By Bulcha Demeksa
Economic recovery or development in an environment of conflict, insecurity and fear is virtually impossible. The coalition government of Ethiopia therefore must impartially and peacefully mediate between the warring parties in order to create a peaceful atmosphere throughout Ethiopia so that economic rehabilitation can get underway. Force cannot be a mechanism for democratizing a society. Force may temporarily silence a people but it cannot bring about genuine peace and stability.
It may be useful to mention that an effective way to stop war in Ethiopia today is to let the various nationalities be responsible for their own local affairs over political, economic, social and cultural issues. That was why there was great optimism among the subjugated peoples of Ethiopia when the Charter of July 1991 affirmed the exercise of self- determination by the nationalities.
This analysis assumes that there will be peace and security in the country to earnestly launch an emergency economic rehabilitation program. But can we begin to rebuild an economy that is profoundly distorted and utterly impoverished? Agriculture stands out as the most promising sector to recover with relatively modest investment obtained in the form of development assistance from multilateral and regional financial institutions and friendly donor countries. Agriculture is the dominant sector of the Ethiopian economy accounting for about 45% of GDP, 85% of export revenue and provides livelihood for 85% of the people. Ethiopia must produce enough food itself and stop its reliance on international donations. This is urgent not only to ensure food security but also to reverse the psychologically corrosive effect of “begging” on the self-esteem of Ethiopians. Furthermore, economic rehabilitation measures produce the quickest results in the agricultural sector, since farmers react quickly to various incentives and the production period for crops is short. This of course is the case in regions where there is sufficient annual precipitation. In regions where soil erosion and drought threaten agricultural production, the ongoing cooperative effort, with donors assistance, to conserve soil and water must be greatly strengthened along with the use of drought- resistant grain varieties. Maximum effort to attain food self-sufficiency through increasing investment in agriculture must be made in the western, central and southern regions.
Higher prices have proven to be one of the most effective ways of increasing agricultural production. Higher prices should be paid to producers when government agencies buy agricultural commodities. Farmers should be allowed to sell their products on the open market. Except in those cases where a government agency purchases commodities in competition with the private sector, agricultural marketing should be largely the domain of the private sector.
During surplus periods, farmers need protection by means of price stabilizing marketing mechanism. Surplus production usually results in depressed commodities prices. A price stabilization policy is necessary to protect farmers so that they don’t have to sell their produce when market is oversupplied and prices are falling.
Another urgent measure that should be taken to rehabilitate the economy is to make credit available to farmers. There is adequate institutional structure (AIDB) to intensify credit operation in rural areas. Since the farmer needs the money for buying seeds, tools, fertilizers, etc., the provision of such materials instead of cash will serve the same purpose as credit.
It is a waste of resources to continue sinking funds in large-scale state farms which are among the most wasteful legacies of the Derg. These farms must be broken up and distributed among the farmers of the regions at reasonable prices payable over a period of, say, ten years. The most desirable solution would be to form voluntary production cooperatives which could own and operate such farms. It would be socially unjust and politically unwise to sell large-scale state farms to wealthy urban investors or to persons exogenous to the region, because they would only hire local people and pay them low wages, given the absence of competition in the labor market.
It seems that the next important step to take is in the area of exchange and trade regime. In the area of trade, priority should be given to importing essential drugs, chemicals, raw materials for industry, spare parts and other intermediate goods. In view of the scarcity of foreign exchange, the government should continue to allow traders to import what the country urgently requires by using the so-called “own funds” or “franco valuta” (F.V.). Such funds usually originate from personal remittances of expatriates. F.V. is now indispensable given the fact that the Derg has totally depleted the nation’s foreign exchange reserve and donor- provided funds. Available information on Ethiopia indicate that factories, most of which are agri-based, operate at 20 to 25 percent capacity, due to lack of raw materials and spare parts. Indeed, some have been closed down.
Another advantage of F.V. is that its users pay customs duties to the government often with surcharge. F.V. operation should be made profitable for traders who would abandon the mechanism if it is not financially attractive. The government, however, should issue guidelines regarding the modality of its use and categories of goods that can be imported with F.V. It must of course be kept in mind that F.V. is a stop gap measure and should not be a permanent feature of the economy. Foreign exchange is the nation’s resource and should normally be managed by the National Bank. An undesirable aspect of F.V. is that it encourages smuggling and a parallel- market.
Further liberalization of trade should also be given priority to bring about early economic recovery. Export retention schemes often ignite quick reaction on the part of potential or actual exporters. If exporters are allowed to retain a certain percentage of the exchange which their exports earn, many people would scramble to export. In many countries, export retention schemes have stimulated traders’ ingenuity to develop new and innovative exports such as handicrafts (on large scale), semi-precious stones, food items, horticulture, spices, certain fine quality textile and leather products. Traders should be allowed to use the portion of foreign exchange which they have retained for more essential imports. The present transaction tax on export, however small, should be removed forthwith.
