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The Dynamic Trio of Political Economy: Cooperation and Conflict, Scarcity and Surplus, Wealth and Inequality & Ethiopia’s Failures Under Ethnic-Based Governments

Ethiopia: “A wealth of burning questions, A poverty of Answers”!

Ethiopia _ failure _ ethnic politics
Photo credit : The Daily Eastern News

Teshome Abebe*

Introduction

In the intricate web of political economy, three fundamental concepts stand out as the pillars upon which the modern world revolves: cooperation and conflict, scarcity and surplus, and wealth and inequality. These concepts are not isolated; instead, they form an intricate tapestry of interactions that shape the dynamics of societies. This article delves into the significance of these concepts and their deterministic interactions on the sociopolitical landscape of Ethiopia. It will be argued that viewed from the vantage point of the dynamic trio of political economy, the consequences of ethnic federalism in Ethiopia have been extremely disappointing and extra-ordinarily destructive.

Cooperation and Conflict

Cooperation and conflict represent the yin and yang of human interactions within societies. Cooperation fosters collective progress, facilitating the creation of goods, services, and institutions that benefit all members of the community. It is the glue that binds individuals into functional societies, enabling them to tackle common challenges.

However, conflict is an ever-present counterpart to cooperation. It emerges when interests clash, whether due to resource allocation, power struggles, or differing ideologies. Conflict, while disruptive, can also be transformative, driving societies to address grievances and innovate solutions.

Scarcity and Surplus

Scarcity and surplus are the economic forces that drive societies to allocate resources. Scarcity, the inherent limitation of resources, compels societies to make choices. It is the foundation of economics, as it necessitates the allocation of finite resources among competing needs and wants.

Surplus, on the other hand, represents the fruits of productivity and efficient resource allocation. It allows for economic growth, investment, and the potential to alleviate scarcity through innovation and distribution.

The interplay between scarcity and surplus defines economic systems. Societies strive to minimize scarcity through cooperation, innovation, and equitable resource distribution, while surpluses present opportunities to address existing inequalities and invest in the future.

Wealth and Inequality

Wealth and inequality are intimately connected to the allocation of resources. Wealth, often generated through cooperation and surplus, accumulates in the hands of individuals and institutions. Inequality emerges when this accumulation is uneven, resulting disparities in income, assets, and access to opportunities.

Inequality, if unchecked, can lead to social unrest and instability. However, it can also serve as an incentive for innovation and progress when managed effectively. Progressive taxation, social safety nets, and policies that promote equal access to education and healthcare can mitigate the adverse effects of wealth concentration. 

Deterministic Interaction

These three concepts are not isolated entities but interact in a deterministic manner. Cooperation mitigates conflict by fostering shared interest and promoting the equitable distribution of resources, which can reduce scarcity and limit the growth of inequality. Surplus, generated through cooperation and innovation, can be harnessed to address scarcity and reduce inequality through strategic resource allocation and inclusive policies.

Conversely, conflict can disrupt cooperation, exacerbate scarcity, and widen wealth disparities. Mismanagement of resources and the concentration of wealth can breed conflict as marginalized groups demand equitable access.

As a consequence, the interplay of cooperation and conflict, scarcity and surplus, wealth and inequality are the essence of political economy. These concepts are not merely theoretical constructs but deeply embedded in the fabric of societies. Recognizing their significance and deterministic interactions is crucial for policymakers and citizens alike. A society that fosters cooperation, manages scarcity, and addresses wealth inequality is poised to navigate the complex challenges of the modern world while promoting collective well-being and social stability.

Ethiopia’s Struggles with Cooperation, Scarcity, and Inequality 

Ethiopia, a country of remarkable diversity and historical significance, faces profound challenges in the realms of cooperation, scarcity, and inequality. To understand its current predicament and chart a course towards a more prosperous future, we must examine how these three crucial concepts intersect and shape the nation’s socio-political landscape.

1) The Challenges in Cooperation

Ethiopia’s recent history has been marred by ethnic and political conflicts, demonstrating the challenges it faces in fostering cooperation. Ethnic tensions have often overshadowed the potential for unity and collaboration among its diverse population. Political divisions and power struggles have further hindered effective governance and cooperation between different groups.

To move forward, Ethiopia must prioritize reconciliation, inclusivity, and the creation of a more equitable political system that accommodates the needs and aspiration of all its ethnic communities. National dialogues and efforts to build trust among various factions are essential for forging a path towards stability and cooperation.

2) Scarcity and Resource Mismanagement

Scarcity, exacerbated by factors such as population growth, lack of employment opportunities, environmental degradation, and limited infrastructure, has hindered the country’s development. Access to basic necessities, such as clean water, education, and healthcare, remains a challenge in many regions. Additionally, the country’s agriculture-dependent economy faces recurrent droughts and food insecurity.

To address scarcity, Ethiopia should invest, among others, in sustainable agriculture, infrastructure development, and effective resource management. International partnerships can assist in mitigating the effects of climate change and providing access to technology and expertise that can boost agricultural productivity.

3) Wealth Inequality and Economic Disparities

Ethiopia faces significant wealth inequality, with a small elite benefiting disproportionately from economic growth while many citizens struggle with poverty. This disparity has roots in historical land ownership patterns, limited access to education, ethnic-based policies and unequal opportunities for economic advancement.

To tackle wealth inequality, Ethiopia needs comprehensive reforms that promote inclusive economic growth, job creation, and equitable access to resources. Land reform, investment in education and vocational training, and targeted social programs can help bridge the wealth gap and promote a more equitable society.

The Way Forward

  1. Inclusive Governance: Ethiopia should embark on a path towards inclusive governance that accommodates the diverse voices and needs of its population. A federal system (not based on ethnic differences) that respects the autonomy of regions while fostering a sense of national unity can help achieve this goal.
  2. Sustainable Development: The country must prioritize sustainable development practices that address environmental challenges and resource scarcity. Investment in renewable energy, sustainable agriculture, and infrastructure can enhance resilience to climate-related risks.
  3. Economic Equity: Ethiopia should implement policies that promote economic equity, including land reforms, access to credit for small businesses, and initiatives to empower marginalized communities economically.
  4. Education and Healthcare: Expanding access to quality education and healthcare is essential for reducing inequality and ensuring that all Ethiopians have an opportunity for a better future.
  5. International Collaboration: Engaging in international partnerships and seeking assistance from organizations and countries with expertise in conflict resolution, development and environmental sustainability can provide valuable support for Ethiopia’s journey toward a brighter future.

