Commentary An Ethiopian Business News organization operating in print and online platforms. EBR provides deep analysis to major business stories and trends facing the private sector in Ethiopia. The Ethiopian Business Review Magazine is for Middle or senior level managers, academicians, business consultants and others working in the areas of business. http://www.ethiopianbusinessreview.net Wed, 12 Dec 2018 15:58:06 +0000 Joomla! - Open Source Content Management en-gb Redefining African Migration http://www.ethiopianbusinessreview.net/index.php/commentary/item/6008-redefining-african-migration http://www.ethiopianbusinessreview.net/index.php/commentary/item/6008-redefining-african-migration

Images of desperate people on the move have blinded Westerners, in particular, to the fact that people have always moved, and that migration is necessary and beneficial for human development. Nowhere is this fact more relevant today than in Africa.

Few issues are as emotional as human migration. Images of desperate people on the move – whether trying to cross the US-Mexico border or packed onto rickety boats crossing the Mediterranean Sea – have heightened tensions and forged a narrative that migration has no upside.
But these images have also blinded us to the fact that people have always moved, and that migration is necessary and beneficial for human development. Nowhere is this fact more relevant today than in Africa.
Despite the ongoing political crisis surrounding African migration to Europe, the reality is that fewer Africans are migrating to European countries than when the numbers peaked in October 2015. As it happens, most African migrants move within Africa. And for African governments in particular, that fact creates an opportunity to harness the positive power of human mobility.
Understanding how migration can build wealth in Africa requires closer attention to migratory trends. According to data from my organization, the United Nations Conference on Trade and Development (UNCTAD), of the 41.5 million people who migrated from, to, or within Africa in 2017, nearly half – 19 million – remained on the continent. Some 17 million people left Africa, while 5.5 million migrated to Africa from other parts of the world.
African migrants include both blue- and white-collar workers, and those who move within Africa often do so to fill labor gaps. For example, labor shortages in mining, construction, agriculture, and domestic services have fueled migration to South Africa and Côte d’Ivoire, two of the most important economic hubs on the continent. Elsewhere, Gabon’s lumber and mining sectors, Equatorial Guinea’s oil industry, and various industries in Kenya have also attracted migration from neighboring countries.
Simply put, migration in Africa helps destination economies grow. In addition to filling labor needs, the presence of large migrant populations spurs economic diversification, private-sector development, and value-added production. Moreover, migrants spend about 85Pct of their earnings domestically. That infusion of capital adds to destination countries’ tax base and boosts local consumption.

But Africa’s migrants also contribute to development in origin countries, thanks to remittances and knowledge sharing. In fact, the total value of remittances by African migrants now exceeds the amount of official development assistance (ODA) that African countries receive. Since 2015, remittances, which have grown strongly since 2000, have accounted for the bulk of total external financial flows to Africa, as ODA declined from 37Pct in 2001-2003 to 28Pct in 2012-2016. Remittances accounted for 51Pct of private capital flows to Africa in 2016, up from 42Pct in 2010.
Forecasts by UNCTAD predict that if pro-migration policies are adopted, Africa’s per capita GDP could increase 61Pct by 2030 – to about $3,250. In other words, intra-Africa migration is not only a human and social phenomenon; it is also a vital ingredient of growth.
African governments are beginning to recognize this. Many countries are supporting the African Union’s new Migration Policy Framework for Africa. And, since March 2018, more than half of the nearly 50 countries that pledged to create an African Continental Free Trade Area have adopted its protocol on the free movement of people.
To build on these achievements, African governments must draw inspiration from one another. For example, initiatives like Rwanda’s temporary visa program for semi-skilled migrants, and Morocco’s recent expansion of job categories for foreigners, will bring more flexible labor policies to these two markets. Many other destination countries would benefit from similar innovations.
Another milestone that would advance intra-Africa migration would be the rollout of the highly anticipated all-Africa passport. Unfortunately, while the initiative’s goal – to foster trade, integration, and socioeconomic development within the AU – is laudable, bureaucratic inertia is likely delaying its rollout.
Finally, the international community is preparing to adopt the first-ever Global Compact for Safe, Orderly, and Regular Migration. This landmark agreement represents a blueprint for managing global migration flows. It is also validation that migration is an economic necessity, and not only for Africa. When the compact is finalized later this year in Morocco, it must reflect the priorities that Africa’s leaders have already committed to.
With well-crafted and properly executed agreements, migration can be a boon to people and the places they call home. Today’s skewed media narratives ignore or neglect the benefits of migration. But with facts and commitment, it is possible to tell a very different story.


