Turning Crisis into Opportunity

In a speech in 1959, J. F. Kennedy has famously said “When written in Chinese, the word ‘crisis’ is composed of two characters – one represents danger and one represents opportunity.”  Langan-Riekhof and others have gone so far as saying “Sometimes the world needs a crisis” to turn challenges into opportunities. They illustrated this with recent and distant past events in world history when industry or country leaders turned crisis into opportunity and sought durable solutions.

Future students of economic history may refer to the Coronavirus Pandemic as a crisis which offered an opportunity to the seriously troubled world because nations have overzealous committed themselves to globalization. The symptoms have been manifested in variety of ways, ranging from the Occupy Wall Street anti-globalization movements to the rises of extremist political groups to the right of the political spectrum. After all, they are protest votes against globalization that gave leaders like Trump and Bolsonaro to this world.

The globalization puzzle has pre-occupied many great minds, for instance Joseph Stiglitz, the Novel Laureate, who articulated Globalization and its Discontents nearly two decades ago. Now the COVID-19 has mainstreamed the globalization debate, moving it beyond activism or academic debates.

It has become a topic out there in streets and homes, being debated among ordinary citizens!  It is no more an issue even the most avid globalization enthusiast business or political leader would dare to shun aside. In a nutshell, the COVID-19 is a crisis that offered opportunities for countries to breakout of the trap or illusion of excessive expectations of benefits from globalization. It is being predicted that the post pandemic economic governance will refocus emphasis on domestic economies.

The wider consensus at global level would simply present opportunities for national economies to fine tune their development strategies.  However, the opportunities may not necessarily be recognized by all countries to same extent. The beneficiaries of newly emerging opportunities will be countries that quickly grab opportunities that present themselves.

So, what opportunities has COVID-19 thrown up for the Ethiopian authorities to grab?

Let us face it, Ethiopia is one of the most over-zealously committed countries to globalization.  COVID-19 has perhaps reminded the Ethiopian authorities that they would need to curb their over-enthusiasm and pay attention to strengthen linkages between different components of the country’s domestic economy.

Ethiopia’s entire development strategy has been geared towards boosting links to the world economy, specifically by promoting exports. In the name of enhancing exports, citizens have been evicted in their hundreds of thousands from their ancestral lands. The foreign direct investment attraction mantra means numerous global leathers & textiles giants were offered exceptionally generous incentives because it was thought they would quickly bring in foreign exchange earnings and relieve the nation from perennial current account deficits. Ironically, the more the country devoted every ounce of its energy to promote exports, the less export growth it had got materialized.

We can think of an economy as a locomotive that runs on two engines. One external and situated outside, far from the sight of the driver who can sense it only remotely (exports). The other located inside, right in front of the driver who can hear its noises and hence capable of monitoring its conditions (domestic demand).

This analogy illustrates the fallacy built into excessive reliance on export demand as engine of growth.  One of the illusions with globalization lies in excessive reliance on unsustainable supply chains in input as well as output markets.  If the authorities turn their attention to using domestic demand as engine of growth, then they are dealing with a supply chains whose nodes they can manipulate using varieties of incentives.  After all the actors in the chain (producers, distributors, consumers) are all resident in the domestic economy, and the authorities have a good idea as to what kinds of incentives to apply and influence their behaviour.

The Ethiopian authorities have done everything in their capacity to run the country’s economy by persistently trying to ignite the external engine, wasting a huge amount of energy. In a way, COVID-19 was a wake-up call, as if it is telling the authorities: “guys, you have been trying that rear engine for way too long without any success, you are not getting anywhere, you are stuck!  It seems you’ve even forgotten to make use of the reliable and sound internal engine right under your feet!”

It would be wiser for the authorities to enable Ethiopian households and businesses to buy goods and services from each other, rather than pleading foreigners to buy Ethiopia’s products. Foreign supply chains have proved unreliable. Uncertainty is the root cause of risk and hence bankruptcy in economic decision-making at all levels, national or firm level.

Incidentally, the obsession with globalization was not Ethiopia specific, although Ethiopia might have overdone it.  What makes Ethiopia so unique is the extent to which domestic demand (household consumption and business investment) as engine of economic growth has been neglected and gradually subjected to a slow and silent death!

For instance, Ethiopia has an exceptionally low wage, not just for factory workers but across the board, at all levels, starting from a distinguished university professor all the way down to a labourer on a construction site.  If one wants to compare Ethiopia’s average wage with that of any neighboring country, say Kenya, then one does not use percentages, e.g. 10% or 50% etc. One has to resort to factors, 5 or 10 times lower, that sort of thing.  Why and how Ethiopia ended up in this kind of bizarre situation is beyond me to comprehend, I leave it to economic historians to examine it.

The message I would like to convey here is simple and straightforward: if Ethiopian authorities would ever contemplate to use domestic demand as engine of growth, then they must start by formulating an income policy, with a view of enhancing purchasing power of citizens.