To state that Ethiopia faces complex challenges in cooperation, scarcity and inequality is an understatement. However, by addressing these issues through inclusive governance, sustainable development, economic equity and investments in education and healthcare, the country can pave the way for a more prosperous and harmonious future for its diverse population. International collaboration and assistance can play a vital role in this transformative process.

The Challenges and Failures of Ethnic-Based Government

The ethnic-centered government in Ethiopia faces significant challenges in designing a pathway to the future that can effectively reconcile the deterministic effects of cooperation, scarcity, and inequality. Here are several compelling arguments to support this perspective:

1. Lack of Experience and Knowledge:

Ethiopia’s transition to an ethnic federal system is relatively recent, having been established in the 1990s. Many ethnic-based political parties lack the experience and historical knowledge required to navigate complex issues related to governance, economic development, and social integration.

2. Fragmented Decision-Making:

The ethnic federal system in Ethiopia has led to a highly fragmented political landscape, with numerous ethnic-based parties vying for power and resources. This fragmentation can and has hindered the government’s ability to formulate and implement cohesive policies and strategies.

3. Ethnic Tensions and Divisions:

Ethiopia has witnessed ethnic tensions and conflicts in recent years, often fueled by competition for resources and political power among various ethnic groups. The two-year war in Tigray and Amhara, the new five-month-old war the government is waging in Amhara, the war within Oromia, and other low-level conflicts in the country are but only a few examples. These tensions and wars can and have undermined the government’s capacity to foster cooperation and social cohesion. Indeed, Ethiopians are more divided now than they were in 2018 when the current perfidious government came to power. The country has been marred by prolonged conflicts arising from ethnic and territorial tensions. These conflicts have resulted in loss of life, displacement of millions of citizens and communities, and strained socio-economic development. Documented disruptions, diversions, displacements, destruction of productive assets, and the unimaginable—genocide are all the hallmarks of ethnic-based regime in the country. Suffice it to mention the genocide of Amharas in places like: Bedeno, Deder, Bekersa, Gondar, Wollo, Gojam, Afar, Chena, Ukersa, Agamsa, Tole, Gutin, Silsaw, Chekorsa, Gene, Wollega, Benishangul- Gumuz and at other unnamed places, river banks, streams, fields, hills and farms.

4. Limited Capacity for Economic Planning:

Economic development and resource allocation require careful planning and execution. The ethnic government’s focus on ethnic identity and autonomy can and has diverted attention and resources away from critical economic planning and development initiatives. A recurring example of this failure is the establishment of an economic advisory group to counsel the head of government on economic policy. It is repeatedly reported that the group has not met but once in almost four years. Regardless, it suffices to mention that no country can wage war against its own people for years on end and achieve economic development at the same time.

5. Scarce Resources:

Ethiopia faces numerous challenges related to scarcity, including access to water, arable land, and other essential resources. Effective resource management and allocation require a coordinated, nationwide approach, which the ethnic government has struggled to achieve due to its fragmentation. Again, suffice it to mention that the current government cannot even pay the monthly salaries of public servants including members of the military. Monthly payroll is generally not met or is postponed for months.

6. Inequality Concerns:

Ethnic-based federalism can inadvertently exacerbate inequalities by prioritizing the interests of certain ethnic groups over others. No other example of this is needed other than the ‘Oromuma’ policies of the current government where jobs, credit, promotions, government contracts and land acquisitions are prioritized for Oromos only, damned be the law.  Addressing inequality is a complex task that requires a government with broader perspective and a willingness to implement equitable policies in the interest of all citizens. Current policies have instead made the country effectively shuttered against the youth, and against non-oromos, especially, the Amhara.

7. International Acceptability:

Ethiopia’s ethnic government has faced challenges in garnering international support and recognition due to concerns about ethnic-based politics, its negative outcomes and the inherent potential instability of the system. This can affect the country’s ability to access foreign aid and investment, which are crucial for development. As I write this piece, the US government has extended by another year its sanctions imposed two years ago due to the war in the North of the country. In addition, international organizations are pulling out of Addis Ababa–the capital–to places like Nairobi. A sure sign that the country has lost its significance in the diplomatic arena inviting comments from some that it has become an empty house despite the leadership’s rhetoric of its greatness.

8. Governance Challenges:

The ethnic-based government in Ethiopia has proliferated with inadequate governance, corruption, and political instability, which continue to undermine the government’s ability, such as it is, to effectively address the needs of its citizens. A future government would have to make a critical assessment of governance structures, institutions, and policies conducted to identify areas of reform that could foster an environment conducive to peace and prosperity.

In summary, the ethnic government in Ethiopia encounters significant hurdles in designing a future pathway that effectively reconciles cooperation, scarcity and inequality. The lack of experience, fragmentation, ethnic tensions, and concerns about capacity and acceptability of the system all contribute to the challenges it faces in addressing these fundamental issues. 

Viable strategies for Ethiopia to break free from the shackles of bad governance and conflict include the eradication of ethnic-based federalism, cultivating and strengthening democratic institutions, promoting inclusivity, empowering marginalized communities, preparing for a transitional government and initiating national dialogue for reconciliation and peacebuilding.

The limited evidence provided here shows that ethnic federalism, which was supposed to devolve power to regional ethnic groups, has led instead to ethnic tensions and conflicts, as well as economic inequality and underdevelopment of certain regions. It has led to the erosion of national unity and identity. In addition, it has encouraged separatism, brought about inequalities in resource distribution and created political instability in Ethiopia when the country could ill afford it. Ethiopians are weary of living amidst violence and instability. Though they are divided by geography, and currently, by the propaganda of perfidious, corrupt elites, they have a shared yearning for peace, coexistence, and socio-economic progress which has eluded them under ethnic-based federalism for the past 50 years. Given the evidence, it is time to dispatch ethnic federalism to the dustbin of history. Enough of the evil alchemy of ethnic federalism!

*Teshome Abebe, PH.D. a former Provost, is Professor of Economics.

