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Ethiopia’s Farms and finance

By Nicholas Norbrook in Addis Ababa
Posted on Monday, 26 May 2014 16:40

The rebel army that chased the Derg military regime out of power in 1991 inherited a time bomb that could easily have spun out of control. Massively poor, plagued with chronic food shortages and with a population explosion around the corner, Ethiopia sat in a region gripped by post-Cold War insecurity.

Look at Ethiopian private banks – all their loans go to services and trade

Today, the neighbourhood is not any easier. The population has almost doubled from 50 million to 92 million people.

Now, Ethiopia is mentioned in the same breath as the East Asian miracle and is perhaps on the cusp of massive state-driven take off.

The unassuming Prime Minister Hailemariam Desalegn tells The Africa Report: “Everyone is now talking about the Ethiopian renaissance”.

Even institutions traditionally at odds with state-led models recognise the progress. In an October 2013 report, the International Monetary Fund praised Ethiopia’s “strong growth performance and impressive progress in decreasing poverty and inequality”.

Motorists in both the capital and further afield testify to and occasionally swear at the infrastructure outlay. Addis is one of the few capitals in Africa constructing cheap urban mass transit systems.

The $4.8bn self-financed 6,000MW Grand Ethiopian Renaissance Dam is one-third complete and should start generating 700MW by September 2015.

An old Model

Maternal mortality rates have fallen sharply, and the government is rolling out a pilot medical insurance scheme. Primary school enrolment has climbed to 85%. Investors from the East and West arrive daily at Bole International Airport, with Unilever, Ikea, Tesco and H&M just the latest. New industrial parks are being completed, with factories slowly swinging into action.

Ethiopia does not claim to have come up with the model it is following.

Several East Asian countries have run developmental states over the past 30 to 40 years: boost agriculture, protect and promote nascent manufacturing sectors, flaunt cheap labour, use the banks to steer progress.

It requires tight discipline in the leadership.

The ruling Ethiopian People’s Revolutionary Democratic Front (EPRDF) is closely modelled on the Communist Party of China, right down to ‘criticism and self-criticism’ sessions, where senior cadres can be dressed down by hundreds of colleagues.

Henok Teferra, vice-president of Ethiopian Airlines, says Ethiopia needs a plan tailored to local realities, but also the capacity to execute plans, including the government’s 2010-2015 Growth and Transformation Plan (GTP): “Action without vision is a nightmare, and vision without action is a daydream, isn’t that what they say?”

Will Ethiopia be successful in its developmental state? And can it avoid the crony-capitalism pitfalls of other countries that have taken the same path?

Within Ethiopia there is a passionate debate about it, and not just in the ranks of the EPRDF, whose former prime minister, Meles Zenawi, articulated the vision of an Ethiopian developmental state most clearly.

Scholars like Merkeb Negash at Jimma University argue, for example, that while Ethiopia may not have a sophisticated technocratic elite and strong autonomous institutions as do Japan and China, it does not necessarily follow that the state will be captured by rent-seeking business elites.

Just as the South Korean government relied on – but never fully trusted – advisers from Japan and the United States, Addis Ababa is importing expertise.

There is a strong level of cooperation between ministries, too.

One of the international advisers, requesting anonymity, says he was impressed that the customs department allowed the ministry of industry the latitude to draft legislation and procedures for bonded warehousing for the special industrial parks.

“It was incredible. Customs people worldwide normally protect their fiefdoms,” he says.

This sort of facilitation is also noticeable at the Agricultural Transformation Agency, modelled on the development agencies of South Korea and Malaysia. This may appear rosy, but the pitfalls are legion.

Bellwethers include the health of state-linked conglomerates, such as the Endowment Fund for Rehabilitation of Tigray – linked to the political elite of the Tigrayan ethnic group, involved in logistics and manufacturing – and the Metals and Engineering Corporation.