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1565@gmail.com (Mukhisa Kituyi ) Commentary Mon, 15 Oct 2018 00:00:00 +0000
Fake News Effect on Ethiopian Politics http://www.ethiopianbusinessreview.net/index.php/commentary/item/6009-fake-news-effect-on-ethiopian-politics http://www.ethiopianbusinessreview.net/index.php/commentary/item/6009-fake-news-effect-on-ethiopian-politics

Fake news means news articles or information sources that are intentionally and verifiably false, and are meant to mislead readers. There are two key characteristics of fake news. First, fake news includes false information and fabricated news reports produced either for profit or political purposes. Second, fake news is created with dishonest intentions. It is deliberately fabricated and disseminated with the intention to deceive and mislead others into believing falsehoods or doubting verifiable facts. As a result, fake news shows circumstances in which objective facts are less influential in shaping public opinion than appeals to emotion and personal beliefs.

Despite not being a recent phenomenon, Google trends analysis reveals that the term ‘fake news’ garnered wide attention during the United States presidential election in 2016, and has remained popular since. Furthermore, the consumption and impact of fake news has been exacerbated by the declining trust between news media and the public, and the shift from broadcast and print mass media to an increasingly digital and mobile social media. These changes are also inherent in the nature of social media since it is timelier and less expensive to consume news on social media and it is easier to engage with news on social media.
Fake news is concerning because the functioning of democracy relies on an educated and well-informed populace and as such, the spread of misinformation has the potential to undermine both science and society. In an age where almost half of all news consumers receive and share their news from online sources, false information can reach large audiences by spreading rapidly from one individual to another. Consequently, in the “post-truth”era, the risk fake news poses to evidence-based decision-making is apparent.
The boundary between authentic news and fake news is too blurred to mark. Fake news can take different forms and cause harm to different extents. But fake news can be categorized in to three groups. The first is serious fabrications uncovered in mainstream or participant media, yellow press or tabloids while the second is large-scale hoaxes. The third group of fake news includes humorous but fakes news satire, parody, and game shows.
Impact wise, the diffusion of fake news is like the spread of a viral contagion requiring an intuitive solution like a “vaccine”.This act of dealing with fake news by inducing attitudinal resistance against persuasion and propaganda, in a manner similar to biological immunization through “mental antibodies” and information, is called inoculation theory.The theory focuses on preemptively exposing people to a weakened version of a counter-argument, and by subsequently refuting that argument.
Based on recent developments and the ongoing political scenes, it is observed that Ethiopia is no exception to the problem of fake news. Even with the limited access to the internet and social media use, victimhood to fake news is prevalent especially among the young and the ‘elite’. Social media usage in contemporary Ethiopian politics in particular can be seen in two ways. One, the use of social media in sensitizing and mobilizing the young and the vulnerable through grass roots movements for change. Two, in post digital-led revolutionary changes, the use of social media in organizing supporters of different political parties and ideologies, in welcoming their heroes, raising political matters and forwarding political opinions. These activities have often crossed the line of fair game and legitimate use of social media for political gains. Of course, Ethiopian laws on related issues like press freedom, data privacy, and disinformation are yet to be enacted or reviewed to have up to date relevance.
