Policy Unpredictability Pernicious, When Frequented Dreadful

Dec 24 , 2022.

Biniam Mikru heads the department of cabinet affairs under Mayor Adanech Abiebie. But he also has the unfortunate reputation for sighing ordinances that disrupt businesses, if not cause self-inflicted damage to the city administration's revenues. Three weeks ago, he instructed the heads of seven bureaus and 11 districts to stall processing ownership transfers of immovable assets pending further notice.

It was not to be the first capricious decision.

Last year, the Mayor's Office took a similar decision before rescinding it six months later. It may be unfair to blame Adanech and her team for these unpredictable policy decisions. The Mayor is not the first or would be the only official compelled to take actions on the go, prompted by market dynamics the authorities deem undesirable. A decade ago, the city administration under Kuma Demekisa froze all construction activities in the capital for nearly two years, causing painful losses to many businesses.

A few months ago, the State Minister for Finance, Semereta Sewasew, signed an order banning the imports of hundreds of goods bundled under 38 categories. The uproar and chaos the decision brought into the market and the havoc it inflicted on livelihoods imposed a sense of realism on the federal authorities responsible for it. A few weeks later, they had tinkered with the initial list, allowing the hospitality industry and supermarkets to use their forex sources to import liquors and consumer goods.

The disruption a state interference caused in the cement prices eventually led the product to fade from the retail market. Caping cement prices at factory gates while letting loose the cost of inputs the plants no longer control and inconsiderate of the growing cost of production in labour and energy pushed the manufacturers to desperation. The losers remain the end users subjected to paying close to 2,000 Br for a quintal of cement in the retail market, more than double the price the factories sell.

Minister Gebremeskel Challa and his team at the Ministry of Trade & Regional Integration (MoTRI), known for their meddling in the cement value chain, were driven last week to take a policy U-turn. They let the factories sell what they produce to whoever could be interested in buying from them.

These episodes can help reveal the state of utter confusion in policymaking meant to respond to existing crises and shortages. However, the abruptness and spontaneity of policymaking harm businesses that are averse to unpredictable environments.

Corporate managers design strategies, board directors nod, and businesses thrive with the assumption that the future is predictable - mostly. Such an assumption also considers risk factors and unexpected shocks, some of which could even be what Nassim Taleb characterises as "the Black Swans". These are highly improbable events with enormous impacts, but people try to explain them afterwards. From the global financial meltdown of the late 1990s to the economic collapse a decade later and from the September 11th attack to the global pandemic (again a decade later), the world is abounding of Black Swans.

Business leaders often stretch their imaginations to prepare to respond to these improbabilities. They plan contingencies and reorganise themselves and reallocate resources to overcome external shocks to contain losses and survive.

However, when a political and business environment gets defined by perpetual unpredictability whose source is policymaking in a knee-jerk manner, the loss could only be regrettable. Foresight, planning and competence in executions would have made the losses avoidable.

Perhaps with insensitivity to consequences that may have become an official attribute, the authorities often try to justify what forces their whimsical policy actions. It could be about weeding out intermediaries in the cement value chain, taming speculators in the forex market, or arresting upsurges in the property transactions fuelled by federal authorities' zeal to combat official corruption.

Citizens may bear the brunt of these actions, but the city government and federal agencies subject themselves to loss of revenues in hundreds of millions of Birr. The Addis Abeba City Administration had collected over a billion Birr from capital gain tax and related service fees in the six months property transaction were permitted last year. The fewer individuals and businesses appear before officers at the public notary offices, the more federal agencies providing authentication services lose from unpaid fees.

These are opportunity costs from transactions that were to be had. Undoubtedly, they are damaging to residents, businesses and the administrations. Nonetheless, the recurrence of economic policy unpredictability should be dreaded for its plunging impacts in creating economic inequality, political marginalisation and deepening unemployment. It is more alarming when this happens, as often as it does, in a society where weak institutions are unable to discourage and prevent an emerging class from gaining from political connections.

The shenanigan observed following state intervention in the cement value chain could serve as a piece of evidence of how the few connected with the political class - known as agents - enriched themselves unduly and at the expense of the many.

Unbridled unpredictability in economic policymaking where political connections work in feral leads companies to suffer from the unfairly high cost of business. Executives try to shield their companies from unpleasant surprises, jacking up their margins to avoid painful losses due to uncertainty. The real estate market responded by pegging the cost of housing to a Dollar to protect itself from volatility in the forex market immediately after the central bank depreciated Birr's value against the dollar by five Birr from 13 Br in the early 2010s. Again, consumers shoulder the added cost businesses bear from economic policy unpredictability.

Unlike external shocks that would not discriminate on their impacts, unpredictable policies damage markets and consumers beyond uncertainties could have while aiding the few politically connected who benefit from privileged information. Those who are tipped of impending policy moves or the removal of restrictions prepare to profit better than the many who are set to be taken by surprise. To the least, they can hedge themselves from risks associated with abrupt policy changes. Experts describe this phenomenon as "asymmetrical information"; it is a discovery that won Jospeh Stglitiz (PhD) a Noble prize in economics.

Two researchers from China have surveyed politically and non-politically connected companies in 99 countries. Their findings can be startling: "The probability of firms cultivating ties with the ruling elites is higher in countries with high economic policy uncertainties."

The current administration mainly comprises power proxies shaped by decades of political hegemony under the EPRDFites. The ruthless competition for positions of power might have rendered their attitude towards policymaking as a short conciliation to their immediate bosses. The unpredictability could be a mere symptom.

PUBLISHED ON Dec 24,2022 [ VOL 23 , NO 1182]

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