The latter is run by the top brass of the military and is set to build sections of the country’s dams and 10 sugar factories.

The sacking of the top three officials in the customs department for corruption in May 2013 suggests the current leadership is aware of the importance of oversight.

It is unclear, however, how successfully Ethiopia can simultaneously pick winners and prune bad companies, a hallmark of successful developmental states.

Building developmental states requires sacrifice and the ability to forge a national project that a majority accepts, something that Ethiopia’s federal character both helps and hinders.

Many people have lost their land for dams and big agribusiness projects. The villagisation project that agglomerates nomadic peoples has also been unpopular.

The ruling party runs a closed-off political system, as seen in the 2005 elections. There was a large turnout for the opposition, and the government responded with a wave of intimidation and arrests.

In its 2013 annual report, Human Rights Watch says “freedom of expression, assembly and association have been increasingly restricted in Ethiopia”.

One criterion for success of a developmental state is a sustained rise in industry’s share of gross domestic product.

In Ethiopia’s case, the sector’s contribution has remained steady at around 12%. Boosters say Ethiopia is only in the very early stages of development.

There are a number of projects that will come together in two to three years: a railway to the port of Djibouti, a large motorway that runs alongside the railroad, the dam to generate cheap electricity and a light rail line in Addis Ababa.

“It’s a jigsaw puzzle that is only just starting to come together,” says Zemedeneh Negatu, a partner at Ernst & Young Ethiopia.

Financial repression

But the tension between ambition and the funding reality is ever present.

Ethiopia’s debt levels are still low. But when vendor financing is factored into deals, such as the loans for the telecoms upgrade being carried out by Chinese companies Huawei and ZTE, the picture is less clear.

“These are only projected liabilities. The huge [$2.4bn] loan from China EximBank has not actually yet been approved because the Chinese government is also concerned about Ethiopia’s ability to repay,” says Guang Chen, the World Bank country director for Ethiopia.

“To support this developmental state, they are going to have to find more resources domestically,” he argues.

Just like China, South Korea and Japan before it, finance is the steering wheel for Ethiopia’s developmental state.

Ethiopia engages in what Shane Shepherd of Research Affiliates calls financial repression.

It is “a set of policies that keep real interest rates low or negative and regulate a captive audience into investing in government debt, resulting in cheap funding,” he says.

Hence the Ethiopian government’s policy that caps interest rates and another that requires private sector banks to spend 27% of their loans on government bonds that go towards building the Grand Ethiopian Renaissance Dam.

Alongside getting cheap funding for infrastructure, the government argues that the private sector leaves financing gaps and is unable or unwilling to invest in manufacturing.

“Look at Ethiopian private banks – all their loans go to services and trade,” Premier Hailemariam says. “They are not giving long-term loans to industry and infrastructure. So you have to have policy banks which can give low interest rates and support industrial production.”

Young spenders

Anecdotally, it might be working. Addis Alemayehu, a managing partner at advertising agency 251 Communications, is starting up a company to take advantage of two things: incentives for companies in the manufacturing sector and the huge young population that is starting to have some discretionary spending power.

“There are more university students here than the population of Djibouti. Imagine all these people buying soap for the first time,” says Addis.

But he says finance is still a problem: “You could have a purchase or- der from God himself, you still wouldn’t get the finance.”

Privately, officials accept they need to do more to create national champions that will become globally competitive.

At the 2 April presentation of the GTP at the United Nations Economic Commission for Africa office in Addis, the International Monetary Fund, World Bank and various diplomats stood up for private sector interests, with no representatives from either the private sector or the Ethiopian Chamber of Commerce in attendance. This told its own story.

Others say the emergence of private sector companies will take place quickly.

Helen Hai, who launched the Chinese shoe company Huajian’s factory in 2012, recalls: “When the first South Korean textile factories opened in Bangladesh, Daewoo trained up 200 workers. After two to three years, half of those had left to set up small manufacturing facilities.”●

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