However, what cannot be denied from recent developments in Ethiopia is the impact of social media and the resulting change it has had on mainstream media. A few years ago, locally inhibited media and social media were some of the very few alternative sources of facts in a highly censured press environment. Today, social media has become a major source of fact finding, conspiracy theories and hate speech. With limited mechanisms to scrutinize resources and poor habits of proper verification, it is difficult to contain fake news stories once they have been created. With particular regard to sensitive and contentious matters, social media is used to fuel the spread of fake news in numerous ways.
For instance, one of the most divisive political figures in Ethiopian history is Emperor Menelik II. Despite his Adwa victory, unification of the country and introduction of various technologies and civilizations, what he did with his local expansionist policies was contentious. Some claim that he carried out brutal and degrading acts while others claim he only engaged in war and did what was necessary to win. Looking at what social media has brought to this debate, there are plenty of photo-shopped pictures circulating online that aim to show how the king mistreated people, especially certain ethnic groups. Such practices, intentionally or not, have become more pervasive lately on various political topics. 
‘Astroturfing’, also called ‘fake grass root’ is another type of fake news. It is the act of carefully constructing a narrative, by unseen special interests designed to manipulate peoples’ opinion. Complacency in the news media and incredibly powerful propaganda and publicity forces made it easy to spin people and their opinions. Astroturfing is a perversion of reality where political, corporate and special interests disguise themselves to publish blogs, create accounts, make ads or simply post comments to manipulate people. It is far more powerful than traditional lobby mechanisms in fooling people, by making it look as if independent and grassroots sources are speaking. This is very common in developed countries and it is also observed in Ethiopia to a growing extent. Propaganda and bogus media companies aimed at indoctrinating and ‘truth laundering’ is not alien to Ethiopian mass media. Lately, these entities are inevitably using social media and digital means where they have a wide coverage and devotees.
The other type of fake news widely seen in Ethiopian social media are fake accounts established in the name of famous people to influence their fans with evil and misleading missions. Such illegitimate accounts easily spread among the crowd that has less time and willingness to verify their credibility beyond cruising to debate on the topic.
Mobilized denunciation of facts and figures is also common in Ethiopian politics. ‘Mob Truth’ – truth that is appealing to the majority is growing in Ethiopia compared to objectively verifiable truth or absolute truth. This is so because social media masses are often observed in denouncing facts and figures that stand opposite to their ideology and belief regardless of veracity. Equipped with only ‘like, comment and share’ weapons to engage in the war their friends and idols wage, social media users are rarely seen in verifying the truth before engaging. Often the winner is chosen by majority than by factual analysis and this is dangerous to the basic pillars of democracy.


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5646@gmail.com (Misker Getahun) Commentary Mon, 15 Oct 2018 00:00:00 +0000
Effective Organizational Leaders http://www.ethiopianbusinessreview.net/index.php/commentary/item/6010-effective-organizational-leaders http://www.ethiopianbusinessreview.net/index.php/commentary/item/6010-effective-organizational-leaders

Leadership can be discussed from different perspectives such as organizational, political, military, religion, and business. There are also different kinds of leadership styles such as strategic, charismatic, transformational, and ethical. This paper focuses on the perspective of organizational leadership, irrespective of leadership style. Although the paper focuses on organizational leadership in general; it fits business organizations much better.

