Interview with Mushe Semu, President of Ethiopian Democratic Party (EDP)
Before talking about inflation, economic growth, or development, we need to talk about people’s freedom. Not only about political freedom, but also their economic freedom enshrined in the Constitution.
This is the freedom to create wealth, to do business, to engage in any field of work, and to become involved in activities that benefit the nation as well as oneself. As long as these freedoms are not respected, talking about inflation or economic development is meaningless.
A government needs to be predictable; otherwise, it will fail no matter how strong its economic policies are. Ethiopia has no visibly favourable policies, regulations, and implementation for doing business. This will definitely have an effect on investment and macroeconomic stability.
Over the past five years, the government has made huge public investments. In order for the government to run itself, it also needs money. It is filling its appetite for money through domestic borrowing or by printing money.
The expansionary fiscal policy of the government and relaxed monetary policy have led to the inflationary pressure. The current undertaking in public infrastructure is beyond the economy and contributes to the increased inflation.
Q: In January 2011, the government fixed the retail prices of 18 commodities. It has also redirected distribution to the Merchandise Wholesale, Import & Trade Enterprise (MWITE) and consumer associations (CAs). With the resulting supply shock, some goods vanished from the market. Yet, now that the price cap has partially been lifted, some commodities such as edible oil are still not easily obtainable on the market. Which policy mistakes and political objectives contributed to the current state of market?
The question to ask is whether the inflation prevails only on the capped commodities. One can also ask whether there was accelerated inflation at the time. There was a price increase on edible oil and to a certain degree on sugar, which was sold at between 17 Br to 20 Br. Besides that, the items included on the price list are not basic.
Which is more essential to the construction sector: paint or cement? It is cement and steel rods. While we were witnessing a significant price rise on cement and steel rods, the government opted to cap the price of paint and corrugated steel. This speaks volumes.
At the time, we believed that the cap was politically motivated because the economy was in a state where demand and supply would have balanced out naturally. At least, consumers were able to find items in shops and oil was available.
Sugar was the only commodity that had problems, and it was the government’s problem.
It allowed rent seeking businessmen to operate in the sugar sector.
If a businessperson wants to purchase sugar, he would attend the auction with a licence and participate without any idea of the state of the sugar. She would win the bid and sell the sugar from a warehouse at a marginal profit of millions to another businessperson without adding any value. He does not even try to divide it into smaller quantities.
The sugar exchanges hands but does not reach consumers. At the root of the problem is the government’s inability to resolve the issue. By having a simple certificate, businesses make millions simply by transacting goods.
Aside from the problem in the sugar sector, the EDP found nothing alarming about the other items.
Whenever supplies are short, prices go up, and when supplies are up, prices stabilise. When the government tells people it will raise salaries and traders are going to sell their goods at set prices, it becomes a political decision.
If someone buys a litre of oil for 30 Br and is asked to sell it for 20 Br, no economic literacy is needed to see the unfairness. The move was political in nature, aimed at garnering support from the poor segments of society.
The government did this to divert attention from its problems; it is blame shifting. I remember, following the price cap, people started believing it was the meat traders that had prevented them from eating meat. Creating this suspicion was the principal objective.
Everybody knows it is the government’s problem, not that of businesses. Following the cap, criticisms were levelled against traders but not against the government, while questions should have been raised to the latter.
If traders were the problem, why did the government fail to take measures to prevent monopolistic price fixation?
The government does not believe the problem will be solved. It knows what the right thing to do is, but the political weight of the matter prompted them in this direction.
The introduction of the price cap was not timely. Just because incomes increased one cannot tell businesses not to capitalise on this. Accusing businesses of speculation and telling them to sell below market prices are driven by political motives. This does not add up.
Coming up with solutions without looking at the source of the problem is a mere political solution. I see no other reason why an economic solution was not opted for.
The crisis has not subsided and the blame game did not work. The recent comments by government officials to businesses at the lifting of the price cap seemed defeatist. It marks a transition point where the government started to candidly tell businesses to work with it.
Maybe, it will be a lesson for the EPRDF that calling a meeting and making demands about what is to be sold and at what prices do not work.
The case of ordering private commercial banks to buy treasury bonds with 27pc of their annual lending is also more political than economic.
How else could a rational government ask a private bank to mobilise deposits at a five per cent interest rate and seek loans at three per cent? It is all political.
Q: Aggressive state intervention in the market has led to a decline in business confidence. Imports and exports have seen a decline over recent months. What has gone wrong and could business confidence be regained easily?
