It is Time to Kill the Economic Policy Legacies of Revolutionary Democracy

By Teweldemedhin Aberra 

It is now well established that the prominent political forces that were born out of the student movement of the 70’s followed an undemocratic approach to their political struggle. Killing, imprisoning, and exiling political opponents were standard parts of their political struggle toolset. This was true for EPRP, Meson, Derg, TPLF and OLF. Interestingly, in spite of their bitter political rivalry, these political forces were all inspired by similar ideas from international communist revolutions such as the Russian Bolshevik revolution. The similarity of the flags and emblems of these political movements with each other and international communist movements is a striking demonstration of their communist inspirations.

With the fall of EPRDF, the reign of communist inspired undemocratic forces should come to an end.

PM Abiy and his Prosperity Party tick many of the right boxes of democratic intentions. They don’t seek to physically eliminate their political rivals as much as EPRDF and Derg and they show no sign of inspiration from Marxism. The PM was incorrectly referring to Marx as ‘Mark’ during a speech in which he clearly stated he is against the Marxist idea of the past. Even though mispronouncing the name of a historically important political economist, that inspired the half a century of disastrous governance in Ethiopia, doesn’t put the PM in an intellectual limelight, it is an encouraging indication that he doesn’t spend a lot of time peering through the communist manifesto and Das

Kapital. In addition to their undemocratic nature the political forces of the 70’s sought to establish socialist economic system. Dergue’s EWP tried full blown socialist-command-economy for 17 years with the resulting economic ruin which the country is still recovering from. Meles’s EPRDF implemented considerable economic liberalization and allowed the market to play an important role in the economy

with Marxist political economy inspired government participation in and control of the economy. This half-hearted approach brought about the highly skewed and imbalanced economy we have now. After decades of relatively high economic growth the country’s trade deficit has ballooned and manufacturing couldn’t expand. Most of the economic growth was in the service sector. Foreign currency shortage problem never abated.

Ethiopian economy expanded during the EPRF reign not because of revolutionary democracy, it grew in-spite of revolutionary democracy. Almost all the revolutionary democracy economic initiatives such as the small and micro enterprises program, agricultural led industrialization, government incentive to commercial agriculture and manufacturing have failed or didn’t bring about the intended result. The economy grew because of the service sector growth and the construction boom that was brought about the influx of aid and loan money the government somehow managed to secure on account of the relative peace and stability in the country.

The late PM Meles once complained about how rich Ethiopians choose investing in construction and service while what the economy needed was investment in manufacturing and agriculture. What the PM didn’t realize was the economic policy he crafted was what was pushing the Ethiopian investors away from the manufacturing to service. Individual investors base their decisions mainly on profitability not on macroeconomic priorities of the country. Revolutionary democracy economic policy made it more profitable to invest in the construction and service sector than agriculture and manufacturing.

Even though Abiy’s government has shown encouraging signs that it doesn’t have any deep-rooted Marxist views of the economy, EPRDF’s Marxism inspired economic policy is largely intact. Abiy’s government needs to move away explicitly and practically from the revolutionary democracy economic policy legacies of EPRDF. The North Korea style currency policy, state enterprises, government financing for small enterprises, the wasteful subsidies on fuel and wheat import continue to damage the economy.

Rolling back Marxist economic policies is politically risky. Marxist’s age-old claim that they are struggling against the exploitation of the farmer and worker by the capitalist class is very popular with the mass, i.e., despite the theoretical and practical fallacies of the claim. The nationalization of houses from people who own multiple housing units by Dergue was popular because it meant the government will distribute the houses to poor people at very low cost. In practice it meant drying up investment for housing and conversion of large affluent neighborhoods into slums; the government is naturally incapable of maintaining these houses it confiscated even if it wanted to. EPRDF understood the situation but found it hard to reverse; because reversing the situation would mean kicking out many households from their houses which is politically unpopular. EPRDF, slowly tackled it through its modestly successful condominium housing program, but the policy that took Dergue a few months to implement is taking more than a decade and counting for EPRDF (and its successor) to roll back.

Even if EPRDF has introduced welcome market reforms it retained important command economy and socialist policies of which the following are the most damaging:

1. The nonconvertible currency (Birr) which is the most important factor behind the perpetual currency shortage
2. State enterprises such as the communication and electric power generation/distribution
3. Government programs that try to forge and finance cooperatives
4. The wasteful fuel and wheat import subsidy

I will say a little bit more about two of the above below.

