Ethiopian Business Review

Private Sector Self-development

The private sector in Ethiopia is positioned as a supplement to the state-owned economy. In the last 55 years, the share of the private sector in the gross domestic product (GDP) has remained low at an average of 12.5Pct. Currently, it stands at 20Pct. This means that the ability of the private sector to organize and push for regulatory reforms has been limited because of the top-down approach to development. In this article, I advocate for bottom-up, local, and endogenous approach to private sector development in order to increase the size of private sector, its organizational capacity, and its political and economic role.

 Before reviewing the effects of top-down approach to development and policies for self-development of the private sector, it is necessary to define what is meant by “private sector”. There are several definitions available in the literature, such as: an economy that is not controlled by the government, or private entrepreneurs who undertake the risk of engaging in business. However, both definitions don’t satisfy the criteria because the former refers to economies that don’t function through market processes (such as smallholder agriculture) while the latter includes self-employed individuals who start businesses as a means of survival (mostly found in the informal sectors of the urban economy).  

In my definition, the private sector includes all business that is managed and owned by incorporated enterprises and individual entrepreneurs who have started and grown their business by taking advantage of unique opportunities. The private sector can be defined as part of an economy owned by individuals and/or corporations who have motives not only of making profit (price minus cost), but also of investing it to make more profits. 

History of state-led top-down development

Typically, states intervene in private transactions when such transactions have the potential to benefit a few at the expense of many. In the case of Ethiopia, the reason for state intervention in the economy was different. It was not related to the need to remedy the failure of the market (not related to the idea of addressing market failure). Rather, it was related to the idea of developing the national economy.

This approach started in the mid 1950s with the launch of The First Five-Year Plan (1955-1961). Since then, the government has prepared and implemented successive plans to transform and improve agricultural and industrial productivity, eradicate illiteracy and disease, and improve the living standards of all Ethiopians.

Top-down programs for promoting local development through transforming communities and sub-regions continued after the 1974 revolution. In 1975, the military socialist regime nationalized private companies, banks, insurance companies, and other financial institutions. In March l975, the regime nationalized rural land and granted peasants “ownership rights” to parcels of land not to exceed ten hectares per grantee. After 1991, the same approach continued. The difference is that today’s national and local development program, directed by the state, is more extensive, and fast paced. 

Despite good intentions, the hitherto top-down approach to national and local development has failed to bring sustainable economic growth and poverty reduction. There is a vast amount of literature that assesses the performance of government policies (choice, design, implementation and outcomes).  Using meta-theories, such as the concept of underdevelopment, scholars like the late Professor Eshetu Chole, have examined the nature and characteristics of the national economy during the imperial era, the Derg socialist regime, and the post-Derg period. Despite changes in regimes, Ethiopia remained “underdeveloped.”

The macroeconomic thinking, the approach, and policy performance of the three regimes has been thoroughly assessed by Professor Alemayehu Geda in his book Reading the Ethiopian Economy. According to his study, the economic performance of the country— though varied across the three regimes—is “generally disappointing”. Not only has the scarcity of goods and services continued, the country also got into debt as it borrowed money from international institutions. Furthermore, in the case of large-scale land acquisitions, resources have been taken away from local people. The studies of professors Eshetu and Alemayehu show that our approach to economic development matters, and boils down to one critical question: top-down, state-led development or bottom-up approaches led by the market and local actors?

Effects of top-down approach

Often, the top-down approach is criticized for its reasoning at the aggregate level, much to the neglect of micro-economic foundations (rationality of households and firms). In the case of Ethiopia this is not only true, but the empirical evidence shows that the top-down approach has stifled the size and growth of the market forces. Furthermore, the approach has constrained self-reinforcing economic development processes at the local level. As a result, the size of the market based private economy is the least important part of the national economy.

In Ethiopia, top-down development programs have had limited effect on private sector development considering the time and resources invested, and the growing population. If there is any top-down effect it was level effect (raising the slop slowly) and not growth effects (modifying growth path at higher rate) and that happened during the incumbent government in the early 1990s. As a result of the government’s privatization program, liberalization, foreign investment and donor support, the size of the private sector level increased from 11Pct in early 1991 to 17Pct in 1995 and has remained largely unchanged since then (it is at 20Pct at the moment). 

From my point of view, the top-down perspective and the macroeconomic thinking prevailing in the past six decades, did not consider the population and market economic systems in the country. Analysis of the effects of rapid population growth, and the workings of the market (study of individuals, families, firms, or other small homogeneous groups, as buyers and sellers) are neglected or received only lip service. In the top-down approach and macroeconomic policy models, the government is assumed to have a full understanding of the transformation and growth problems of the country. This type of approach and intervention resulted mainly in the growth of the economy directed by the state. According to 3D system accounting of GDP, the size of the economy controlled by the government has increased from 22Pct in 1992 to 39Pct in 2015. The size of this type economy increased at the expense of the market and the population economies (consisting mainly individuals, households and firms). 