The intervention is based on faulty assumptions founded on a trend of extreme suspicion towards entrepreneurship and the business community at large.
The previous regime was a dark period in the country’s history, as it alienated people from wealth. The regime considered the business community thieves and killed many. The nation has yet to recover from that legacy.
The EPRDF fought against that regime to reach this stage. The fight was in a bid to guarantee individual freedoms. I would never have believed that, under any circumstances, the government would erode the confidence of the business community to the extent it has.
This is a major problem because the trauma caused by the past regime has not faded.
We have citizens who are still afraid of putting their money in banks. When they trade, they view the government with suspicion. They are afraid to pay taxes. Most things are done in fear and anxiety.
This was before the intervention by the government. When the price controls materialised, the anxiety and suspicion became evident. It will not be easy to regain the little confidence that was there.
Q: The EDP’s statement also mentioned that the ruling party placed special emphasis on the agricultural sector, depriving the policies on other sectors of the same level of attention. What is the impact of such attention on the other sectors?
The ruling party makes huge investments in a sector that cannot take the economy out of the vicious cycle it has been in for centuries. The current agricultural policy mainly relies on small and fragmented land holding that is rain fed and has very low productivity.
As long as production is not mechanised, it can not sustain itself, let alone get the whole nation out of poverty. Agriculture is being undertaken as a scheme to create employment. This must change.
There has to be a noble sectoral transformation in the country, not like the one EPRDF preaches. As land utilisation is also not efficient, the current system needs to be changed. Farmers need to own the land, with full rights to lease, sell, and use it as collateral for loans.
The economic structure of the country is lopsided towards the service sector.
However, over 90pc of the service sector is dominated by government consumption, preventing the creation of a vibrant private sector. Service sector growth itself should have been underpinned by industrial growth, but that is not happening.
The way the service sector reached its current 45.5pc contribution to the GDP is inflationary as it is driven mainly by public investment.
The overprotection given to agriculture is inappropriate as its productivity is low. Only a handful of public owned industries contributed the industry’s share to the GDP, which amounted to 12.9pc in 2010.
We do not even have industries that can be counted as industries in the proper sense; those with significant impacts on economic transformation.
The sectoral growth is exaggerated as the starting point for the industrial sector is below zero. Hence, the addition of the 10 or 12 proper industries over the past 20 years brings the share to its current level.
Real sectoral transformation needs to be initiated. We had been saying it all along. Had the economy been oriented to the industrial sector, there would have been a shift in labour force from the agriculture sector to industry.
That would have resulted in the economic transformation the EPRDF is preaching belatedly. There is an urgent need to reorient the economic structure towards the industrial sector if sustainable growth and development are meant to be ensured in this country.
Q: your party’s statement alleges that big infrastructure projects would be inflationary for the economy. The ruling party claims that these projects are crucial for national industrial takeoff, employment creation, and poverty reduction (with poverty incidence standing at 35pc in 2010). What is missing in balancing the two and what is the alternative?
The five-year GTP will have its own macroeconomic impact. The question is not only our concern but that of the international community, including the International Monetary Fund (IMF).
The plan is bold and will cost billions of Birr. The financing is largely expected from domestic sources. This will inhibit the private sector’s ability in the short-term, as it will create a shortage of available finance.
Expansionary infrastructure policy would dampen the economy as it does not have the ability to shoulder the burden. Ethiopia’s practical wealth would not miraculously rise, and the monitoring is so loose that such an infrastructure development strategy would be inflationary.
We should not instantly be happy when we build roads, as development demands lifting the overall living standards of people.
The government might say that such development would help industrialisation, but that would be a half truth. Aside from infrastructure development, a stable macroeconomic situation needs to be created for inflation so as not to eat into the income of the people.
The current infrastructure development strategy is rather aggressive and is inflationary. Although it might be correct from a political perspective, the economy is overheating.
Development needs to be phased and progressive. Beyond all, it should not destabilise the macro economy as it defines wealth creation and overall living conditions. Rectifying the economic policy should be the priority.
Q: As your party has long been criticised for not clearly articulating economic explanations or proposing bold policy alternatives, would the recent reshuffle in the EDP bring about a change in course?
Our party manifesto during the past election [May 2010] dealt with economic issues in detail.
We as a party might not undertake sophisticated economic analysis, but we commission studies for the public as well as for internal consumption. The EDP is a leading party, which has consistently generated documents on what it views as alternative policies over the past 10 years.
Since 2000, we have produced over five volumes of policy alternatives following our manifesto and all are detailed to sufficient levels. If anyone is interested, we are ready to avail them with it.