The Nonconvertible Currency (Birr)

At Dubai international airport I saw Kenyan’s using their shillings (Kenyan currency) to buy items from the duty-free shops while Ethiopians can’t do the same with our Birr. Ethiopians need to find dollars using all sorts of legal, and illegal means to shop anywhere outside our border. Your ATM card you got from the banks in Ethiopia is also equally useless outside of the country. While a Kenyan can use his ATM to withdraw money from almost anywhere around the world. We are put into this embarrassing situation not because we are poorer than Kenya, we are in this situation because of the communist inspired currency policy choices of Derg and EPRDF.

This is not something that has to do with our currency shortage, the currency shortage is a manufactured problem. We didn’t have the currency shortage problem during the Haile Saleasie times, when our economy was much smaller. We are condemned to this precarious situation because of a Socialist inspired policy need of Derge and EPRDF to retain strong control on the economy. In more stark but accurate terms, we are suffering because our communist leaders wanted to have a closed economy on which they can perform a fully controlled political economy experiment.

Meles had once defended this currency policy during one of his speech/Q&A sessions in parliament. It is customary practice for leftists and communists around the world to predict the eminent demise of capitalism during major market crises or at least they consider the crisis as their best I-told-you-so opportunity. Meles, true to his Marxist core, used the 2008 financial crisis to justify his choice of closed financial system for the country. Speaking to the HPR, he talked of how our economy is analogous to a small ship in a small lake and the economy of developed countries as large ships in world oceans. He talked of how remaining isolated in the lake saved us from the storm that shook the large ships. He said our small boat would have capsized if we were in the big ocean and that our isolation is a correct decision. Notwithstanding the flaw in the analogy, I say we prefer us to be in the ocean with the big ships. I prefer to have the option to sail to far away places than remain trapped in a small lake for fear of a storm that might come and capsize our boat. We will have a better chance of building a bigger ship as we make friends, accumulate knowledge and wealth through interaction with people around the world. If the storm comes before that, let’s lose the boat, after all it is a small boat and not a big loss. What Mele’s wants us is to remain trapped in the small lake forever to avoid the storm in the oceans.

Ethiopian currency is nonconvertible which means there is no free market where you can exchange the birr with other currencies such as the dollar. It is illegal to take birr out of Ethiopia. If you have foreign currency the government is happy to buy your currency for birr at a price it arbitrarily sets by itself. If on the other hand you want to buy dollars with your birr, the government will ask you what you want to do with the dollar and based on which it sets how much dollar you can have. Usually, it determines that you need much less than you really need. For instance, a few hundred USD for travel expenses. When the government sells you dollars, it sells it below its market price, it is basically a dollar ration scheme. Similar to the cooking oil ration during Derg times. When there is ration, there is always a queue. And indeed, there is usually months to a year waiting list in the dollar ration queue. The insistence of the government to control the currency exchange is basically the main cause of the dollar shortage. As we can see below, the policy discourages export which is the natural long-term solution for the foreign currency shortage.

EPRDF abolished the rationing system for cooking oil and other commodities Derg used to practice and then we don’t have cooking oil ration que and generally no persistent shortage of cooking oil. It should have done the same with the dollars, but it didn’t because it needed to retain its grip on the economy.

The currency policy aggravates the currency shortage on a long-term basis by effectively discouraging export while encouraging import. The government effectively confiscates the dollars exporters make and gives them Birr that is worth much less than the dollars they are forced to hand over. As a result of that, for some commodities such as beef, selling them in the local market fetch more money for exporters than exporting them to the international market. On the other hand, importers, after waiting in the queue (unless they bribe their way to the head of the queue), are handed out dollars at below the market price; this is effectively a government subsidy on imports.

So, for a businessman it is more attractive to wait in the dollar ration queue and make lucrative profit on import of all sorts of commodities instead of laboring to produce goods for export and to only finally be forced to handover the dollars he made to the government.

Getting out of the dollar rationing business should be a priority for the Abiy government if it has real intention of moving away from the disastrous revolutionary democracy. Let exporters do whatever they want with their dollars after they have paid their taxes. Let importers find dollars from the free market instead of waiting for government handout. As it is always the case with rationing of anything, government rationing of US dollars leads to shortage and long queues.

