My Opinion | 121197 Views | Aug 14,2021
Dec 28 , 2024.
On a flight between Juba and Addis Abeba, Stefan Dercon, a professor of economic policy and former chief economist at Britain’s Department for International Development (DfID), penned a forward to a book, “Deals & Development: The Political Dynamics of Growth Episodes.” It was 2018, a time when many hailed the new Prime Minister, Abiy Ahmed (PhD), as a herald of meaningful political and economic reforms.
Dercon contrasted South Sudan’s dismal slide into patronage-fuelled opulence with Ethiopia’s seemingly brighter trajectory. He pilloried South Sudan’s elite for squandering oil wealth, which he blamed for plunging the population into conflict and famine. He saw Ethiopia, by contrast, posting growth for each citizen for each year exceeding six per cent annually for 12 consecutive years, accompanied by gains in the health, education, and poverty reduction front. Yet Dercon’s caution rang loud. Mishandling such growth could quickly unravel it.
That prophecy seems apt today. Federal and regional state policymakers and regulators have begun overstepping their mandates, sowing confusion and eroding certainty.
Take, for instance, the Ethiopian Petroleum Supply Enterprise (EPSE), a federal agency that supplies petroleum products to distribution companies. Its executives now intend to limit fuel for new or under-construction stations to curb imports and spur vehicle electrification. According to a study by the Ethiopian Petroleum & Energy Authority (EPEA), at least 500 districts lack a single filling station. Charged with ensuring fuel availability, the Authority wields the mandate to license, regulate, and sanction market forces in the energy sector.
Another illustration of bureaucratic overreach was when the Harer city administration shut down local bank branches, even though only the National Bank of Ethiopia (NBE) has the authority to close or permit the operations of branches in the financial sector. The Addis Ababa Revenues Bureau recently announced wage standards for five industries, including hospitality and garment manufacturers, in a bid to deal with alleged tax evasion. Nonetheless, a law Parliament passed five years ago governing the labour market empowers only a Wage Board, composed of government, unions, and employers, to set or revise minimum wages. The Bureau infringed the law by setting its benchmarks, further muddling the regulatory environment.
These episodes expose a creeping tide of bureaucratic intrusion in businesses that prefer stable, transparent rules. It is wise to remember that capital is footloose and will flee if it senses a whiff of unpredictability. Though Ethiopia’s growth story once dazzled, it risks stumbling if decisions continue to be made by officials who disregard legal boundaries. When state agencies act outside their remit, it distorts incentives, discourages investment, and paves the way for corruption.
Certainty is a precious currency in economic development. Once shaken, trust cannot easily be restored.
In many countries, unclear mandates, abrupt policy shifts, and overlapping jurisdictions create what the authors of "Deals & Development" call "regulatory chaos." Research from Uganda, Cambodia, and Malawi to Ghana and Liberia suggests compliance can eat up to 20pc of a small firm’s annual profits.
In Liberia, over 60pc of the GDP flows from the informal sector, a result of entrepreneurs who fear the morass of paperwork and arbitrary fines that come with formal registration. Uganda’s shifting telecom licensing regime makes contracts a gamble, leaving firms wary of whether their deals will outlast the next election cycle. Malawi’s muddled property rights fuel intractable disputes, driving off agricultural investment.
When rules constantly change, rational businesses hold back, stunting growth and dimming the prospects for poverty alleviation. By some estimates, firms facing ambiguous regulation are 22pc less likely to make large-scale commitments. The knock-on effects include delayed or no investments, lost jobs, and missed opportunities for future growth. For owners of a firm pondering a new factory, the spectre of changing regulations, sudden fee hikes, and bureaucratic snags is often enough to deter them from investing elsewhere.
Interestingly, economists long ago identified the trade-off between rules and discretion. Rules-based frameworks offer clarity but lack flexibility, while discretion-based systems can adapt but breed unpredictability. In low-income countries such as Ethiopia, the worst-case scenario is a proliferation of uncoordinated decisions by local officials and federal agencies alike, culminating in contradictory edicts and wasted resources.
The recent behaviours of a federal enterprise and two city administrations illustrate how bureaucratic mission creep can undermine progress. Federal bodies, regional agencies, and city administrations issue overlapping directives, often ignoring the line between their jurisdictions. This would risk the reversals of gains Ethiopia laboured to achieve over the past decade, threatening to imperil the trust investors place in one of Africa’s growing markets. Once officialdom seems free to do as it pleases, businesses assume the worst.
Understandably, policymakers in social and political transitions could face a volatile environment. A workable alternative is for them to construct a transparent and predictable “deals space,” bridging the gap until rules-based systems are robust. But if officials keep jostling for new powers, the outcome may mirror South Sudan’s or Ghana’s unhappy episodes. The cost of poor governance is immense: Capital retreats, economies stagnate, living standards slump, and the vulnerable pay the price.
Legislators should update arcane laws to restore stability, and policymakers should clarify institutional mandates. Regulations, directives, and circulars, often hidden from public view, need stricter oversight. Agencies should be accountable when they overreach, and citizens or businesses should be able to bring them to court without facing a "Kafkaesque maze," named after Franz Kafka, a famous author known for his stories with surrealism and disoriented characters.
The civil service protections, ensuring regulators do not rotate with every shift in political power, may help anchor decision-making in the long term. That would restore a vital sense of certainty and guard against the temptation of self-serving discretion.
Ultimately, firms crave consistency, not the absence of rules. Businesses can plan if a tax hike is clearly spelt out and widely expected. But, if local authorities contradict federal directives from one month to the next, trust disintegrates.
Stefan Dercon’s admonition should resonate more with Ethiopia's contemporary leaders than ever. The lesson echoes that countries that manage to tame bureaucratic sprawl and communicate policy clearly reap the reward of vibrant growth. Those that cannot often languish. They can preserve a stable environment in which entrepreneurs flourish, or they can indulge in discretionary whims that stifle opportunity. It is a question of resisting short-term power grabs in favour of predictable governance. The cost of erring Ethiopia is painfully high before Dercon’s warning becomes its destiny.
PUBLISHED ON
Dec 28,2024 [ VOL
25 , NO
1287]
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