Exchange rate adjustment is another economic measure which would correct distortions in the economy and quickly stimulate exports. Most people do not realize the advantages of exchange rate adjustment and tend to exaggerate its disadvantages. Exchange rate adjustment can benefit producers of traditional exports such as coffee, hides and skins, oil seeds, spices, civet, livestock, tchatt, etc. As is well known, it is really the exporters who earn foreign exchange that accrues to a country, although they have to surrender it to the National Bank. But when the National Bank gives the exporters “birr” for their export earnings, the rate at which the exporter is paid is 2.07 birr, for example, to the U.S. dollar. In the black or parallel market, however, birr is discounted to 25% of its official value, which means about 7 birr to the U.S. dollar. If we say that usually the parallel market reflects the economic value of the birr, the farmer/exporter loses a significant amount of money when he is paid at the official exchange rate. At the same time, if someone wants to import a stereo, a reconditioned car, a VCR or a television set, he/she buys foreign exchange from the National Bank at a relatively cheap price, i.e. at only 2.07 birr to the dollar. Therefore, the farmer/exporter loses about 5 birr to the U.S. dollar and the importer gains the same amount because, had he gone to the parallel market, he would have had to pay 7 birr to the U.S. dollar. It is quite obvious that there is a clear case of misallocation of resources. Who is subsidizing whom? Should the peasants subsidize urban dwellers?
Government economists who oppose exchange rate adjustments, argue that it would fuel inflation, increase government external debt payment, etc. There is no doubt that exchange rate adjustment or devaluation can cause these problems. However, the proponents of a dynamic exchange rate assert that the resulting inflation and increase in the nation’s debt repayment does not usually offset the advantages of exchange rate adjustment. In any case, in the particular case of Ethiopia, rigidity in exchange rate policy has undoubtedly been hurting the economy for a long time.
It might be useful to mention here that a two-tier exchange rate can be adopted so that government and the private sector can use different exchange rates. An appropriate exchange rate can also be attained through public bidding for available foreign exchange rather than an outright devaluation. Bidding usually succeeds when the government is sure of making the foreign exchange regularly available to the bidders.
A word may be appropriate about an aspect of the government’s new economic policy because it is key to the recovery of the economy. Much has been said about the need and appropriateness of privatizing the financial sector. Most free market economists, including myself, support a mixed-economy principle which is that the government, in competition with the private sector, can own and operate insurance companies and banks, especially if the sector is dominated by foreign investors. In any case, reform action in this sector is urgent because the financial sector usually attracts foreign investment if the policy is auspicious and assures investors of sufficient return on their investment.
A clear policy as regards land ownership is also vital to rapid economic reconstruction. Government insistence that land should remain in the public domain and non-transferable has given rise to some debate among economists and the donor community. There is no real reason to object to this position of the government, at least as regards rural lands. According to those that support non- transferability of land, land users can be confident that they can always keep the land allocated to them as long as they use it. If they wish to relinquish the use of the land, they can always sell whatever is on the land (buildings, trees, water wells,
and so on). If the buyer likes the particular piece of land, he/she can pay an attractive price for the houses and trees. Thus, the fact that land is non-transferable does not impede economic development as some people assert. The risk of allowing the transferability of land is greater than keeping it in the public domain.
Urgent action should be taken to rehabilitate roads and bridges that link centers of consumption with regions of production. After years of war and neglect, the nation’s roads and highways have become almost unusable. Unless there are all-weather roads, the farmers cannot sell their products and consumers are forced to pay exorbitant prices for the limited amount of agricultural products that manage to arrive near urban areas.
The mineral sector has potential for quick development to earn foreign exchange. Ethiopia currently produces a very modest amount of gold (less than 900 kgs.. per annum). A significant investment has already been made so that production can soon reach the estimated three tons per annum with potential to increase to ten tons in a few years. This exploitation should be undertaken without delay since it would represent a significant amount of foreign exchange.
In conclusion, it should be said that the poverty level in Ethiopia is unacceptably low even by African standards. Among the group of countries categorized as “least developed countries” by the United Nations, Ethiopia stands out as an absolutely impoverished economy with a population over 50 million continuously living on the verge of starvation.
This state of affairs is undoubtedly directly attributable to a the Derg’s corruption and incompetence. Economics and politics being two sides of the same coin, a bad government cannot enrich its people. This is particularly true of a government that relentlessly waged war against the majority of the people and sought to eliminate the professional and intellectual class by political persecution. The lesson is clear: The peoples of Ethiopia must learn to rebel against a repressive government.
Ato Bulcha Demeksa is former Executive Board Member of the World Bank representing 17 African countries.