As the government hands out dollars at below market price, naturally all sorts of contraband and illegal activities flourish to try to get the dollar from the government and sell it in the black market or just hold it. Bankers take bribes from importers to help them avoid the rationing queue, importers try to whisk away some of the dollars they got from the government into foreign accounts instead of using all the dollars to purchase commodities for import.

The government tries to fight this by creating elaborate checks during custom clearance which serves to make Ethiopian custom clearance the hellishly slow, inefficient, and expensive it is. And there is no evidence that it is deterring determined and well-connected importers from gaming the system.

And thus, the trade deficit continues to expand from year to year despite the double-digit economic growth and all the big ticket revolutionary democratic economic programs from agriculture led industrialization to small and the micro enterprises development program. And it is sad that the country must suffer all the ills of this disastrous currency policy to allow the socialist policy makers to perform their little fully controlled political economic experiment.

The country is wasting foreign currency daily, the policy is not something we need to slowly move away. The government should get out of the dollar rationing business immediately.

It is customary for pundits to warn of the possible hyperinflation that can result if the currency market is liberalized abruptly. Ethiopian import is about 15% of the GDP. A price increase on imported items say by 100% should contribute only 8% to the general inflation in a market with rational players. It is true that hyperinflation is not driven by rational action; it is what economists call a self-fulfilling phenomenon and that the currency policy change might cause market players to expect extreme inflation and that expectation can itself cause hyperinflation. The government can manage the market’s perception by issuing a whole new currency that can be valued to any arbitrary number for one dollar (say 5 of the new currency for 1 USD). Hyperinflation is not a death sentence for an economy, it is a collapse of a money system. When a money system collapses a new money system can be created and the economy can continue. People who had most of their savings as money will be hurt but the factories and the workers won’t go anywhere, the economy can easily continue after a hyperinflation episode. The only question is whether the government has the will and political capital to manage the potential political challenges of the transition. The political challenge can be particularly hard given the generally left leaning nature of the political forces in the country.

State Enterprises

My biggest problem with the developmental state narrative from revolutionary democracy advocates is the assumption that the government is capable of participating in economic activities. The reality is the developmental state couldn’t figure out how to collect trash in Addis Ababa after three decades of free reign on the governance of the capital city.

The state is naturally unsuited to run actual complicated economic activity such as running factories and managing the telecom infrastructure. Absent profit motive, government officials and employees have little chance of effectively running complex enterprises, case in point is the disaster that is EthioTelecom and Ethiopian Power Corporation (EPCO).

It is an absurdity that a state that is far from being able to carry out its core governance roles such as law enforcement wants to run high tech telecom operations. Why we should have a government with a small footprint on the economy is not because of allegiance to some foreign ideology, it is the practical reality that we as a society have very little chance to form a government that can efficiently operate large enterprises. Our culture pushes government officials towards rent seeking instead of value creation, EPRDF has tried to fight it for three decades and far from solving the problem it only succeeded in coining various terms for the problem; corruption, rent seeking, parasitism, abuse of power, and rotting.

The developmentalist state’s insistence on running EthioTelecom and EPCO irrespective of their disastrous performance is probably the biggest single most damaging revolutionary democracy policy next to only the currency policy. The state by running these critical infrastructures unsurprisingly inefficiently placed a bottleneck in the development of modern economic activities and manufacturing sectors. You can’t hope to construct a thriving manufacturing sector with constant power cuts. You can’t hope to develop a modern economy with unreliable communication.

One has to make a distinction between investment by the state and state attempts to run enterprises. Investment by the state in infrastructure without at the same time minglinging with the construction and the operation of these infrastructure is generally welcome and harmless. It is welcome that the government decided to invest in the Grand Ethiopian Renaissance Dam (GERD), but it was a disaster that it tried to involve in the construction through METEC. Abiy’s government decision to kick government enterprises out of GERD construction is the correct remedy and it has worked. Abiy’s government now needs to formulate this approach as a policy not as a one-time fix.

Conclusion

Revolutionary democracy is the biggest holdback on the economic development of Ethiopia. Most of the programs inspired by its political economy had been a waste of resource and time. It has failed to transform the economy; it isolated the citizens from the dynamic global financial system and the trade deficit worsened from year to year.

The new government should not only depart from the revolutionary democracy it should do it decisively and explicitly. It should immediately get out of the dollar ration business. It should start handing over the operation of telecom and power infrastructure to specialist private companies.

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