which stands at 40.1pc signifies, the structural bias of the economy is manifesting itself on price levels. So long as the rate of food price increment is greater than that of non-food commodities, the burden of the inflationary pressure on the poor will be colossal.

Indeed, the economy is on a fast growth trajectory with average GDP growth standing at 11pc. Nevertheless, over 80pc of the consumption backing the growth comes from the public sector. To the dismay of the government, increasing public investment remains inflationary as it increases aggregate demand. Stumpy productivity complemented the growth that little value added trickled down to solve the supply constraint. Hence the joint occurrence of growth and inflation.

Prevailing global recession has also made financial mobilization difficult. An off budget financing requirement of 569 billion Br, of which 55.5pc is in foreign currency, would not be easy to meet amid a global recession. With Chinese and Indian economies constrained by the Euro Zone debt crisis and a productivity downturn in the US, development financing is not coming along as expected in the plan. In light of this, the change in tone might be wise.

Although single digit inflation was an economic prerequisite for the success of the economic plan, the structure of the economy will inhibit its realization soon. As the Ethiopian reality goes, monetary policy passively reacts to fiscal policy. Hence, any measure to tighten monetary policy would have a growth-reducing effect for it would limit fiscal space. This would be unfortunate as it could reverse the achievements of the past eight years.

Maintaining growth within the current inflationary situation would demand recounting the base case scenario as a new high. Doing so would help to avoid economic overheating but it must be complemented with thoughtful fiscal prioritization.

Similarly, the new high might require settling for a bottom double digit inflation rate. Growth driven by public investment would inherently add demand pressure on the economy, as would the investment outlaid in the five-year economic plan. So long as curbing public investment is unacceptable for the government, living for the bottom double digit inflation cannot be unjustifiable.

Nevertheless, it cannot be realized with rising inflationary expectations. That is why bold speech needed to accompany the change in tone. The public must be assured of governmental actions. It is only through enhancing legitimacy that the inflationary expectations can be tamed.

After all, embracing the private sector as an engine of growth would be defining. Non-inflationary job creation could be ensured through vibrant private sectors as employment would vary along with aggregate demand. Limiting the role of the state in the economy is one way to ascertain efficient resource allocation and avoid inflationary expectations.

Any realistic evaluation of implementation capacity must bring flexibility into the scene. It is of high demand at this high time of redrawing the developmental course. Resolving the legitimacy deficit of local government officials and putting in place resilient implementation capacity is definitive of future success.

If so, Meles’ change in tone could set the stage for realistic and inclusive growth. 





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