Efficiency vs. Justice: The Economic Debate

Sep 11 , 2020
By Christian Tesfaye

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One of the more exciting developments to have come with the premiership of Abiy Ahmed (PhD) is a reorientation of economic policy toward markets. It is a return to an economic policy that had currency almost half a century ago. Between Emperor Haileselassie and Prime Minister Abiy, two left-leaning governments, one much more socialist-inspired than the other, saw to it that free markets were not allowed to decide the direction of the economy.

There are nuances here. For the Dergue, capitalism was inherently flawed, and a command economy, where the means of production are controlled collectively, was meant to be in the interest of protecting the working class. The EPRDF was less ideological than the military junta that overthrew the Emperor. Indeed, "pragmatism" was in their blood - they were socialists up until it was clear that the West’s capitalism had won. They also were not necessarily against the private sector, at least according to documents outlining their economic strategies.

With Prime Minister Abiy’s administration, Ethiopia seems to have come full circle. Liberalisation and privatisation of major state-owned enterprises are underway. The government has also been vocal about following a contractionary fiscal and monetary policy and even has plans to float its currency. These are all significant steps for a country with such small aggregate demand.

The debate rages. For those left-of-centre, Ethiopia is making a huge mistake in flirting with capitalism. Markets are no friends to the working class and create inequality. The winners will only be those that are already rich, and those with capital are sure to exploit the opportunity once the government removes its protective hand. They also allege that there will be no demand to stimulate the economy - not enough middle-class population to incentivise production - once government spending slows.

For those right-of-centre, markets create competition and innovation will follow. Yes, this helps those with capital, but it also helps them create jobs. The honest free-market advocates also concede that private sector-led growth might not produce high-GDP rates initially but makes the economy more resilient in the future. They add that the law of supply and demand is not voodoo science like centralised planning but a theoretically sound model that produces price signals and gives the best return on investment for both consumers and producers.

They both have a point. Markets are indeed theoretically sound and do produce economic surplus. For consumers, this is being able to buy goods and services for lower than they are willing to. For producers, this is selling goods and services for higher than they are willing to. Both sides of the market are rewarded.

Unfortunately, for markets to work in this manner, at the very least, there needs to be very little government involvement. It should not be allowed to determine prices, force suppliers to adjust the quality of their products or even distort the market by collecting too much in taxes (or, if possible, no taxes whatsoever).

Therein lies the Left’s biggest contention with the intellectual descendants of Adam Smith. One may be able to forgive the theory of demand and supply for assuming perfect access to information, complete lack of monopolies and oligopolies or failing to consider that people may be irrational in making economic choices.

But it is hard to justify that economics, as a science, says little to nothing about human welfare. The whole assumption that markets should be left to themselves to correct holes and imbalances seems cruel.

What if it takes a decade for the food market to reach equilibrium price and supply, where both consumers and producers are satisfied? Should we allow so many people to be food insecure out of consideration that government intervention would distort the market? Even if an unrestricted food market may mean that the demand is fully met a decade from now, should food insecure people in the present be left to their fates? Do the means justify the end?

The debate being had in Ethiopia about the right economic policy to follow is thus a debate between social justice and economic efficiency – which, as far as I can tell, are somewhat mutually exclusive. It is also why, with very few arguable exceptions, purely free market and command economies do not exist anymore.

Many countries around the world have come to prefer a capitalist-leaning mixed economy that attempts to address social injustices. True, most countries today are largely free-market-oriented, but few governments have policies against publicly provided transportation, education and healthcare. It is no longer about ideologies but what works in creating wealth for the most amount of people.

This is why the national discourse on the direction of the economy is deficient. It argues in binaries – as in politics. It is still about neoliberalism versus socialism - as if there indeed is an eternal struggle against those with labour and those with capital.

But the Cold War is over. It is time we discuss how social justice can be promoted inside an economically efficient system – one of the biggest puzzles there is.

Christian Tesfaye (christian.tesfaye@addisfortune.net) is a researcher and Fortune's Op-Ed Editor whose interests run amok in the directions of both print and audiovisual storytelling.

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PUBLISHED ON Sep 11,2020 [ VOL 21 , NO 1063]

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