Studies by distinguished scholars and the 3D methodology of macro aggregate empirical results shows that we have to change the current school of thought and approach in order to create more jobs, develop technology, increase investment, accelerate economic growth, and improve the standards of living. My view is that the top-down and macroeconomic approaches that underscore the role of the state have a useful role to play in economic thinking and policy, only if the underlying microeconomics are understood. It is under these conditions that the private sector can reach critical mass/size. Unflinching local self-development process, public private cooperation, as witnessed in the developed countries, is necessary. Succinctly stated, the horse has to come before the cart. I advocate the approach of local and private sector development as a panacea to economic problems facing the country. 

Two-pronged economic challenges

There is a two-pronged economic challenge that makes the development of the local and market based private economy pressing. The first challenge to sustained economic growth comes from the economy controlled and directed by part of the population that is growing rapidly in the country, namely the population economy. This part of the national economy is used for reproduction and multiplication of households in the country. 15 million households in rural areas and 5 million households in the urban areas did not appear by miracle. Vast numbers of empirical studies attempting to explain livelihood strategies, activities, and resources of smallholder agriculture and the urban informal sector belong to this type of economy. 

The population economy is fragmented, characterized by diminishing returns, and scarcity pressures in inputs, goods, and services.  Under condition of population doubling in countries where there is limited private sector development, fragmentation, low level of labour productivity, and scarcity are not artificial perceptions. Using the 3D methodology GDP accounting, we have found out that over 90 million Ethiopians are currently living on 45Pct of the GDP (about seven Birr per person). 

Population loss in the form of outmigration, hunger, and political unrest in the country is not a surprise. The country’s future should be based on the idea of creative destruction of the population economic system, not on continued co-operation for further reproduction as has been done so far under the programs and approaches of top-down development. 

Private capitalism should replace the population driving force in the destruction and creation of wealth in the society. The economic system has to pass from the hands of reproductive households to the hands of wealth creators (private capitalists and the like). 

The second part of the current economic challenge comes from the growth of the economy controlled by the state. The government has been using many economic policy instruments and programs to increase its control over trade, the financial market, fiscal relations, production enterprises, public services, etc. This is done in the name of poverty reduction, liberalization, and growth and transformation plans. Currently, the state economy has expanded to such an extent that its institutions have literally become inefficient, and the government has officially admitted to this. The political elites who control the non-economic factors (bureaucracy, army, security, law) control 39Pct of the GDP. De-bulking the state economy is necessary for institutional efficiency and for the application of corporate style strategic planning to public sectors.  

Policy recommendations

There are two ways of increasing the size of the private sector in Ethiopia: self-development of the private sector at the local level, and privatization of state and party owned businesses. The first method focuses on the emergence and growth of local entrepreneurship.

The process of self-development of the private sector at the local level does not go forward without sweeping away the existing system of the population economy. In rural areas, land fragmentation and economic activities have to be consolidated and centralized through a policy of land privatization. The emergence of capitalist farmers, who use wage labour, social capital and market inputs, particularly in high-grain production areas, is absolutely essential for self-development of the private sector. 

In rural towns, particularly in areas that have location advantages, local entrepreneurs should be encouraged to engage in industrial activities through the development of the local human resources. The purpose of industrializing rural towns is to provide products to utilize local agricultural inputs and household products. This program can be done through industrial planning at the district level. The development of the private sector in the field of rural industrial towns can be done through methods of value chain interventions and cluster initiatives. 

To promote endogenous development of the private sector under the first method, the federal and regional governments should create a legal environment that is conducive to the development of the private sector, one that allows it to function. This is done through private property rights and contract law, through subsidies or improved access to credit, and through the provision of supportive infrastructure services such as water, power, land, transport, and communication services.

The second method of increasing the size of the private sector development in Ethiopia is the privatization of state and party owned businesses. De-bulking the state share of the GDP and breaking its hold on the national economy through privatization reforms should be done cautiously to avoid social, political, and economic chaos. To provide the stability necessary for the functioning of a free market, it is important to create an independent and pragmatic bureaucracy that has the objective of creating sustainable and endogenous industrialization.


6th Year . February 16  - March 15 2018 . No.58


 

 

Tsegaye Tegenu (PhD)

is a senior lecturer of Social and Economic Geography, Uppsala University.

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