How to Address the Five Structural Economic Issues Confronting a Transitioning Ethiopia. Opinion Getachew T. Alemu

Opinion

Addis Abeba, February 01/2019 – It is really an interesting time to live in Ethiopia. A country that used to once be defined by a suffocating political space is now witnessing relaxation. As Prime Minister Abiy Ahmed told members of the national parliament this morning, suppressive laws are being revised, dissidents are called upon, exiled politicians have returned back, thousands got freed from jail, serious discussions on the future of the country are being held and many more.

But this is not the whole story. There remain challenges with a potential to reverse the course of things. And these range from ethnic clashes to widespread informal gun market, from violent propaganda (sometimes backed by regional state apparatuses), to dysfunctional local government structure, and from populist inclination to lack of sense of urgency in the bureaucracy.

Regardless, the transition in Ethiopia has attracted headlines of the global media and the international community. As the captain of the transition, Prime Minister Abiy Ahmed is also getting international acclaim, with Foreign Policy, a magazine, naming him as one of the global thinkers of the time. Indeed, one could not find a better expression to what is unfolding in the country of 100 million than a senior World Bank official that named PM Abiy’s passion “contagious”. There can be no major shift, as such, for Ethiopian politics, which has for long been identified for its authoritarian tendency and brutal police state.

Much is being said about politics, in almost all mediums. Sadly, though, little is being debated on the economic aspects of the transition. That is why I attempt in here, much as in my other articles previously, on the outstanding economic challenges of the country that is seeing sea change in its political culture and trends.

It is not a mystery that popular pressure is what drove the current change happening in Ethiopia. A realization from the side of the ruling party – EPRDF – that the quest for change has reached its tipping point has taken the interaparty ball to the side of the reformists. One thing that we often forget, however, is that the old guard has also done a good job in terms of leaving the space all the more peacefully. Had they resisted, the cost of the transition would have been higher.

Thanks to the commitment of the reformists, the cost has been reduced and hence the transition has started before the possibilities of a state collapse became imminent.

In the background of the rather inflaming anger in many parts of the country sat the economic marginalization that communities felt. With the Ethiopia being one of the youngest in Africa – 70% of the population of is below 35 – the disappointment of the youth and their subsequent uprising against the status quo put things forward to the transition. No doubt the journey cost hundreds of lives, millions of assets and took years.

Structurally speaking, however, the same problems that brought the old status quo to its knees remain around. If anything, what has changed is the willingness of the political class to listen to the concerns of the public, experiment on new ways of doing things, trying out what could previously be considered mad and dogmatically implausible, and a strong belief from the leadership that the youth can craft their own future.

Indeed, Ethiopia is in transition. And transition involves dealing with intricate sets of problem with various time frames. In such times, time is of essence and focus is precious. The line between clarity and confusion is very thin. Unless everyone pitches in ideas, the burden is indeed huge for any political class (no matter how resourceful it is) to shoulder. That is why I am pitching in my ideas on the five major structural economic issues that we, as a country, should consistently stare at, if we are to cure the economy.

Jobs

There cannot be an economic issue as fundamental and urgent as creating jobs in today’s Ethiopia. We have proved, time and again, that jobless youth that feel marginalized from the economic pie is just a time bomb.

When it explodes, it takes everything away. And sadly, it is easy to push such force to the corridors of irrationality – from religious extremism to ethnic fundamentalism.

As such, Ethiopia needs a new jobs compact. And the policy guidance has to be dynamic. We can no more settle for a jobs compact that is based on linear process – organizing SMEs. Instead, we have to move towards a jobs compact with multiple pillars.

One one hand, we have to identify areas under the state’s realm that could create more jobs. For me, this involves from outsourcing non-value addition services, such as maintenance works (IT tools, office machines, vehicles and so on), janitary services, landscaping, delivery, catering and so on. Further, areas such as irrigation and water management, agroforestry, sanitation, farm input supply, agricultural mechanization, veterinary services, transportation, rural infrastructure, rural finance and so on are areas that the state could create new jobs.

On the other hand, the state ought to create conducive environment for the private sector to create jobs. And this involves revising policy stances, relaxing laws and requirements, creating institutions and easing the bureaucracy. One area, for instance, the state could act on is that of online payment system. Lack of a fully functional online payment system is the single most hindrance for start ups in Ethiopia. As such, creating the policy guidance and plan of implementation for such a system will unlock huge job creation potential, not to mention self-employment.

Similar policy adjustments in foreign exchange, credit system, public procurement, business registration, land lease system and so on could change the way the private sector is doing in terms of job creation.

New ventures of job creation, such as Public Private Partnerships (PPPs), should also be given serious thought. Areas such as urban waste management, infrastructure maintenance, tourism and agricultural marketing are areas that such partnerships could create jobs to thousands of jobless youth.

Investment

Ethiopia has been witnessing significant inflows of foreign investment over the years. Despite fluctuations, net FDI inflow into the country remains in the highs of three billion dollars per annum in the past decade.

Yet, the investment matrix of the nation sees considerable distortions. For one, the investment space is dominated by public investment. Not that this is a problem, in and of itself, but the way the public investment has been made was problematic.

Over the years, the public investment space remains to host wasteful practices and loopholes for embezzlement. As such, efficient allocation of resources has been a pipe dream. Due largely to personal interests and policy misreading, significant public money has been directed to spaces where it has not been productive. Such is the case with procurement of luxury vehicles, outlays for projects with no foundational studies, expenditure on unnecessary events, engagement in repetitive businesses, such as retailing, and so on.

Beyond the inefficiency, however, the unthoughtful pubic investment has been playing against private investment. It not only crowds out private investment, but also disincentives it from productive engagement. It also has been playing a role in picking patrimonial network of champions unfit to a competitive space.

