In view of Prime Minister Meles’ recent interview on the economic condition of Ethiopia, and his derogatory comments about people who complain about it, we thought we would educate ourselves in some economics and analyze his teachings just a little.
To begin, it is obvious that his statements about hydroelectric power production investments and their impact on the government are false. If Meles’ logic holds true, we should all go out and secure the loans of all our acquaintances without any worry of repercussions incase they default on repayment. What we found more interesting however were his comments on inflation and his assertion that only the economically unlearnt would think Ethiopia’s rising inflation was bad for the economy.
It seems the origin of this statement is the Prime Minister’s in depth knowledge of modern industrialized economies and how they stimulate their economies in times of economic downturns by making use of monetary and fiscal policies that create inflation. In other words, their central banks expand the monetary supply [print money] and generally lend it to the governments, which in turn spend it buying goods and services in the economy and stimulating expansion while creating inflation.
It does not take a genius to realize that Ethiopia’s economy is far from a modern industrialized one and operates on completely different principles. As an example one can take the five year period between 1997 and 2002. This period is selected due to data availability and because it marks the beginning of Ethiopia’s reorientation towards an aid economy – which we expect to continue into the foreseeable future. For the purpose of simplicity we need only look at two parameters, the GDP and Aid trends and what they imply.
In the given period, foreign Aid to Ethiopia increased at an annual average rate of approximately 25% while real GDP grew at an average of 4%. These values and future forecasts can be found at various web sites that are openly available to the public(*). Aid in fact increased from 10% to 24% of GDP in these five years indicating a major policy change by the government as well as donors. Conservatively ignoring inflation, simple calculations from these values shows that while Aid accounted for 65% of the growth in 1997, it accounted for 144% of growth by 2002 indicating a contraction in the rest of the economy.
This implies a 1.78% growth in the non-Aid component of Ethiopia’s economy by 1997 but a decline of 2.3% in that sector by 2002. Since this analysis does not account for temporary shifts in GDP growth rates, the implication of this is frightening. By all accounts it is becoming evident that in the future Aid growth rates will far outstrip GDP growth rates in Ethiopia indicating a contracting non-Aid economic base in the country. Even if the above numbers are slightly off, it is becoming clear that people who live in countries that receive little aid and have no GDP growth will be more productive than Ethiopians.
The Prime Minister’s understanding of economics thus comes into question when his primary growth industry is the Marketing of a poverty brand associated with the country but he plans to expand the economy through inflation. If, as the above calculation implies, the production base in which Ethiopians are involved is actually shrinking – and there are strong indications that it is in the exploding number of farmers who are aid dependent and not productive any longer – then there is no useful inflationary stimulus that the government can apply as is the case in productive economies.
This leaves two possible explanations for the recent increase in inflation. One is that the Prime Minister is printing money to buy political support and this is getting out of control or that Ethiopians are on a buying spree – of goods and/or foreign currency – due to the political instability in the country and keeping less cash with them. Despite Meles’ economic lecture, neither one has anything to do with an economic stimulus. The present condition is further evidence of the negative economic impact of illegitimate governance and it would behoove donors to take note of this impending disaster. As for Ethiopians, well the struggle continues.
* http://www.imf.org/external/pubs/ft/fandd/2005/09/andrews.htm
To begin, it is obvious that his statements about hydroelectric power production investments and their impact on the government are false. If Meles’ logic holds true, we should all go out and secure the loans of all our acquaintances without any worry of repercussions incase they default on repayment. What we found more interesting however were his comments on inflation and his assertion that only the economically unlearnt would think Ethiopia’s rising inflation was bad for the economy.
It seems the origin of this statement is the Prime Minister’s in depth knowledge of modern industrialized economies and how they stimulate their economies in times of economic downturns by making use of monetary and fiscal policies that create inflation. In other words, their central banks expand the monetary supply [print money] and generally lend it to the governments, which in turn spend it buying goods and services in the economy and stimulating expansion while creating inflation.
It does not take a genius to realize that Ethiopia’s economy is far from a modern industrialized one and operates on completely different principles. As an example one can take the five year period between 1997 and 2002. This period is selected due to data availability and because it marks the beginning of Ethiopia’s reorientation towards an aid economy – which we expect to continue into the foreseeable future. For the purpose of simplicity we need only look at two parameters, the GDP and Aid trends and what they imply.
In the given period, foreign Aid to Ethiopia increased at an annual average rate of approximately 25% while real GDP grew at an average of 4%. These values and future forecasts can be found at various web sites that are openly available to the public(*). Aid in fact increased from 10% to 24% of GDP in these five years indicating a major policy change by the government as well as donors. Conservatively ignoring inflation, simple calculations from these values shows that while Aid accounted for 65% of the growth in 1997, it accounted for 144% of growth by 2002 indicating a contraction in the rest of the economy.
This implies a 1.78% growth in the non-Aid component of Ethiopia’s economy by 1997 but a decline of 2.3% in that sector by 2002. Since this analysis does not account for temporary shifts in GDP growth rates, the implication of this is frightening. By all accounts it is becoming evident that in the future Aid growth rates will far outstrip GDP growth rates in Ethiopia indicating a contracting non-Aid economic base in the country. Even if the above numbers are slightly off, it is becoming clear that people who live in countries that receive little aid and have no GDP growth will be more productive than Ethiopians.
The Prime Minister’s understanding of economics thus comes into question when his primary growth industry is the Marketing of a poverty brand associated with the country but he plans to expand the economy through inflation. If, as the above calculation implies, the production base in which Ethiopians are involved is actually shrinking – and there are strong indications that it is in the exploding number of farmers who are aid dependent and not productive any longer – then there is no useful inflationary stimulus that the government can apply as is the case in productive economies.
This leaves two possible explanations for the recent increase in inflation. One is that the Prime Minister is printing money to buy political support and this is getting out of control or that Ethiopians are on a buying spree – of goods and/or foreign currency – due to the political instability in the country and keeping less cash with them. Despite Meles’ economic lecture, neither one has anything to do with an economic stimulus. The present condition is further evidence of the negative economic impact of illegitimate governance and it would behoove donors to take note of this impending disaster. As for Ethiopians, well the struggle continues.
* http://www.imf.org/external/pubs/ft/fandd/2005/09/andrews.htm
2 comments:
Thanks for contributing to the growing awareness of Ethiopia's economic plight and the EPRDF's poor economic record over the last fifteen years.
Currently, Ethiopia is faced with not only stark poverty, but a booming population, massive deforestation, soil erosion, erratic rainfall, climate change and desertification, diminished land per person, and epidemic diseases.
The level of poverty has remained the same since the EPRDF began its rule (page iii, http://www-wds.worldbank.org/servlet/WDS_IBank_Servlet?pcont=details&eid=000160016_20050920094758).
Ethiopia cannot afford no longer afford the luxury of bad governance and wild and speculative policies based on a homespun 'revolutionary democracy'.
Excellent Expose...Meles has been saying that Ethiopia will be a middle income country in 20 years. I don't think even the "marketing of a poverty brand" will get him there. But it shows in what direction they are moving. Realizing none of his economic plans are working, he has been begging for a doubling of aid - the only growing area of the economy.
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