‘Addis Abeba Consensus’: the Next Phase in Ethiopia’s Development

Oct 5 , 2019
By Eyob Tekalign (PhD)

While the recent healthy debate in these pages on the Homegrown Economic Reform Agenda is welcome, some misconceptions should be clarified and a consensus built around the economic reform programme that aims to correct imbalances and ensure a stable macro-financial system, argues Eyob Tekalign (PhD), Ethiopia's state minister of Finance.

The recently launched Homegrown Economic Reform Agenda aims to drive sustainable and inclusive growth to ensure the path to Ethiopia’s prosperity. The agenda was prepared with the same decisiveness with which Prime Minister Abiy Ahmed (PhD) has championed reforms across the political and social spheres. It was developed through a rigorous deliberative process to identify the binding constraints and drivers of economic growth in the country. Homegrown and heterodox in its nature, it extricates itself from any ideological attachment and employs a pragmatic approach to address emerging economic challenges and seize growth opportunities.

On these pages, there is a lot of healthy debate on how strong our progress has been, or what would be needed to transform the Ethiopian economy further, and whether the government’s plan makes sense. We fully welcome such debates. Fulfilling our ambitions to become a middle-income country by 2025, toward job creation and for generally improved living standards will require a shared commitment across society.

The points raised by some of the critics suggest a narrow interpretation of the reform agenda’s measures as well as the country’s growth trajectory. The recent critics on the agenda have raised issues related to the diagnosis of economic growth and its drivers, as well as structural reforms and ideological inclinations. The arguments against misguided growth diagnostics and the disputes over the role of capital accumulation as the driver of growth, for instance, defy the susceptibility of empirical exercises, such as a growth accounting exercises, to statistical uncertainties. Precisely because of these uncertainties, the reform agenda relies on broader diagnostic analyses, beyond the decomposition of growth into the contributions of the factors of production.

The role of investment (capital accumulation) to Ethiopia’s growth in the past decade is supported by numerous statistical evidence, including the national accounts data, which shows that investment has been the main contributor to growth on the demand side; public finance data, which indicates a significant increase in public investment, and the financial and external sector data, which reveals that the lion’s share of domestic credit and significant amounts of external debt and grant flows were channeled to finance mega public sector investment projects.

On Ethiopia’s structural challenges, critics argue that the reform agenda has misplaced the country’s structural priorities. A thorough analysis of the reform measures shows the interlinked challenges it has identified at the macro, structural and sectoral levels. Structural elements-that one author claims as “real structural problems in today’s Ethiopia”-are captured across the reform agenda. For instance, to address human capital deficiency, the reform calls on building human capabilities; on structural import dependence problems, it envisages improved agricultural productivity and promotion of import-competing industries; to reduce structural dependence on external finance, the reform demands fiscal prudence, enhanced domestic resource mobilisation, including through capital market developments, and aggressive export promotion. To deal with structural unemployment in the economy, it places job creation at the heart of the reform. A careful reader would actually notice the critic’s tacit admission of the robustness of the reform plan without saying it directly.

Other criticisms dwell on ideological fixations to erroneously compare current-day Ethiopia to the economies of African and Latin American countries during the SAP era. The home-grown economic reform agenda is fundamentally-in timing, purpose and approach-different from historical experiences of reform, often associated with The Bretton Woods Institutions’ conditionalities, in the developing world. The IMF-WB stabilisation and structural adjustment programmes in the 1980s and 1990s in Africa took place in the context of collapsing economies, with growth often negative and social conditions rapidly deteriorating. Ethiopia is launching its own reform programme on the back of continuing growth success, with double-digit growth that any other developing country would envy.

It creates a fundamentally different circumstance for rebalancing. It aims to sustain growth; it is neither to initiate growth nor to break a recession. It seeks to sustain the country’s double-digit growth through measures that address the headwinds that surfaced due to sub-optimal macro-financial policies.

The main critique of classic structural adjustment and stabilisation programmes, with their emphasis on unleashing the private sector, was that there was little chance for a "supply response" in output growth as the structural conditions of these economies, such as their level of infrastructure and human capital, was in a dreadful state. The evidence is strong that a private sector response was hardly possible in that period, given the fundamental structural conditions.

Ethiopia’s circumstances are again distinctly different. Unlike most of its peers today and developing countries during the SAP era, it has invested in the economic fundamentals-infrastructure and human capital development-extensively. That has allowed it to initiate and sustain growth for more than a decade. Most of the countries that implemented SAPs lacked the infrastructure and human capital to undertake market-enhancing measures. Conversely, one of the rationales for the reform in Ethiopia is to leverage its successful investments in infrastructure and human capital to unleash the full potential of the economy: hence, the burgeoning focus on supply enhancement, private sector development and quality growth. Providing better market signals accords far better opportunities for the private sector to respond now in Ethiopia than ever was the case during the period of structural adjustment programmes elsewhere.