It is not only the public investment that had problems, however. The private investment in the country has also serious problems. First and foremost, the private investment space is filled with portfolio investors with focus on short-term returns. As such as highly risk sensitive, they often prefer to sit idle with their money than embarking on new ventures. They often are seen being guided by herd mentality. They also confuse formal and informal engagement, not to mention of mixing the legal with the illegal. Narrow as their area of engagement is, they often live in the comfort zone of transactional businesses.

This is exactly why, the portfolio of local investors in manufacturing remains minute. So is their involvement in the knowledge space, such as ICT and services.

Thus, there is a huge work in terms of correcting the distortions in the investment space. For a start, an effective and efficient public investment framework ought to be put in place. And this has to be accompanied by stringent accountability structures. It is only when the public investment space is guided by clear visions, objective sets of investment criteria, comprehensive appraisal framework and functional community participation tools that it could produce the intended jobs.

In contrast, straitening the private investment space involves introducing effective incentive schemes and smart regulation. Whereas the incentives will be pulling the investment to where it is highly sought, such as manufacturing, smart regulation will discipline it to play by the rule of competitive market place.

On FDI, the overall guidance has to be towards one that is with long-term perspective and potential linkage with the real economy. We seem to have enough of opportunistic FDI that is after short-term gain. What we now need is one that is committed to producing, enabling supporting local industries, forward and backward linkages, taking it to the global value chain, technology transfer, social responsibility and environmental protection.

Taxes

It looks like there is a wide consensus on the fact that our tax regime has serious problems. For one, we are not generating enough taxes. Further, the tax regime entail serious distortions.

On the amount, Ethiopia’s tax collection to GDP remains one of the lowest in SSA. This has to do with a huge portion of the economy, mainly agriculture, remaining untaxed. Further, the line of taxable economic activities is not expanding with time. So is also the base of taxed establishments.

Cost of tax compliance is also very high. Corruption, regulatory loopholes, poor enforcement capability, informality of economic activities, widespread tax evasion, unregulated border trade and manipulation by MNCs all contribute to low tax collection in the country.

As such, we need to reverse course in our tax collection efforts. We have to end the era of focusing on the narrow tax base, and embark on the journey of expanding the taxable. The era of leaving agriculture untaxed has to also end. Attending the loopholes and enhancing the regulatory capacity (both institutional and human) should also get their fair share of attention from authorities. Equally important will also be the work of making compliance less costly, less time taking and convenient.

No doubt that reforming the nation’s local resource mobilization system in line with the actual potentials of the economy is fundamental to generate the resource for job creation. It is only through an effective, innovative and dynamic tax collection system that sustainable development and job creation could be guaranteed.

Competitiveness

In this time of globalization, competitiveness is the catch word. In practical terms, it means creating a system that produces what the market needs and delivers it on time and at affordable cost. Creating such a system is easy said than done, as it involves the synergy of many elements. One underlying factor in this is that competitiveness a relative and changing feature of an economy.

In light of this, our economy stands at the lower rung of the global competiveness pyramid. And this tells that our systems are sluggish, our business processes are costly, our regulations are less facilitative, our infrastructure is not upbeat and our human resource not highly productive.

Improving the competitiveness of the economy so that it could produce well and sake it well in the global value chain will entail focusing on the bigger picture. No piecemeal approach could enhance our competitive standing. Only an integrated approach would work.

Thus, in essence, the effort to enhance our competiveness ought to involve leaning the bureaucracy, cutting short business processes, overhauling hindering regulations, improving the infrastructure base and skilling (and reskilling) our work force. Such a comprehensive action will need the active involvement the state, private enterprise and other stakeholders (such as donors and civil society).

Enhancing the competiveness of the economy will make it attractive to foreign investment, sustains business profits, reduces cost of regulation and creates jobs. It is also vital to improve access to key social services, enhance the wellbeing of society, infuse fairness and ensure social justice.

As such, there cannot effective economic transition in a multinational country like Ethiopia without giving attention to economic competitiveness. It is through enabling the local economy compete better in the global market place that sustainable development and job creation could be ensured. 

Productivity

Lower productivity is one major roadblock in the national effort for industrialization. In practical terms, productivity entails the time it takes to compete a given production task or the number of items produced per unit of time. In this terms, our workforce stands at a lower ranking compared to other SSA countries or Asian production hubs. And much of it has to do with skill set, exposure to technology, working culture, labor laws and structure of labor market. The graph below depicts the state of our work force.

Improving the productivity of our workforce is, therefore, a crucial engagement. It is vital if we are to attract foreign investment, produce to sell to the world and stand competitive in the global value chain. As such, we need to craft comprehensive policies to enhance the productivity of our work force.

Much as labor right protection is important, we have also ensure that the labor market is competitive enough. And this entail changing the existing labor law in view of competitive markets.

Our higher education, vocational education and internship programs have to also be reviewed with a focus on making graduated employable. The old way of supply-driven education-industry linkage has to also be reformed towards demand-driven linkage. Institutions that enable experience sharing, networking, and reskilling ought to also be introduced. Spaces for freelancing ought to also be created.

As such an integrated package for enhancing the productivity of the labor force need to be crafted and rolled out.

So as Ethiopia transitions from state-dominated economy to one that promotes private sector development, giving due attention to the above five fundamental economic issues will be important to sustain the outcomes.

Indeed, there is so much to hope for in the transition that Ethiopia is witnessing. And that hope could be realized if the economy is managed well. I would, therefore, say that it is high time for the reformists to craft a comprehensive economic roadmap that puts the jobs, investment, taxes, competitiveness and productivity at the center. Only then could we start to put the transition on a rather reliable footing. 

Getachew T. Alemu is a public policy consultant with over 15 years of experience in public and private sectors. He can be contacted at getupfront@gmail.com.