Editor’s note : Views in the article do not necessarily reflect the views of borkena.com  

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26 COMMENTS

  1. This is what I believe must be common on all websites here in our Diaspora and over there in the old country. It is a well written article and uses easily understandable terms and phrases. Our dear patriot Obbo Teshome Abebe, PhD, seems to put the age old and proven KISS principle in practice here. Thank you, sir! Keep educating us. I can tell you most of us need to be educated/re-educated.
    I’m book marking this article.

    • Kibur Wondime Ittu Aba Farda, Thank you, and I am humbled! Our challenges are numerous, and you will agree with me when I say that our willingness and ability to deal with them is limited. What we can do, as a consequence, is for each of us to contribute in ways we can. I am grateful that you view the piece as a small but positive contribution. Best, Ittu!

      • Obbo Teshome,

        Thank you for your kind words. I like articles like the one you posted here. There is another countryman who posts articles just as educating as yours on another website and I have been encouraging him to keep writing. For some reason I don’t see his essays posted on this website. I hope you two will have meeting of minds and educate us about the old country in particular and the world in general.

        Meanwhile, I politely ask you to avoid by all means using incendiary words like ‘Neftegna, Woyane and Oromummaa’ as pejoratives in all of your pieces. Using these words to demonize or incriminate others will not help further the accord for those upright people we all still hold very dear to our hearts.
        I also would like to wish you and your family a Happy New Year and continued success in years to come!!!

  2. ።Thank you for the article dear Teshome Abebe.
    I have a question on the 5th point you mentioned in “the way forward”. You mentioned “…seeking assistance from organizations and countries with expertise in conflict resolution, development and environmental sustainability can provide valuable support for Ethiopia’s journey toward a brighter future.” On contrary, Ethiopia has been in the deepest hell because of foreigners intervention and dependence on foreign aid. Ethiopia endured all sorts of conflicts that are “virtually” foreign, in their roots. How come ‘foreigners assistance in conflict resolution’ an advice to “brighter Ethiopia”? Connected issue is the topic of “development”, for which again, you advice seeking assistance from organizations and countries. I am quite sure that you know for how long we sought assistance for development, the entire century. Right? Why couldn’t we develop then? Do you yet believe in aid for development? Really? I wish I had reservations on environmental sustainability at least not to ridicule number 5 in the wayforward totally. However, I realize that environmental degradation in Africa is the deliberate cost of environmental protection in the northern hemisphere and western world. I strongly believe in our own potentials! Emphasis on inward looking would brighten future Ethiopia instead of opening doors for more tiers and loops of intervention & betrayal. In my opinion, brighter Ethiopia can be & will be achieved by Ethiopians.
    I appreciate your insightful contribution Sir!
    Best regards,

    • Dearest Desalegn, thank you for reading the article and for your comments. I will be very direct in my response because you seem to have been swayed by the silly argument that, in general, nations can do everything by themselves, and specifically, Ethiopians can do things by themselves. Please stop, stop this Marxist polemic. If what you propose is true, then why haven’t we done it already? Why are we so destitute as a nation? There is no country that produces everything it needs, and there is no country that relies on its own resources completely. The Maxist polemics is devoid of economic thinking and violates one of the ten principles of economics: that exchange/trade is advantageous! Those officials in Ethiopia that spout the erroneous thinking that we can do it ourselves rely on imported hair color so that no gray hair is visible on them (unlike mine), then there are other officials who import wigs from China and India while spouting ‘self reliance’, and I could go on. Why import such items if one is self reliant? Aid food is stolen away from its intended purpose so that someone could sell it in the open market for production of bread. Where is the self-reliance here? Furthermore, why would you have a problem if some other country is willing to help? You seem to see the problem in the acceptance. I see the problem in the bending over in servitude of such aid. Flawed thinking is not very attractive. Then there are the other issues you have raised with regard to the environment and development. Suffice it for me to state that the science on the environment is in, and it is clear–it requires more than just planting trees. The question on development requires an understanding of not just economics but also the services of all the other social sciences. Perhaps you and I could partner in developing a concept article on the issues you have raised but feel strongly about–it is your lead! I am very grateful that you were interested in the issues I covered in my article. I am even more grateful to you for raising the questions that led to this quick and short response. Best, Desalegn.

  3. I would like to take a moment to wish all of you my dear countrymen/women A Happy New Year! I wish all of you continued success in your careers with peace and health for years to come!

  4. Such is the type of professionalism that is desperately lacking from the so-called “learned Ethiopians”, who rather choose to peddle their this or that titles to earn ‘respect’ as politicians rather than professional experts. The value added in education is using the training to solve real problems on the ground rather than fantasizing to be political leaders.

    Below was a report by International Monetary Fund or IMF on Ethiopia’ economy which was prepared nearly two decades ago; it was a fantasy fiction designed to encourage Ethiopia to borrow more from abroad, more specifically from the IMF thus getting the country into deeper poverty. The reality today about the state of the economy is almost identical, but the difference this time is a government that is committed and determined to promote economic growth, despite numerous internal and external political challenges. The priority of then TPLF led government was to swindle Ethiopia’s resources to benefit one ethnic group and region.

    © 2008 International Monetary Fund
    The Federal Democratic Republic of Ethiopia
    July 2008

    I. BACKGROUND AND RECENT DEVELOPMENTS

    1. The Ethiopian economy has grown rapidly in the last four years, despitecontinuing regional political tensions. Favorable weather conditions and pro-growth development policies—with an emphasis on public investment, commercialization of agriculture, and nonfarm private sector developments—have helped sustain recovery from the sharp drought-related contraction in 2002/03. Growth has averaged 11 percent since 2003/04, far exceeding the minimum growth target of 7 percent in the Program for Accelerated and Sustainable Development (PASDEP), that is estimated to be consistent with keeping the Millennium Development Goals (MDGs) within reach.

    2. Over this period, Ethiopia has continued its transition to a market economy, although some sectors have yet to be fully liberalized. 4 Public enterprises still play a major role in many areas, including the financial, energy, and communication sectors. Market pricing is not fully functioning in the financial sector where interest rates are not responsive
    to changes in demand and supply conditions.

    3. In recent years, it has become clear that demand is running ahead of efforts to expand the capacity of the economy through public investment in physical and social infrastructure investment and through private entrepreneurship. Inflation rose to 39 percent in the twelve months to May 2008 with food price inflation reaching 54 percent.