This is not just a reform program with our backs against the wall, and some enforced move toward a “Washington Consensus” in which the state’s role is pushed aside. It is about sowing the seeds for sustaining the growth further. It is about making sure that our state-led investments in infrastructure and people can be completed and that jobs are being created through unleashing opportunities for private firms, but with the state continuing to support the economic transformation strategically. As the economy becomes more complex, it is clear that it cannot be guided by the state solely. The state cannot do all and should definitely not hinder the emergence of successful firms at home that can create jobs and better living standards. Instead, it should make more room for them. The reform envisages a gradual move to a market-based system with government intervention in priority sectors and the sequencing of reforms in both the product and financial sectors.

Most importantly, the reform plan is neither proposed nor imposed on Ethiopia by international institutions. Spearheaded by some of Ethiopia’s finest minds, as Prime Minister Abiy recently put it, our reform plan is Ethiopian through and through. Just as we have done in the past, we recognised the need for a correction ourselves, and have designed our reform agenda with that in mind.

It is important to correct an oversight some critics made associating the reform agenda directly to the initiatives of development partners, one making a specific mention to the USAID’s new project, Advancing Economic Diversification in Ethiopia. That project, which is in its inception stage, is one of many that aim to support export competitiveness. The government views and welcomes these kinds of projects as a complement to its reform efforts, not as its guidance tools. If our international friends in the East or West are willing to support our plans, we will welcome them. Ownership of the agenda matters, not just out of pride, but also to be successful. Research on reform programmes has shown that if it is not locally "owned," the chances for failure are much higher. This is our agenda, and Ethiopians, as well as our partners, need to recognise this. If consensus is a word to be used, we hope the reform plan will rather be a broadly shared "Addis Abeba Consensus".

The reform agenda aims to leverage the country’s considerable investments in infrastructure and human capital to achieve high-quality growth, job creation and poverty reduction through private sector development. Commendable progress has been made during the past decade to address infrastructure constraints. However, the return on these investments can only be realised when the productivity of the private sector is enhanced.

In the coming three years, the agenda, through a complementary macro, structural and sectoral measures, aims to address the most binding constraints on growth. A wide range of constraints to progress exist in Ethiopia in human capital, infrastructure, market structures and regulations along with sectoral imbalances.

All should recognise that the Ethiopian economy is facing serious imbalances that we must continue to address. Any realistic approach toward a longer-term vision for development needs to have a sensible plan for the short-term challenges today. These economic challenges are real. Inflation is running above 15 percent per year. Foreign exchange is severely rationed, while the parallel market exchange rate premium is well over 20pc.

These are signs of serious macroeconomic imbalances. Meanwhile, while the state has been strong in driving much of the recent progress, it is not sufficiently being complemented by a thriving private sector that creates jobs across the economy from entrepreneurial firms and large firms alike.

The Reform Agenda is thus the government’s approach to drive further progress, aiming for a new balance: within the macroeconomy in the short run as well as between the public and the private sector, in order to create space for the next phase of our growth and development success story.

It aims to preserve our progress, including the high growth of the economy, through this balancing act and further investment in our structural base, in hard economic infrastructure (such as energy and roads) and soft infrastructure (such as our human capital but also our economic governance).  On the macro front, the main objective of the reform is to correct imbalances and ensure a stable macro-financial system, which is critical to improve access to finance and boost the confidence of economic actors to support growth and job creation. Structural reforms aim to create an enabling environment for investment and improved productivity by removing structural bottlenecks. Sectoral reforms envisage to address constraints and market failures specific to productive sectors, such as agriculture, manufacturing, tourism and mining, that are critical to poverty reduction and job creation and have significant market potential.

The agenda is in line with the political, economic and social transformations that the country recently envisioned. In the notion of Medemer, the reform views past achievements as its building blocks and aims to capitalise on the resources of all segments of society. Ethiopia has misused numerous opportunities for change in its recent history. As many recognise and the reform agenda elaborates, Ethiopia’s double-digit growth for the past decade-and-a-half has been statistically exceptional. It is critical that we remain vigilant to internal and external factors that could negatively impact the growth trajectory. We have untapped resources - in natural and human capital and market potential - to realise a prosperous country if we pull our resources toward a shared vision of prosperity.

PUBLISHED ON Oct 05,2019 [ VOL 20 , NO 1014]

Eyob Tesfaye (PhD), UNCDF program director for financial inclusion.

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