PM Abiy seems to have chosen to approach Ethiopia’s economic governance by taking it for granted that he has inherited a vibrant and rapidly growing economy. As far as politics is concerned, there is no doubt that he has been forging ahead with radical reforms, making major departures from the old ways of EPRDF political culture. 

On the contrary, however, all along during his period in office, there have been tell-tale signs that he is not as keen to acknowledge the sorry state of affairs in the Ethiopian economy. This has become abundantly clear during debates at recent events organized to mark PM Abiy’s twelve months in office.

The phrase “to continue with rapid economic growth” has been repeatedly used at various venues, including at a report presented by Mr. Mamo Mihretu, PM Abiy’s Senior Economic Advisor, who presented a progress report on economic policy reform  on 30^th March 2019 at a public gathering that took place at the United Nation’s Economic Commission for Africa meeting Hall in Addis Ababa. 

In this piece I would argue that it would prove to be a fatal policy blunder to frame Ethiopia’s economic policy reform agenda by taking it for granted that rapid economic growth has indeed been happening as portrayed in Ethiopia’s official economic statistics.  I will provide solid  evidence bases to substantiate my claim that Ethiopia’s economy was not really growth at the rate implied by official data. 

There are compelling reasons for PM Abiy not to waste any more time holding onto the untenable economic success narrative.  Doing so is extremely dangerous: it is likely to distort his vision and priorities; steering him in the wrong direction, away from desperately needed economic reform areas. 

Recap

Those of you who might have read some of the articles I have been writing on Ethiopian economy over the years, specifically those I have published during the last twelve months would know that I am simply re-iterating concerns I have been expressing all along.

I have been following the Ethiopian economy during the EPRDF era. I can confidently say I have meticulously documented my observations, expressing viewpoints that substantially differed from the official rhetoric on the so called miraculous economic growth. I have recently brought together about twenty five such articles mostly on economic policy matters and published a book entitled; Chronicles on the Political Economy of Plunder in Ethiopia (1991-2018), published initially at Amazon.com and then reprinted by Addis Ababa University Printing Press for domestic readers (now available at Amazon Book Stores as well as AAU and other Book Stores in Addis Ababa). 

My primary motivation to bring those pieces in a book format at this point was to provide some evidence base and assist the authorities with reshaping current economic policy, that is to say, to pre-empt the scary prospect of a progressive and reformist leader inadvertently sticking to the familiar but dodgy story-line.  Unfortunately, my fear is being realized.

As early as August 2018, just a few months after PM Abiy assumed power, I have had the opportunity to meet with one of his senior staff. On that occasion, I have given my honest opinion that the sooner PM Abiy disowned the bogus miraculous economic growth narrative the better.  

A couple of months afterwards, I have written a relatively long article published with Addis Standard and entitled What is happening to EPRDF’s developmental state?  In that piece I have outlined the danger of confining fundamental reform to the political domain, giving only
some leap service to economic policy reforms. Accepting the premise that fundamentals of the old EPRDF era were sound and limiting economic reform to a few tweaks over the edges would hurt PM Abiy and his administration more than anybody else.  It is to PM Abiy’s best interest to distance himself from the bogus economic success story.

Since PM Abiy has started with the wrong premise, that the economic fundamentals were right, he has directed his efforts to reforms in some narrow domains where he seems to believe economic challenges prevailed. For instance, during his speech at a public gathering at the Millennium Hall in Addis Ababa on 2^nd April 2019, he had very little to say on the economic reform agenda, mentioning only that substantial inflows of hard currency, to the tune of
13 billion, has occurred during the last 12 months.

Clearly, there has been an excessive concern with foreign exchange, with the presumption that Ethiopia’s economy was doing fine except that export lagged and enough foreign earning have not been generated.

To begin with, if Ethiopia’s economy was doing so well, then why did it fail so miserably to generate enough exports and hence foreign exchange?  Exports lagged not just during the protest years, but during the entire period EPRDF has been on power.

What if the economy has not been growing at least to the extent portrayed in Ethiopia’s official statistics?  If there are some convincing reasons to prove that Ethiopia’s economic statistics was not reflecting the reality on the ground, then it means PM Abiy must change his approach to economic reform.

