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EconTalk
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No. 2 — < An Occasional Column on the Ethiopian
Economy> — 1995
EDITOR’S NOTE: After a long hiatus, here is the second
issue of EconTalk. In this issue, I present four important
economic principles (laws?) for you to ponder. Comments and guest
columns are welcome. Enjoy!
— B. ABEGAZ ([email protected] )
MURHY’S LAW OF ECONOMIC POLICY (A. Blinder):
“Economists have the least influence on policy where they
know the most and are most agreed; they have the most influence
on policy where they know the least and disagree most
vehemently.” This creative application of the insight of
Murphy (i.e., if anything can go wrong, it will), aptly captures
the little impact respected Ethiopian economists have had on the
formulation of government economic policy. Its corollary,
Gresham’s law of economics, states that bad economics drives good
economics out of public circulation. Isn’t this an apt metaphor
for the relationship between the residents of Negus Menilik’s
ghibi and those of Ras Mekonnen’s palace (AAU)?
The propensity of politicians to listen to “bad”
advice from quacks does have three (not so mutually exclusive)
explanations. Let us call them the three “I’s”:
ignorance, ideology, and interests. Ignorance of the
long-term economic consequences of a policy package is one
obvious reason, not least of which is due to the failure of
professional economists to promote economic literacy. Who has not
complained about the propensity of economists to mask crass and
stylized ideas in less than intelligible language?
Ideology is unarguably a major culprit for bad policy in
Ethiopia, especially in the past twenty years. One can hardly
distinguish the economic vision of the Derg and that of the
opposition since they all shared the same paternalistic (and yet
self-serving) ideology of Ethiopian socialism. It was a populist
ideology, indeed. But then again, isn’t the road to economic hell
paved with good intentions!
The major explanation is probably the undue influences of
interest groups (which, by the way, may not necessarily decline
under a democratic system): the salariat, the urbanite, the
ethnocrat, the sharpshooter, the regionalist, the foreigner, and
the like. What is sensible for the nation is not necessarily good
for those interest groups with the most political clout. There is
a silver lining here: as Amartya Sen argues, poor citizens do not
die of mass starvation in a democracy. Sectarian interests are,
of course, cloaked by propagandists with the most noble of
widely-shared goals: peace, prosperity, and social justice.
THE ‘IRON LAW’ OF LIVING STANDARDS: The rate of growth
of the median income in a country, rich or poor, depends almost
entirely on the growth rate of its overall productivity.
Productivity growth (and level), of course, depends on a whole
host of factors including the quality of labor and capital, work
ethic, diffusion of modern technology, good policy, and such
societal factors as social peace. When things go right, a
virtuous spiral of accumulation and productivity growth make the
national dream a reality. If not, the process of cumulative
causation works in reverse to produce a vicious trap of
self-reinforcing forces. The result is a nasty distributional
struggle over the existing pie among groups mobilized along
sectarian interests (class, ethnicity, region, religion, urban
residence, etc.) which at its extreme may threaten the viability
of the socio-political fabric.
Parenthetically, it would also be useful to remember the
daunting nature of the arithmetic of catch- up. How fast does
Ethiopian per capita income (US$200) have to grow in order to
reach that of S. Korea (US$7,000) in ten years time?
Answer: With a population growth rate of 3%, it would take an
annual growth rate of 45% or a doubling every 1.5 years! Lost
decades are incredibly costly.
KAUTSKY’S LAW OF LAND REFORM: The Left supports land
reform not because of what it would do FOR the landless
peasantry, but because of what the reform would do TO the landed
classes. I leave it to the reader to substantiate Kautsky’s
insight in the Ethiopian context.
THE LAW OF INDIRECT ECONOMIC INCENTIVES: People are
basically rational, and they respond best to economic incentives
where the rules of the game are transparent and fair, where the
link between individual productivity and reward is close, and
where there is a sense of security about the future to commit
one’s resources to the future. Where material incentives are
perverse and accountability ambiguous, one gets secretaries who
type a page per hour, the boss who shows up to open and close
shop, the ministry asking for more employees than it needs, the
administrator who treats the public purse as semi-private
property, the farmer who dreams of being a soldier instead of a
perpetual victim, and the office culture that ostracizes the few
who take their responsibilities seriously.
Bad incentives produce inefficiency, not to mention unfair
income inequality. However, good incentives are necessary but not
sufficient: they must be complemented with resources to enable
individuals and groups to realize their potential. So far,
competitive markets and decent social contracts have produced the
most prosperous and just societies known to man. Anecdotal proof:
how many of us contemplated asking for asylum in socialist
countries?!
~ ~ ~
EconTalk’s Stat Clipboard: Recent Macroeconomic Indicators
for Ethiopia
Indicator (%) ——————— 91/92 ——— 92/93
——- 93/94 —— 94/95
Real Growth Rate of GDP*…..-3.2 ………….. 7.6-12.3**
……. 1.3 …………….. 5.5
Rate of Inflation …………………. 21.0
……………….10.0 ………….1.2 …………….10.0
Debt/GDP Ratio …………………..13.3 ……………….
10.8 ………… 9.6 ………………n.a.
Real Gross Investment ………..10.4 …………………
9.0 ………….n.a. ……………..n.a.
(*): Comparable figures for 1965-73=4.0%; and 1974-90=2.0%.
(**): First figure from World Bank; Second from IMF (latter
figure is considered overstated according to many observers).
Source: IMF Survey, 1995.
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