    4. Economic growth may be slowing but remains high. The authorities consider that agricultural production is continuing to expand rapidly, notwithstanding the poor performance of the short rainy season in some regions, and expect broad-based growth of 11 percent in 2007/08, with significant contributions from manufacturing, construction, and
    services. However, tempered by estimates that export and import growth has slowed to 4–9 percent in real terms, staff projects real GDP growth is closer to 8½ percent.

    5. The rise in world oil prices is hitting Ethiopia’s economy hard. Although surging coffee prices have helped limit the impact on the terms of trade, and private remittances have risen sharply, the higher oil and fertilizer import bill is placing considerable pressures on international reserves . The inflationary impact of high oil prices has so
    far been relatively contained as they have only been partially passed through to consumers. This has resulted in sizable government subsidies (estimated at about 1 percent of GDP), which are being provided off-budget through the Oil Stabilization Fund.

    6. Overall public sector borrowing has remained high in part because of heavy public enterprise expenditures. In 2006/07, the general government fiscal balance (including grants) improved because of cuts in spending and increases in grants. For 2007/08, helped by some revenue measures (notably, the introduction of an import surcharge on consumer goods) and increased external financing and privatization revenues,
    domestic financing of the general government is being contained below the 2.5 percent of GDP budget target. In this context, measures to alleviate the impact of high food price inflation—the lifting of VAT, turnover tax, and surtaxes on some food items—have been
    limited. But with significant borrowing by public enterprises, staff estimates that overall domestic public sector borrowing would reach 5 percent of GDP for 2007/08 compared with 4.8 percent in 2006/07

    7. Credit expansion to the public sector has to a large extent also driven relatively rapid broad money growth (Table 4 and figures below). The National Bank of Ethiopia (NBE) raised minimum reserve requirements on commercial bank deposits from 5 to 10 percent (July 2007), and to 15 percent (April 2008), and raised the minimum time and saving
    deposit rate from 3 to 4 percent (July 2007). This has helped reduce banks’ excess reserves and slow private sector credit growth somewhat. But broad money growth has been propelled by credit to the public sector, particularly to public enterprises, while the NBE resumed the
    provision of direct advances to the government in late 2007 in response to commercial banks’ request to rediscount treasury bills.

    8. The real effective exchange rate has continued to appreciate. The official exchange rate for the Birr against the U.S. dollar, and in nominal effective terms has steadily depreciated since end-2007. In parallel markets, the Birr weakened significantly, and the premium widened to 10 percent by mid-March 2008, prompting the authorities to close the
    markets at the end-March.6 Nonetheless, the real effective exchange rate has appreciated due to Ethiopia’s much faster inflation rate than in its trading partners.

    II. ADJUSTING TO SHOCKS AND IMBALANCES

    9. Discussions focused on how Ethiopia could reduce inflation and adjust to the global food and oil price shocks in a manner that would least affect the momentum for growth and poverty reduction. There was full agreement that the authorities’ targets of reducing inflation to single digits and raising international reserve coverage, over time, to 10-
    12 weeks of imports are consistent with sustaining development over the medium-term. At the same time, policies to achieve a soft landing will have to judiciously balance the risks to growth, inflation, and the balance of payments. The consultation explored these risks and their implications for policies in the period ahead.

    Twin challenges

    10. The authorities recognized that the twin challenges of high inflation and low international reserves considerably limited their policy options. On inflation, the authorities placed somewhat more emphasis on the role of structural factors driving an increase in the relative price of food, but agreed that policies to dampen demand were called for. The authorities in this regard viewed rapidly rising agricultural prices as a mixed
    blessing: they were expected to encourage a strong supply response, but in the short term had an adverse impact on many vulnerable groups, including the urban poor, and reduced the real value of food aid.7 On the oil price surge, staff and the authorities agreed that it should be best treated as a permanent, and very large, shock to
    the balance of payments: in 2008/09
    the import bill was expected to be
    about US$1 billion higher (over 3
    percent of GDP) than two years
    earlier and to persist at its new high
    level over the medium term. Staff
    agreed that, in the circumstances, it
    was unrealistic to rebuild the foreign
    exchange reserves rapidly, and
    moving toward the authorities’
    intermediate target of 8-10 weeks of imports should be the goal in 2008/09.

    11. The authorities were hopeful that adjustment to low inflation and high oil prices could be achieved without a significant slowdown in economic growth. They agreed that monetary and fiscal tightening was a necessary response, but felt that the potential growth of the economy had been raised as a result of past infrastructure investment and reforms, with the export sector in particular likely to make a rising contribution to
    growth and the balance of payments in the years ahead.

    12. By contrast, the staff’s analysis, summarized in an illustrative baseline medium-term adjustment scenario, suggested that sustainable medium-term growth would be significantly below rates achieved in recent years. With front-loaded tightening of monetary and fiscal policies, inflation could be brought down to single digits over the course of the next two years. Full pass through of fuel prices would help adjustment to the oil price shock, but given the need to build foreign reserves to 10-12 weeks of imports and pay for higher oil imports, the scope for domestic demand and import growth would be circumscribed in the medium term, notwithstanding strong concessional and nonconcessionsal official inflows. Export growth might be buoyant as the authorities expected—although there were questions about competitiveness (see below)—but given the
    small size of the export base, staff estimated that average GDP growth would be around 7 percent (the PASDEP floor) in the medium term and lower than this in the near term.

    13. Moreover, staff pointed to considerable downside risks to growth. There was a risk that inflation expectations were becoming ingrained and more aggressive policy tightening might be required. The external environment might deteriorate or oil prices could rise further.8 And the scenario abstracts from potential adverse weather effects on
    agriculture—Ethiopia’s growth has benefited in recent years from the absence of severe droughts, which in the past have occurred every 5–6 years. Notwithstanding the authorities efforts to encourage the development and resilience of the agricultural sector, the recurrence
    of droughts would lead to both high variability of output and inflation as well as lower average growth.

    14. Necessary adjustment therefore posed a serious threat to Ethiopia’s efforts to reduce poverty. Even if the more worrisome downside risks do not materialize, the projected growth slowdown is substantial and budget resources for development and propoor spending will be squeezed because of slower growth of tax revenue and the need for tight fiscal policy. Staff argued that policy tightening could not be avoided if high inflation was to be curtailed and demand adjusted over the medium term to accommodate the oil bill: failure to do so could lead to more costly and disorderly adjustment later.