Ethiopia is a big country with a geographical area about the same as Germany, France and the United Kingdom combined. Ethiopia’s crude population density (persons per sq km) is much lower compared to those countries:  37% of UK’s, 44% of Germany’s, 88% of France’s.  Ethiopia’s effective density (person per sq. km of arable land) is about the same as Germany’s and about half of UK’s. Yet we often hear lame excuses that Ethiopia has been overpopulated.  Ethiopia has everything: chunks of underutilized arable land and large population, which means big market size and huge domestic market potential. Ethiopia’s only constraint and limiting factor of production is public policy.

The trapped potential of domestic demand as engine of economic growth can be released by simultaneously tackling three dimensions of inequalities in Ethiopia.  The first dimension is related to interpersonal income inequality and it is already discussed, Ethiopia needs to swiftly move to formulating an income or wage policy.

The second dimension is inequality between places, regional disparities particularly the gap between Ethiopia’s center and periphery. In pretty much same way Ethiopia’s low wage is peculiar, Ethiopia’s centre periphery inequality is perhaps the most bizarre, the kind one can rarely find anywhere else in the world.  Everything happens in and around Addis Ababa, the centre!  It feels as if Addis Ababa is the only city in the country.

The relative size of Addis has grown to an amorphous size, over ten times the size of the second largest city, unheard of in world urbanization history! Addis Ababa symbolizes a vacuum cleaner, sucking everything towards itself from all directions.  About 60% of total electricity generated goes to Addis Ababa, whose residents are less than 5% of the country’s population!

The center is crowded, congested, and overheated, one mega project after another, nonstop for decades. Life is becoming unbearable and unaffordable for most citizens. The bustling is only for the haves, who have amassed wealth, one way or another, affordability is never an issue for them. The periphery is frozen, ice cold, nothing happening over there. No advancement in technology or any other form of modernization except for political cadres wearing polished suites and driving SUVs.

The gap between the center and periphery is so much that it feels as if Ethiopia still has unexplored wild west equivalents, except that the wilderness is in almost every direction: West, South and East! Utter recklessness with regional policies! Governments are supposed to work against agglomeration which get re-enforced with market forces. In Ethiopia, public policy works hand in hand with market forces, accelerating agglomeration and accentuating centre-periphery disparities.

The third dimension is about inequalities within businesses.  It reminds me of Schumacher’s, Small Is Beautiful: A Study of Economics as if People Mattered, in which the author promoted several progressive ideas on sustainability and economic development with a human face. Of relevance to this discussion is the role of small and medium sized enterprises.  Consistent with their overenthusiastic commitment to globalization, Ethiopian authorities have taken unsustainable path to industrialization, neglecting small and medium sized domestic industries, and excessively relying on large foreign firms.

For instance, Ethiopia used to have mushrooming small and medium sized textile & leather industries. The misguided industrialization policies meant those infant industries seem to have vanished. The authorities would need to reset the countries industrialization strategy, re-balancing the emphasis towards small and medium sized enterprises.

In this piece, I have attempted to illustrate opportunities available to the Ethiopian authorities by highlighting major areas requiring policy re-orientation in the aftermath of the Coronavirus Pandemic.  However, if the authorities are ready to grab the opportunities that lie in the crisis, then this can be detected in the way they behave during the pandemic period itself, particularly the way they formulate disaster relief packages. Offering a full assessment of their relief package is beyond the scope of this piece. Here it suffices to say that to my dismay, I do not see a signal that the authorities would reposition themselves to see opportunities in the ongoing crisis.

I would adduce two evidence: one from the design of the relief package and another from political developments. There is an element of relief package referred to as Urban Productive Safety Net Program (UPSNP), apparently an extension of PSNP which has been practiced in drought-stricken rural areas. Even at conceptual level, this thing does not make any sense whatsoever! To begin with, the safety net in rural areas was made to have “productive” in it, because there is “food for work” component: beneficiaries would engage in public works, e.g. roads, terracing, tree planting etc.  So why muddle the issues by using the rural drought package analogy to urban areas?  Besides in rural areas there are strict selection criteria, whose equivalents can by no means apply to select beneficiaries of COVID-19 relief package.

There are established relief package distribution methods that other countries have adopted, providing subsistence to everyone who lost their jobs and forced to stay at home. The UPSNP seems to me a dishonest maneuvering to avoid commitments to provide relief to everyone in need.  This includes small and medium sized enterprises and informal businesses.  In short, it seems the authorities are still working with the old mindset, without realizing the depth of the crisis, not willing to reposition themselves to operate differently during and after COVID-19 periods.

Now about the deflating political developments!  I have talked about turning a crisis into opportunity. However, the authorities have already been busy turning COVID-19 crisis to generate yet another crisis, the on-going political and/or constitutional crisis! Before the constitutional crisis was blown up to full scale, I was toying with an idea that perhaps COVID-19 crisis would create incentives and motivations for change.

I thought the crisis would lead to new cooperative behaviors among the ruling party and the multitudes of opposition groups to create new ways of going about their political businesses, more cooperatively. During the crisis, I hoped they would take a break from cut-throat, unhealthy, destructive and divisive competitions. COVID-19 like crises are supposed to cause the collective adrenaline flowing, focusing minds to solve the problems and overcome challenges. What seems to have been happening is quite the opposite!  Let us hope their minds will begin to refocus at some point and re-engage with the reality on the ground, even with some delay!