In the next few paragraphs I would adduce some evidences to highlight flaws in Ethiopia’s economic growth accounting in recent decades.

Evidence 1: Inflated Cereal Production and Yields

There is credible evidence to indicate that Ethiopia’s economy was not really growing in double digits.  For instance, there is convincing empirical evidence, which I discussed at length in one of the articles in my book. It is related to inflated statistics on Ethiopia’s agriculture. 

That evidence was generated using a thoroughly structured survey of cereal production in Ethiopia. The survey was sponsored by EU, a major donor to Ethiopia and implemented by the International Food Policy Research (IFPRI). EU staff were puzzled that regardless of considerably large increases in cereal production, as reported by Ethiopia’s Central Statistical Authority (CSA), prices of cereal kept on increasing at alarming rates, year on year, almost defying the law of supply and demand.  If cereal production has really increased to the extent reported by CSA, then there was no reason for cereal prices to rise at alarming rates.

Therefore, EU sponsored a survey of cereal production in Ethiopia. The findings of FPRI’s survey were shocking.  For instance, in 2007/8, cereal production and yield in CSA reports have consistently exceeded IFPRI’s survey results by astonishing margins. The discrepancies ranged from 29% for Maize to 44% for Sorghum, the average for all cereals being 34%, about the same rate for inflated Teff output and yield. 

Evidence 2: Shallow Structural Transformation

In a developing economy like Ethiopia, sound economic growth entails two changes happening concurrently. These are expansion in the size of the economy (measured by the size of the GDP), and structural transformation from predominantly traditional (rural and agricultural) to modern (industrialization, particularly the share of manufacturing in GDP).  Available evidence suggests that Ethiopia has had an extremely shallow type of structural transformation. 

First, the share of manufacturing in Ethiopia’s GDP has barely changed from where it was in 1991. According to the latest World Development Indicators Database (of the World Bank), when EPRDF took power in 1991, manufacturing had a 4% share in in Ethiopia’s real GDP. This reached 5.6% in 2017, increased only by 1.6% in nearly three decades. 

Second, the share of the agriculture in Ethiopia’s GDP has considerably declined, from 59% in 1991 to 32% in 2017, a whopping 27% drop! Perhaps even this figure is likely to underestimate the actual decline in the share of agricultural value-added in GDP, given agricultural output growth has been exaggerated, as discussed above.

Structural transformation essentially means a decline in the share of agriculture in GDP due to an increase in agricultural productivity, that is to say, agriculture releases labor for other sectors, because those who remain behind can produce enough to feed themselves and the rest of
society. 

Evidently this is not the case in Ethiopia. On average 8 to 10 million people receive emergency food aid, on top of the additional 10 million trapped in the productivity safety-net programs through the food for work schemes.  

Evidence 3: Poverty Reduction

We have to rely on logic and common sense to pass judgment regarding whether or not EPRDF’s claim that poverty rate in Ethiopia has considerably dropped is factual.  I have brought together relevant facts in another piece that I devoted to assessments of EPRDF’s claim regarding achievements through the Millennium Development Goals (MDGs). 

First, much of the decline in Ethiopia’s poverty reduction was said to have occurred in rural areas.  Second, the empirical basis for assessing those achievements hinged on increases in agricultural production and productivity.
However, as discussed above, Ethiopia’s agricultural data is proven to be flawed.  Third, poverty was reported to have declined by about 33% on average, precisely the same rate by which agricultural yield and output were found to be overestimated.

In any event, how on earth it can be true to say that poverty rate has declined by 33% when nearly a fifth of the population of Ethiopia is still surviving on food aid?

While the above three evidences may suffice, I have extensively documented more over the years, all available in the book referred to earlier.

An Inconsistent Story-line

In the previous paragraphs I have tried to provide some evidence to justify my proposition that PM Abiy should ditch the miraculous economic growth narrative. Now I appeal to logic and reason, in addition to facts I have presented.