    15. The impact on development and pro-poor spending could, however, be alleviated by additional donor financing as illustrated in staff’s alternative scenario. The scenario assumes just over 1 billion U.S. dollar of additional grants—on top of the already identified financing—concentrated in the next two fiscal years. This would create room for
    additional public spending with some finance assumed to be allocated for capital projects that have high import content and raise longer-term growth. Short-term growth is also higher than in the baseline because finance for imports helps alleviate shortages of key commodities.

    Adjustment, the real exchange rate and external debt sustainability

    16. An appreciating real exchange rate is beginning to raise questions about competitiveness, although the authorities were confident that exports would remain strong. Ethiopia’s export market shares, for example, have increased in recent years, pointing to productivity advances and broader improvements in supply and business
    conditions that are not reflected in CPI-based measures of the real effective exchange rate (REER). However, with Ethiopian inflation continuing to run ahead of that in competitor countries, the REER has moved above historical levels.

    17. Staff analysis points to some potential overvaluation of the REER, although there are several qualifications. Forward-looking analysis of the sustainable current account deficit, for example, suggests that some real depreciation of the exchange rate might be necessary to support balance of payments adjustment. However, estimates are highly
    sensitive to assumptions about what is a reasonable medium-term pace of reserves accumulation to underpin external stability, the availability of external financing, and the degree of domestic imbalance in the economy. Likewise, estimates of the fundamental equilibrium REER are sensitive to specification uncertainties with some evidence that earlier
    debt relief has until recently compensated for the adverse impact on the equilibrium REER of the terms of trade decline, and the actual REER has closely followed its equilibrium level.

    18. The authorities agreed that an active structural reform program is needed to improve productivity and efficiency so as to strengthen external competitiveness. The PASDEP calls for a range of public investment and services to (i) expand investments in farm-to-market roads; (ii) encourage private sector involvement; (iii) build agricultural credit markets; and (iv) enhance the security of land tenure. Staff pointed to the importance of stimulating private sector development (with special attention to the investment climate) and building the financial sector in light of recent declines in the private investment rate.

    19. The updated debt sustainability analysis incorporating borrowing by some of the major public enterprises shows a moderate risk of debt distress. Under the baseline scenario, the risk of debt distress is low, but stress tests point to breeches of the threshold on the NPV of debt to exports if new public sector loans are negotiated on less favorable terms,
    export growth is lower than the historical average, and simultaneous adverse shocks apply to growth, exports and grants. To limit these risks, staff stressed that securing grant and concessional financing and containing domestic borrowing remained vital and urged the
    authorities to draw up a comprehensive public debt strategy that specifically includes public enterprise debt and contingent liabilities, and to strengthen debt management capacity.

    Monetary policy tightening

    20. In view of the still high growth of broad money after the initial monetary tightening, the authorities were stepping up their tightening efforts. The initial measures had helped to significantly reduce excess reserves of commercial banks, and improve the efficacy of monetary policy instruments, with better control over liquidity developments.
    However, money growth remained buoyant in the first half of 2008 with the surge in credit to public enterprises and the temporary resumption of NBE direct advances to the government (which replaced treasury bills held by commercial banks). The authorities concurred with staff that central bank advances to the government would need to be contained, and the sale of treasury bills facilitated by attracting more market participants possibly through higher Treasury bill interest rates.

    21. The money growth target for 2008/09 is relatively conservative, but needs to be kept under close review especially if high inflation persists. The authorities’ broad money target of under 20 percent appropriately factors in a rise in money velocity. However, setting the money target was further complicated by the uncertainties surrounding the inflation process. Staff agreed that underlying inflation was likely significantly below the headline rate because food price inflation was partly driven by convergence to world prices, a process that had finite (albeit uncertain) limits. Nevertheless, there remained a significant risk that excess demand and inflation expectations were driving inflation, in which case the authorities needed to stand ready to tighten monetary policy further.

    Fiscal support for adjustment

    22. The authorities recognized the need to support monetary tightening with a reduction in public sector domestic borrowing. With some rebuilding of net foreign assets, the money supply target would imply a sharp decline in private sector credit in 2008/09 if public borrowing were not curtailed. This would lead to imbalanced development and slower output growth. In this context, staff recommended roughly halving domestic public sector borrowing to 2–3 percent of GDP in 2008/09, a level that was also historically consistent with single-digit inflation (Box 4). To the extent that this might require lowering the budget domestic borrowing ceiling to 1½ percent of GDP, real government expenditure growth would be negligible in 2008/09 absent measures to strengthen tax revenue. This would place
    additional emphasis on the need for careful project selection that emphasizes productivity and contribution to growth as well as prioritization to preserve pro-poor spending.

    23. While the authorities expressed their intention to limit overall public
    borrowing, they were concerned that going as low as 1½ percent of GDP for domestic budget borrowing would imply too large a squeeze on government spending and the investment budget. Nevertheless, until there were clear signs that inflation was turning, they intended to keep domestic borrowing well below the 2007/08 budget ceiling of 2½ percent of GDP and implement import-intensive capital spending cautiously to mitigate the impact on the external position. At the same time, the top economic policy makers, who now meet regularly to coordinate the macroeconomic policy strategy, would keep a close eye on the activities of public enterprises.

    24. Staff reiterated that, if strong control over the activities of public enterprises is not feasible, budget policy would have to react to pressures on domestic borrowing. Effective controlling measures—including the introduction of performance contracts and/or approval of their budgets and borrowing plans—should be explored. It also stressed that
    allowing full pass through of oil prices should be part of the strategy in order to reduce the growing quasi-fiscal liability of the Oil Stabilization Fund. The authorities noted their intention to raise fuel prices further.

    25. The need to keep fiscal policy tight in the medium term to help the economy absorb the oil price shock puts the spotlight on the poor performance of revenues. The tax-to-GDP ratio has been on a downward trend in recent years because the rebounding agricultural sector is lightly taxed and newly emerging sectors in services and industry
    benefit from tax breaks. Unless the trend is reversed, the budget arithmetic would become increasingly difficult going forward. Therefore, the authorities were undertaking a comprehensive study of tax reforms, based on earlier technical assistance recommendations.

