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
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
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
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
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
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
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
Cooler heads better prevail amongst
the Revolutionary Democrats, soon.