Before discussing who effective leaders are, it is important to describe leadership. Leadership is the process of influencing others to understand and agree what needs to be done and how to do it. It is about facilitating individual and collective efforts, and reaching a mutual understanding on the strategic direction of the organization to accomplish shared vision, mission, values, and objectives.
Effective leaders use traits and skills appropriately. According to Gary Yukl (2003), effective leaders have the traits of good emotional maturity, personal integrity, social power motivation, high energy level, internal locus of control orientation, moderately high achievement orientation, moderately high self-confidence, and moderately low need of affiliation.
They have a combination of conceptual (cognitive), interpersonal, and technical skills and use them appropriately in relation to the organization’s nature, time, place, and context (condition). Effective leaders have basic skills of economics, financial management (investing, financing, and business risk), marketing, operation management, and human resource (talent) management.
Effective leaders articulate the organization directions & formulate organizational strategy; monitor the external environment; and establish external networks and relationships. They are innovative and good entrepreneurs; they initiate new business development and/or organizational development concepts and approaches where they can grow and contribute for their organization, country, and the world. They work to find a strategic fit/alignment among organizational leadership, management, strategy, organizational culture, and structure.
They can identify organizational weaknesses and strengths; utilize opportunities and manage/minimize threats, as well as anticipating risks and approaching them strategically, detecting, assessing and exploiting trends for an organization’s greater benefit. In addition, they ensure that strategies are efficiently and effectively implemented, and that necessary changes are adopted. They do this through commitment, but at the same time they are flexible enough to adapt to a dynamic and fast changing world.
They also have the managerial competencies of personal intelligence, emotional intelligence (empathy, self-regulation, self-awareness), social-intelligence, and learning ability. In addition, they can manage change, manage conflict, and have good communication and reporting skills. Effective leaders manage situations properly. They listen carefully & understand; build trust and confidence; respect all stakeholders of the organization; build mutual understanding and commitment; build and develop teams; understand cross-cultural differences; respect and manage diversity; and encourage & appreciate tolerance.
On top of that, they rely more on personal power than on position power and they use power in a careful fashion that minimizes status differentials and avoids threats to the target person’s self-esteem. In addition, they have good followership principles and practices. They maintain credibility and trust, taking responsibility for their own life, and remaining true to their own values and convictions. They listen and care for their subordinates and followers.
To be effective, it is necessary for leaders to develop themselves, managers, and employees, through different kinds of development approaches such as special assignments, job rotation programs, action learning, mentoring, executive coaching, and training. They create an inspiring vision of the future and in motivating and inspiring people to engage with that vision and manage the delivery of the vision. They are self-aware; and have behavioural and technical abilities; are able to change strategy into action; and live with consciousness, authenticity, integrity (walk the walk, talk the talk), and consistency. It is necessary that they understand the external environment of the industry where the organization is operating, and the organization internal situations.
Avoiding leadership and competency traps are necessary for leaders. In order to do this, they must look within and understand where the world is heading, as well as connect the past , the present and the future, to understand how to operate within a contemporary world. They should compete successfully in the national and international market and apply leadership approaches as appropriate.
Effective leaders identify problems, explore alternative solutions, and make decisions through evidence based processes. They facilitate the use of knowledge sustainably for their leadership practices.
Organizations need to be agile in using knowledge wisely. And that role is more of organizational leadership. Contemporary leaders should have knowledge management (KM) competency among others. Effective leaders lead organizations knowledge use in effective, efficient, sustainable, productive, and result-oriented way, and have wisdom which is the collective and individual experience of applying knowledge to the solution of problems that involves where, when, and how to apply knowledge; effective leaders have good judgment and action.
These days, we live in a knowledge economy. That economy is more dependent on knowledge than the traditional means of production (labor, land, and capital). Given the contemporary science and technology advancement, given the availability of knowledge; our problems are not mainly related to lack of data, information, and knowledge. But because we are not using worldwide opportunities of knowledge; and we are not leveraging and nurturing knowledge in organizations sustainably, strategically, systematically, and comprehensively. Effective leaders own knowledge in wisdom spirit under their leadership roles and take it as their knowledge management competency.
In addition, effective leaders should have societal concerns, and integrate corporate social responsibility (CSR) issues in their leadership processes. The CSR focus is in relation to the “triple bottom line” which is beyond the concern of the firm and argues that the survival and renewal of the greater economic system, social system, and ecosystem are important.
According to The Future Agenda Project of the World 2020 report, effective leaders are transformational with three skills: strategic thinking, innovative thinking, and situation management.
Strategic thinking provides leaders with the tools to articulate their vision and involve their team in the process so that the team members understand and buy into the process, thereby motivating them to adopt it as their own.
The process of innovation provides leaders with a tool to promote the notion of continuous improvement, which has always been a must for any organization. In this increasingly competitive world, innovation has become vital for survival.
The processes that make up situation management are key skills to master in order to deal effectively with the day-to-day issues that arise.
Finally, based on various researches and lesson learned, Gary Yukl (2003) forwarded 10 roles of effective leaders. These are most important leaders’ responsibilities to enhance collective work in teams and organizations: help people interpret events understand why they are relevant, and identify emerging threats and opportunities; help to create agreement about objectives, priorities, and strategies; increase enthusiasm for the work, commitment to task objectives, and confidence that the effort will be successful; foster mutual respect, trust, and cooperation; help create a unique identity for a group or an organization, and they resolve issues of membership in a way that is consistent with this identity; help people get organized to perform collective activities efficiently, and they help coordinate these activities as they occur; encourage and facilitate collective learning and innovation; promote and defend the interests and reputation of their unit and help to obtain necessary resources and support for it; help develop the skills and confidence of people in their work unit and empower people to become change agents and leaders themselves; and set an example of moral behaviour, and they take necessary actions to promote social justice.