    26. Improved public financial management would also ensure greater value for money in public expenditure. Staff welcomed progress in performance budgeting and also encouraged the authorities to seek help from development partners to strengthen the vetting and selection of capital projects.

    Exchange rate policy

    27. The staff argued that greater exchange rate flexibility is needed to better reflect demand for and supply of foreign exchange. Absent effective competition in the interbank foreign exchange market, and with the central bank the major supplier of foreign exchange, exchange rate movements have been highly circumscribed. 11 However, in light of
    potential strains on competitiveness and the need to adapt to higher oil prices, staff stressed it was important to avoid overvaluation. Moreover, the wide spread that had opened up in the parallel market suggested supply and demand imbalances, and the closure of the market
    could push some transactions further underground, possibly resulting in a wider exchange rate premium. The authorities agreed that more flexibility could in principle be beneficial, but were anxious to avoid sharp corrections of the exchange rate—not least, because they could fan inflation expectations. They agreed to consider measures to foster a more liquid and flexible interbank foreign exchange market, such as allowing banks to bid for foreign exchange more freely.

    Financial sector soundness and development

    28. Staff reiterated that increasing competition in the banking sector is central to improving the environment for implementing monetary policy and encouraging private
    sector development. Private
    sector commercial banks have
    grown in importance in recent
    years, but even so the stateowned
    Commercial Bank of
    Ethiopia (CBE) still accounts for
    about two thirds of banking
    system assets. The concentrated
    nature of the system, along with
    the significant role of the public
    sector in the system, partly
    explains lack of competition for
    deposits and loans and a
    distorted interest rate structure.

    29. The authorities remain reluctant to open the banking system to foreign competition and to privatize the CBE. However, they took note of staff suggestions to allow banks to explore commercial links with foreign partners, which might lead to the development of new financial products and cost savings that would reduce high spreads between lending and deposit rates and fees/charges for financial services.

    30. Financial sector soundness indicators are not signaling problems, but because this is probably the high point of the economic cycle, continued close scrutiny by supervisors will be important. A slowdown of economic growth and unwinding of high inflation could expose credit risks, particularly as interest rates have been highly negative in real terms. The implications of quasi-fiscal liabilities in the banking system
    should also be carefully examined in any process of normalizing interest rates.

    III. STAFF APPRAISAL

    31. Ethiopia’s growth performance has been impressive, but macroeconomic imbalances are intensifying. Double-digit growth has enabled Ethiopia to keep achievement of the MDGs within reach. High growth, however, has led to increasing pressures on prices and international reserves, which if not firmly addressed will threaten the sustainability of development.

    32. The surge in oil prices also threatens Ethiopia’s ability to sustain poverty reduction. The size of the shock is very large and comes at a time when international reserves are already low. Assuming that oil prices will not come down significantly from their record levels, Ethiopia has no choice but to adjust demand to accommodate the increase
    in the oil bill. Continued efforts to strengthen the supply side of the economy and encourage exports will help, but full pass through to domestic fuel prices will also be needed as well as tight monetary and fiscal policies in the period ahead. Absent additional donor assistance to
    help ease adjustment costs, there is thus a strong likelihood of a significant setback to Ethiopia’s progress in reducing poverty.

    33. After a tentative start to addressing imbalances, the recent strengthening of policy coordination at the top and articulation of a consistent macroeconomic policy framework are thus welcome. It will be particularly important to implement a balanced mix of fiscal and monetary policies. This will require implementing all necessary measures to achieve the appropriately tight monetary target and supporting it with a significant reduction of public sector borrowing to 2–3 percent of GDP. Careful monitoring and controlling of the activities of the public enterprises will in this context be essential.

    34. With the risk of inflation expectations becoming ingrained and foreign
    reserves at a low level, policy tightening will need to be forcefully implemented. The authorities should implement their budget cautiously in the first half of 2008/09 and ensure that domestic borrowing is kept well below 2½ percent of GDP. Direct advances by the NBE
    to the government, which automatically create liquidity, should be avoided and Treasury bill rates should be allowed to rise if heavy liquidity mopping up needs arise. The authorities should stand ready to tighten policies further if inflation does not begin to subside quickly
    and international reserves do not begin to recover.

    35. Tax and expenditure reforms will be needed to alleviate pressures on the budget over the medium term and ensure value for money in public spending. To reverse the declining tax-to-GDP ratio, the current study on tax reform should be swiftly completed, and reforms implemented without delay. The authorities are also encouraged to strengthen expenditure controls in order to cut low-priority outlays, while safeguarding poverty-reducing expenditures.

    36. Careful attention will need to be paid to external competitiveness in light of the fragility of the balance of payments. While it is not clear that the exchange rate is overvalued, the risks lie in this direction. The authorities are thus encouraged to permit more exchange rate flexibility, including by fostering a deeper and more competitive foreign
    exchange market. Longer term, competitiveness will need to be supported by ongoing structural reforms that improve productivity and efficiency in the export sector. While the debt sustainability analyses show a moderate risk of debt distress, securing grant and concessional financing and containing domestic borrowing are vital in order to stay
    sustainable over the medium to long term.

    37. The financial system will require careful monitoring. If, as is likely, this is the high point of the current economic cycle, a slowdown in growth and inflation could expose credit risks. Development of the banking system is in any case a structural policy priority in order to provide more access to financing for the private sector. In this regard, more
    competition among banks is needed, including through further diminishing the market share of the CBE and exploring partnerships with foreign financial institutions.

    38. The data provided to the Fund are adequate for surveillance purposes, but further steps should be taken to address shortcomings in real, fiscal, and balance of payments statistics. Stepped-up efforts, with technical assistance from various sources (including the Fund), are called for. In the meantime, the authorities should be commended
    for preparing the statistical appendix for Article IV consultations.

  5. 1). On “Inclusive Governance… that accommodates the diverse voices…”: Who was excluded? US/EU/AU monitored the last election. Abiy’s party won! Just respect that!

    2). Abiy/Egypt/White Supremacist West [WSW]: Abiy rejected the Egypt-US Nile Deal. Abiy & Ethiopia became targets: Economic Warfare, Proxy Wars, Smear Campaigns, etc.

