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Published On  Dec 04,  2011
   
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A potent combination of an overheated state-led economy, spiraling inflation, grain shortages, and a bulging population could lead to a bust, if not corrected as early as possible, observes this writer, whose identity Fortune withheld upon request. Rejection of policy alternatives is no longer an option for the government, he argues.

Looming Collapse Highly Probable

 

The notion that state-led development can avoid the boom and bust cycle normal in capitalism is being severely tested in Ethiopia. Although a serious economic crisis or collapse has not yet occurred, all indications are that the current economic policies are unsustainable. The clock is ticking.

There are two factors that are propelling Ethiopia to the brink - vastly increased government borrowing and spending as will as inflation.

It is not as if the Revolutionary Democrats have not been warned. When private advice by former World Bank (WB) Country Director Ken Ohashi was ignored, he went public to express his alarm at the direction of the economy. His desperate but well-intentioned advice was heavily resented by the Revolutionary Democrats.

The International Monetary Fund (IMF) followed suit, just a few weeks ago, publically releasing their previously private advice that Ethiopia was playing with macroeconomic fire. This again seems to have been unheeded.

It is not the first time that the Revolutionary Democrats have gone to the brink of fiscal irresponsibility, but this time it seems different.

Normally, sensible heads prevail. Like the inflation crisis of 2008, measures would be taken to cool things down and restore stability. Yet, in the fevered environment of the Growth and Transformation Plan (GTP) and the Great Renaissance Dam, rhetoric still seems to drown out reality.

Consider two very different examples of this. The five billion dollars required for the Great Renaissance Dam is a big headache for the Revolutionary Democrats, but they have pushed themselves so far into the rationale for the dam that they cannot back down.

Even with the voluntary purchase of bonds by the public and the forced purchase by the private banks, they are raising money in the millions, not billions. The many other ambitious capital projects, including roads, railways, and hydroelectric dams, add to the massive capital demands.

Ethiopians clearly like the idea of a Great Renaissance Dam to be built on the virtually untapped tributary of the Nile, and the Revolutionary Democrats are riding this wave of popularity. But, that wave has clearly been disappearing under the pressure of paying the price.

Inflation has made this worse. With inflation, particularly in basic items such as food, comes diminishing real income for the poor and middleclass, if, the middleclass still exists at all.

With the official rate of crop production increases over the last seven years, the country should be swimming in excess grain. Over 10pc annual increases in official production led the government to not only allow, but promote grain exports in early 2011.

Those heady days were quickly forgotten when domestic grain prices started to rapidly escalate. Cutting off exports was not enough, neither was the ill-conceived and poorly implemented price control that followed.

Inflation has gone its merry way, with food inflation leading the charge at over 50pc over the last year. Instead of changing policy or recognising mistakes, the minister of trade and his deputy, who was really in charge, have been fired. Perhaps this will only be the first in a frenzy of blame for unmet targets of the GTP.

There should be some temporary relief in food prices during the current harvest season. But, the stark reality remains that crop production increases cannot get closer to 10pc, and they cannot even be large enough to keep up with population growth.

Hapless local officials are told that they must reach the targeted increase in crop production, and so they report a 10pc increase. Whatever the official crop estimate is that comes out this year, which will be predictably 10pc or a little higher, the reality will be considerably less and the consequences for inflation highly predictable.

The combination of grain shortages ramping up inflation with an overheated state-driven economy will cause a major crisis. Such an economy will have to go through a painful adjustment back to reality. The social consequences of failing to do so will be enormous.

Having rejected democracy, the Revolutionary Democrats only have their ability to deliver economic growth as their source of legitimacy. All those youth coming out of universities and other education programmes with degrees or other pieces of paper have high expectations and few jobs. It is a potent combination.

Cooler heads better prevail amongst the Revolutionary Democrats, soon.

 
 
 
 
   
 
 
 

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