International financial institutions are urging Ethiopia to shift its emphasis away from central economic planning and adopt more market-oriented policies. Two departing senior economists are pointing to the need for a change of course to revive Ethiopia’s battered private sector and spur much-needed investment.
In separate interviews this week, the country directors of the World Bank and International Monetary Fund, IMF, commended Ethiopia’s strong growth in the recent past. Despite a series of setbacks that have kept it among Africa’s poorest nations, government statistics indicate double-digit growth for the past several years.
But both the World Bank’s Kenichi Ohashi and the IMF’s Sukhwinder Singh warn there may be tougher days ahead, spurred partly by uncontrollable external forces, but also by misguided economic policies such as price controls. As a result, the inflation rate has shot up to 30 percent.
Last week the IMF refuted the government growth estimate of 11.4 percent for the past year, saying 7.5 percent is more realistic. A statement forecast even lower growth of about 6 percent for the coming year. Country Director Singh says the downturn is due in part to a more restrictive business climate.
"We feel that in some areas the environment for the private sector has become a bit more difficult in recent months. If you add on the fact of recent policy changes that had an adverse impact like price ceilings, and if you add to that the fact that the government has taken a significant share of credit from the banking system for lending directly itself, I think these are factors that in our view moderate the growth prospects compared to where we were before," Singh said.
The IMF statement welcomed the recent lifting of most price controls imposed earlier this year, but suggested that Ethiopia’s five-year economic plan might be overambitious. It cautioned that the plan’s success would hinge on whether the private sector is allowed to thrive.
Singh says the government needs to rethink policies such as diverting scarce loan money from private institutions to a state-run development bank.
"If you take a lot of resources from the system and keep it for the government, you’re killing the goose that lays the golden egg. We’re not saying the government shouldn’t take a leading role, or the government shouldn’t do many productive things, but it’s a question of balance and speed," Singh said.
The World Bank’s Ohashi argues that diverting scarce resources to the state is preventing Ethiopia’s weak private sector from taking the risks that spur economic growth.
"Here the government would argue the private sector is very immature, but the way they’re going about nurturing or fostering private sector development seems too control-oriented. Private business people are willing to take risk, and the government should allow them to take whatever risk they wish to take and see if they can find new areas where Ethiopia can succeed instead of dictating where investment should go," Ohashi said.
Ohashi says he sympathizes with the sense of urgency that seems to be driving the state’s move to take the lead role in the economy. But he says state planners are finding it impossible to jump directly to rapid growth without first creating a favorable business environment.
"They were too impatient. I’m sympathetic with impatience, you don’t want to be complacent; but you have to go step by step, and they’ve tried to jump too many steps at once. And basically they’re finding out they can’t do that," Ohashi said.
In a series of essays published in a local business newspaper as he prepares to retire, Ohashi questions whether it may be time for Ethiopia’s leaders to reconsider the state’s massive investment in development projects. He suggests it might be wiser to focus more on fostering private investment and improving the quality of education.
"To some extent it’s great for the government to be foresighted and invest in infrastructure and create an environment good for private investment, but if private investment is not following, you need to pause and evaluate whether just charging ahead with massive public sector investment is where the focus should be or perhaps pay more attention to making sure the private sector is catching up. Seems to me there’s a bit of divergence here," Ohashi said.
Both the World Bank and IMF representatives noted progress in expanding access to basic education and health care services, and to develop a more dependable safety net in Africa’s second most populous country.
But Ohashi says a host of worrisome signs continue to raise concerns among the donor community. As he wrapped up an hour-long interview, he paused for a moment, then asked, “How do you deal with a situation where the picture is so mixed?”