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Aychew.a@ethiopianchampion.com (Aychew Adane) Commentary Mon, 15 Oct 2018 00:00:00 +0000
The Making of Addis Ababa http://www.ethiopianbusinessreview.net/index.php/commentary/item/6011-the-making-of-addis-ababa http://www.ethiopianbusinessreview.net/index.php/commentary/item/6011-the-making-of-addis-ababa

Unlike African cities planned by colonialists, Addis Ababa is a city unique for its indigenous urbanization created out of natural necessities. The expedition to assimilate the south in the mid-1880s concluded with the emergence of a new capital. So, the first settlements of Addis Ababa were set up with a vision of reestablishing the country. These individual settlements known as ‘sefers’, were naturally conceptualized with a top-down hierarchy named after their own chiefs.

Due to the understanding of European colonial interests by the ruling elites of the time, modernizing the nation was unequivocally believed to be the only option for defense. The battle of Adwa won recognition for Ethiopia among the European forces and diplomatic relationships begun soon after. It was after the battle that the settlements started to undergo an urban sophistication.
Foreigners began to pour into the city, bringing with them diverse architecture, design and even dining tastes. Such gestures influenced the urban and architectural spaces of the city. City architecture has refined itself, transforming from the simple rural town to the extent of creating its own architectural style in less than thirty years, namely the Addis Ababa style.

New urban identity and its spaces
As the city continues to progress morphologically and sociologically a fine cocktail of inherited experiences – indigenous and western –have begun to form a new urban identity peculiar to the extrovert city lifestyle, to the extent of creating the impression that urbanization is parallel to modernization.
Historically, its reputation as the seat of the Royal Court meant that Addis’ public spaces were used for public proclamations, ceremonies and festivals, and for a viewing of commercial, transportation and technological infrastructures. These brought new cultures and goods to create an accumulated identity in an urban society. Arada, a large public space known for its weekly market is one of the three urban infrastructures, along with the La Gare railway station and Emperor Menelik II Palace where the city started to develop horizontally.
Before and after the five-year Italian occupation, the educated elite were responsible for spearheading any remodeling changes – specifically modernization to catch up with the western world, in order to resist forthcoming fascist invasions, and to enlighten the society with science. Up to the time of the fall of Emperor Haile Selassie I, the urban elite were known for extensive discourse on how to assimilate persistent modernization without fundamentally changing one’s own identity.
Urban spaces have always played a critical role in the calls for modernization. Piazza spawned a community who pioneered urban culture. The former Haile Selassie I University (now Addis Ababa University) and its surroundings were prominent during the time of the student movement.