    3). On “International Acceptability”: TPLF was the Architect of Ethnic Government [EG]. The WSW nurtured that under TPLF & still supports TPLF. So, it’s not about EG.

    4). WSW’s Support for TPLF’s Proxy War: Drastic Birr devaluation; drastic credit rating cut; trade/loan/aid repeal; Egypt/WSW proxy wars [TPLF/አማራ ሸኔ(APF)/ኦሮሞ ሸኔ]; etc. [NB: Ethiopia was also ordered to privatize its assets →Give away your assets for FREE]

    5). On “Inequality Concerns…” [‘Oromuma’ Employment Policy]: You are dishonest! Amaras still hold the most prestigious posts in Gov’t, Ethio enterprises, etc. Have a look:

    i). Gov’t: youtu.be/Ed_EurvckOU?t=218 (ii). Airline: youtu.be/Ed_EurvckOU?t=362
    iii). telecom: youtu.be/R-Qg31DIaTI?t=79 (iv). Bank: youtu.be/dYW26_2vvYw?t=143

    6). On “Governance Challenges…” & “Inclusive Governance”: Former regimes made Ethiopia “The World’s Poster Child of Poverty & Famine.” Do these songs ring any bell?

    (i). “ዋይ! ዋይ! ዋይ!” ሲሉ – [Circa 1975]; (ii). “We are the World!”– [Circa 1985]. So, won’t it be travesty of justice & insult to Ethiopians to reinstate them using such guises?

    • The professor wrote scholarly article and you are trying to respond to him as Abiy’s carde. Please stop. Just find your place.

      Dear Prof. Teshome, I appreciate your work in service of Ethiopia. Your article is timely and I concur with your advice for a way forward.

      Best,

      • Dear Manny, thank you for your comments. It is actually a longstanding personal policy not to respond to paid cadres and mouthpieces. They usually attempt to keep the truth in the dark with irrelevant material. Melkam Addis Amet to you and yours!!!

        • Good job Obbo Teshome! You’ve better things to do educating us all than responding to some detractors. I don’t either. I always let them make fools of themselves.

          I am sure you are blessed to live long enough to remember how political discourse used to be conducted back in the day of the 1960’s and 70’s. It was so polemic that at the end of the decade(s) the-know-better among us were still hopelessly divided. 1960’s wasted! 1970’s wasted but turned out to be so deadly that the old country lost its cream puff of the crop in just 2 years. But the ideology that took root then has not left us yet. When some of us read articles, we do that with presuppositions already engrained in our mind not to learn from them but to find dirt if any. If our search did not capture an obvious one, we go on twisting phrases and terms to make up one. The attitude is I am always right and everyone is naturally and always wrong. Their mantra is ‘I should always gain and everyone else must lose.’
          Keep ignoring them because responding to their wasteful diatribe is like adoring a pig with silk.
          Happy New Year!!!!

  6. “…adoring a pig with silk.” Loved it!

    The intent is to muzzle others, to shut them up so that the prevailing point of view is theirs only. I welcome debate on the precise points I wrote about, after all that is one way to test the validity of my assertions. The rest is a waste of everyone’s time. Cheers on the day!

  7. Dr. Teshome, Manny, etc.

    1). “I see!” said the blind man to his deaf wife! I have itemized my points vis-à-vis Dr. Teshome’s. Is name-calling me ‘Cadre’ the ultimate ‘reasoning power’ of your ‘brains’ to counter my counter argument? What have you done for Ethiopia compared to Abiy?

    2). Abiy is a Nobel Prize millionaire! He could have quit & lived a fabulous life without kissing anybody’s butts like most of you! He REFUSED TO SELL ETHIOPIA to Egypt & the White Supremacist West [WSW] despite all this: youtu.be/Pg3WuF1eXww?t=5

    3). Abiy owes me nothing! I owe Abiy for saving Ethiopia from Egypt’s & the WSW’s Wolves in Ethiopian Sheep’s Clothing →Ethiopian Diaspora [ED] like you, ትግሬ ሸኔ [TPLF], አማራ ሸኔ [Amara Patriotic Front Fanno], ኦሮሞ ሸኔ, ad nauseam. Abiy is a Hero!!

    4). What do most ED want? ≈80% of ED are former regimes’ rulers/gofers/awardees who fled Ethiopia fearing retribution for their crimes. All they want is to snatch power using the Anti-Ethiopia WSW’s muscle & guises like ‘All-Inclusive Transitional Government.’

    5). Most ED are the same Amaras who made Ethiopia “The World’s Poster Child of Poverty & Famine.” It’s a cruel joke on Ethiopia to sneak them back to power! Who would ever forget these famine-appeal songs for Ethiopia?

    i). Tilahun Gessesse’s: “ዋይ! ዋይ! ዋይ!” ሲሉ – “የረሃብን ጉንፋን ሲስሉ ….” [Circa 1975].
    ii). “We are the World!”→Dubbed “World’s National Anthem for Ethiopia”- [Circa 1985]

    6*). Abiy’s Ethiopia [The World’s Poster Child of Prosperity & Greenery]: Over 10 million kids get ≥2 free meals a day! >20 million parents get peace of mind knowing their kids eat at schools. Adanech also gives ≥2 free meals a day to ≥50,000 Addis residents. Mechanization, electrification, industrialization, etc. are almost all on track…

    *Despite drought, locust, COVID, WSW’s loan/aid/trade repeal & drastic currency devaluation, Egypt/WSW-Sponsored Proxy Wars via ትግሬ ሸኔ/አማራ ሸኔ/ኦሮሞ ሸኔ, etc.

    • “Abiy’s Ethiopia [The World’s Poster Child of Prosperity & Greenery]: Over 10 million kids get ≥2 free meals a day!”
      Dear i_mognu making people poorer and creating feeding centers is not something adorable. Right gov’t help people have jobs and feed there families. The so called school feeding is neither likeable nor sustainable. A true people loving government has to work to take people out of vicious circle of poverty and work for its sustenance!
      God bless Ethiopia!!!

  8. ABC,

    FEEDING people even for a day is more HONORABLE than STARVING them. Take it from Derg’s Child Prisoner starved for days at Derg’s HQ. So, I don’t advocate leaving the future of Ethiopians at the mercy of the White Supremacist West [WSW] either.