The economic growth miracle is often attributed to public sector activities and large investment schemes.  However, PM Abiy and his team have done a great deal of job in exposing the shambolic nature of almost all government projects. We have viewed many documentaries exposing rotten practices and shoddy implementations of mega public investment projects.  Even if they were implemented properly, large infrastructural projects take a relatively
long period of time to induce other sectors to become productive. 

If manufacturing has not expanded to any meaningful extent, if agriculture has shrunk so much, if the public sector projects were mismanaged to such shocking extents, then what has actually been growing?  It seems Ethiopia’s GDP was made to have separate and autonomous existence, detached from the reality on the ground.

In any event, at the very least, it is not tenable for PM Abiy’s administration to hang onto the economic success narrative, while at the same time relentlessly exposing the shaky foundation of that very success story. 

PM Abiy would need to start from a clean slate, openly admitting to the people of Ethiopia and the donor community that he has actually inherited an economy which was in disarray. Otherwise, he would live to regret showing brave face regardless of a shocking economic malaise. Sooner or later the reality will catch up with him. The sooner he rectifies the inconsistent story-line in his economic reform rhetoric the better.

Reorienting Economic Policy Reform

This piece is essentially about raising awareness about the danger of implementing an economic reform program starting from a wrong premise.  If the will power is there to reorient the economic reform program, then the kind of economic reform the Ethiopian economy desperately need are not difficult to identify.  I will revisit this issue in another piece in the near future but for now I will highlight a few priority areas.

First, EPRDF have had uncontrollable obsession with the external sector, specifically with foreign exchange earnings at the cost of everything else in the economy. Apparently foreign exchanged was required to finance the many white elephants, none of which have come to bear any fruit.

I recommend that PM Abiy shift emphasis toward the domestic economy.  Ethiopia is a very large country with a very big market size. It means domestic trade is even more important than foreign trade.  There is an urgent need to refocus attention to the domestic economy by designing a host of interrelated policy reforms that would have synergistic outcomes to accelerate growth fueled by domestic demand.  The package of reform programs required to realize domestic market potentials may include:

Credit expansion. It should be high priority to revamp the banking sector to expand domestic credit to all sectors of the economy, particularly, small-holder agriculture (with land as collateral) and small and medium sized enterprises, which create jobs and reduce unemployment.

Income policy.   Pathetically low income has crippled the Ethiopian economy, pretty much like an elusive disease that has never been diagnosed.  Low pay has been standing in the way of realizing domestic market potential. Employment expansion alone would not do any magic. Ethiopian households deserve to earn a living
comparable to those in neighboring countries.

Inducing remittance inflow. PM Abiy does not need to “beg”, as he chooses to say, leaders of other countries to give or lend him dollars.  There are hundreds of thousands of Ethiopians who live abroad and can happily send substantial sums to help themselves and their motherland.  In this regard, the current diaspora accounts that Ethiopian banks are experimenting with are nothing short of novice banking practices. There are plenty of instruments that can be utilized to induce tens of billions of dollars that would awash Ethiopia’s banking sectors. I have devoted a piece on this matter:  How Can Ethiopia Boost Remittance Inflows? (also reprinted in the book I cited above).

Second, one of the most pressing challenges to PM Abiy’s administration is creating jobs for the millions of the unemployed labor force. What can be done to create jobs in millions? 

It seems that PM Abiy’s administration would bank on the private sector to create jobs. This rhetoric has been told in recent months, and Mr Mamo repeated it at March 30^th event.  No doubt the private sector would play an important role, provided that proper incentive mechanisms are put in place, for instance, the credit expansion schemes I mention above. 

However, I would think the government can undertake large job creation schemes, for instance, on natural resource regeneration, e.g. to cover Ethiopia’s exposed landscapes with tree plantations.  This is the kind of economic activity through which considerably large natural assets (tree stocks) can be created just using domestic currency, the birr (zero dollar!) 

In the medium to the long run, in addition to environmental benefits, accumulation of such assets would boost economic activities (lumbering, furniture, etc) in a few years, hence import substitution or exports. This means focusing on domestic sectors is a precondition to sustainably earn foreign exchanges in the medium to the long run.