    MOST of today’s ‘Ethiopian’ Diaspora PhDs who lecture me on Human Rights & Co. were scholarship awardees of former tyrant regimes that turned a blind eye to Wollo & Tigray famine AND made Ethiopia “The World’s Poster Child of Poverty & Famine.”

    1). Food Security & Self-Reliance: That’s exactly why Abiy sent Amaras over 1,530 tractors, thousands of water pumps, etc. in the last 2 years. That’s how Amaras harvested >242,000 hectares of wheat this summer alone! Does that make Abiy enemy of Amaras?

    2). The Perpetual Plot to Starve Amaras & Reduce Them to Beggars: The latest is Wearing Amara Activist Hat, Murdering Elected Amara Officials, Waving Ethiopian Flag, and launching another Ethiopia-destabilizing Proxy War to evade justice. [Case in point: The Amara Putschist Quartet (Zemene+Eskinder+Mihret+Mesafint)]:

    i). TPLF launched its 2-year Proxy War at the peak of harvest season. Amaras suffered!
    ii). Zemene/Eskinder/Mesafint/Mihret launched their Proxy War during farming season.
    iii). Amara Diaspora lobbied the WSW for embargo [trade/loan/aid cancelled] & got it. Ethiopia lacked enough USD for fertilizer import. Amara farmers went on demonstration.
    iv). Amara farmers received over 1530 tractors, thousands of water pumps, etc. recently. So, is there a worse way/time to starve Amaras & reduce them to beggars than this?

    • i_Mogne, I got a very good lesson from Prof. Teshome not to reply for paid cardres who are not willing to open their eyes and see left an right. I am sorry for you that you can’t even see PP doesn’t have any genuine support in Amhara Tribal land.

  9. ABC + Manny + etc. →Your Usual Crocodile Tears + Lip Service + Smear Campaign + ad nauseam

    Did he post the article for Misinformation/Disinformation/Propaganda/Indoctrination OR for discussion? I challenged parts of his views hoping that it was for discussion! So, why don’t you ‘know-it-all genius diaspora intellectuals’ challenge me with valid argument?

    Your name-calling me ‘Cadre’ only PROVES your Poverty of Mind & that the REVERSE IS TRUE → You are the Cadres of the heartless successive former regimes that starved Ethiopians and made Ethiopia “The World’s Poster Child of Poverty & Famine.”

    Why would ANY Ethiopian want you back in power? To be starved again & to become the world’s laughing-stock again? Aren’t the “All-Inclusive Transitional Government” and all its derivatives meant to bypass elections and snatch power without being elected?

    Over 75% of Ethiopians back home are under 45. LEAVE them chart their FUTURE! Had any of you ‘intellectuals’ cared about Ethiopia, you would have gone back and helped Ethiopia with your expertise like this HONORABLE GENTLEMAN: youtu.be/dvJzvvQondc?t=2

  10. Borkena, sorry about this part! I inadvertently deleted #v of #2 above! Here is the whole story:

    2). The Perpetual Plot to Starve Amaras & Reduce Them to Beggars: The latest is Wearing Amara Activist Hat, Murdering Elected Amara Officials, Waving Ethiopian Flag, and launching another Ethiopia-destabilizing Proxy War to evade justice. [Case in point: The Amara Putschist Quartet →APQ: Zemene+Eskinder+Mihret+Mesafint]:

    i). TPLF launched its 2-year Proxy War at the peak of harvest season. Amaras suffered!
    ii). APQ launched its Proxy War during this farming season. Amaras will suffer again!
    iii). Amara Diaspora lobbied the WSW for embargo & got it [trade/loan/aid cancelled]. Ethiopia lacked enough USD for fertilizer import. Amara farmers went on demonstration.
    iv). Amara farmers received over 1530 tractors, thousands of water pumps, etc. just in the past 2 years.
    v). When Abiy somehow bought the fertilizer and got it to Addis, APQ cutoff transport at Dejen [Gojjam’s town right after the Abbay Bridge] and prevented the fertilizer delivery!

    Q: So, is there a worse way/time to starve Amaras & reduce them to beggars than this?

  11. Critique of the Article on Ethiopia’s Ethnic-Based Federalism:
    The article paints a picture of Ethiopia’s ethnic-based federalism as a primary source of the country’s current challenges, particularly focusing on fragmentation, ethnic tensions, and economic disparities. However, this perspective might overlook some of the nuances and potential advantages of a federal system.
    1. Centralized Governments and Dictatorship: Historically, centralized governments, especially in diverse countries like Ethiopia, have been prone to becoming authoritarian. Central governments can easily become a tool for a single group to consolidate power, disregarding the needs and voices of minority groups. Without a decentralizing system like federalism, the central government might only serve the interests of the dominant group, potentially leading to a dictatorship.
    2. Bureaucratic Entrenchment: Centralized systems can also perpetuate old bureaucratic structures that resist reform and innovation. This resistance can hinder the country’s development and adaptability to new challenges. Federal systems, on the other hand, can offer more flexibility, allowing regional governments to innovate and tailor solutions to their unique challenges.
    3. Resource Redistribution and Regional Development: Contrary to the article’s argument, the current federalism in Ethiopia has, in fact, enabled a more equitable distribution of resources to regions outside the capital, Addis Ababa. For decades, regions outside the capital felt marginalized and underdeveloped. With federalism, these regions now have a say in their development and can allocate resources according to their priorities, promoting a more balanced national development.
    4. Representation and Identity: Federalism allows regions with distinct cultures, languages, and histories to maintain their identity and have a voice in governance. This representation can foster a sense of belonging and reduce feelings of alienation among minority groups.
    5. Potential for Checks and Balances: While the article underscores the fragmentation of the political landscape due to federalism, this fragmentation can also be seen as a system of checks and balances. With power distributed across various regions, it becomes harder for a single entity to dominate the political scene, which can act as a safeguard against potential autocratic tendencies.
    In conclusion, while the article provides valuable insights into the challenges posed by ethnic-based federalism in Ethiopia, it might benefit from a more balanced view that considers the potential benefits of federalism. The decentralization of power, if executed effectively, can offer solutions to some of Ethiopia’s longstanding challenges.

  12. non professional article that does not shows the reality in Ethiopia. we have our home grown economic refroms. the article is based on old age and politicaly motivated thinking

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