Collective urban identity
The 1973 revolution made urban spaces public domain– treating every organ of society with a singular label. Nationalization of private properties, mass domestic movements and war were used as pressures to camouflage diverse social classes and groups. Urban spaces played the role of displaying bold statements and executed opponents of the Derg government. Nevertheless, the labor movement contributed public spaces to Addis, defined in by the architectural master pieces such as the Tikur Anbesa Hospital.
After the eventual defeat of the Derg government in the 1990s free – market economy was introduced while power and wealth started to be decentralized and distributed. This started reestablishing social classes, and specifically brought the rural into the urban domain. The ethnic based decentralization excluded the urban culture that had been refined within the first seventy years of the city. This had its own catastrophic and constructive sides.
Public spaces severely suffered in the past two decades. The domestic emigrants literally invaded urban spaces with construction of private properties and informal markets. The city became a place of people who traced their identity to a particular node somewhere in the country and without any awareness of genuine urbanization – pushing the urban descendants out of the urban arena. Urbanization, in the lay understanding must promote an image of the planning and building industry, with reference to the global boom-markets of China or the UAE. As a result, the urban spaces of Addis today have become places that belong to no one. The way the emigrant dwellers integrated themselves can literally be interpreted as they ‘brought money downtown and sat on the city,’ disrupting the architectural language with demolished social structures, for the city to be famed as ‘a city without character.’ The segregation of social classes by gated communities was also introduced responsively in the urban culture.
On the other hand, an unprecedented opportunity for the city came about that intensified the economic, cultural and social ties with the rest of the country– opportunities to transform these virtues to suit urban culture. The new layer of urban space that truly reflects these new phenomena has not yet emerged.

Discourses on prospective urban spaces
It is important to distinguish urbanity from rurality. Who is the urbanite after all? And how does an individual properly and proficiently urbanize? For an individual or a group to urbanize, certain requirements must be met, other than being physically present in the city or using shared urban resources. Urbanity demands continuous intellectual openness to diverse and creative ways of thinking and day to day problem solving skills, without intending to interfere with the process of rationalizing outside oneself, but rather fundamentally communicating intentions and end-products. It is from such experiences that an individual starts to grow in urbanity, honest and loyal to one’s own cause, and moves to further modernizing without being caught up in the labyrinth of visualizing urban spaces as contesting spaces of one’s own racial identity with the other. Individuals possessing the above qualities are an urbanite. The urbanite of Addis is not someone who drives his/her belongingness by being present in the urban arena, but is an individual who qualitatively contributes to the collective existence.
The notion of visualizing public spaces as arenas of diversely embodied identities that strive for a recognized goal of urbanism has potential in reclaiming the public spaces of the city as incubators of urban culture; furthermore, into refining and progressing the discourses on contemporary modernity in every fashion.
Public spaces are the features that principally pronounce the city’s contemporary identity. A debate on the morality and rationality of each diverse approach that melts into or springs from the urban spaces inevitably embraces all vibrant classes of the urban society. In such cases urban spaces remain continuously forming and reforming– interacting pioneering ideas with traditional customs through critical outlooks that suit the times.
Modernity is the driving force that brings about urbanity. Urbanity maintains a perspective that it is an outcome of the collective modernization progresses. Post socialist urbanization did not necessarily bring about modernization as envisaged. Urbanity is a culture and a language in itself – a character of its own accord. It is an identity that authorities and people fail to comprehend in the early 21st century Addis Ababa.


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dfas@gmail.com (Nahom Gedeon) Commentary Mon, 15 Oct 2018 00:00:00 +0000
Sustainable Ethio-Eritrean Relations http://www.ethiopianbusinessreview.net/index.php/commentary/item/5990-sustainable-ethio-eritrean-relations http://www.ethiopianbusinessreview.net/index.php/commentary/item/5990-sustainable-ethio-eritrean-relations

Major issues to consider 

One of the greatest achievements of Prime Minister Abiy Ahmed (PhD) in his short stay in power is bringing peace between Ethiopia and Eritrea, which is an excellent political and diplomatic success. This is also a smart political move on his part to fight established interest groups who could stand against his reform. His visits to Egypt, the UAE and Saudi is also a predictable political underpinning for the success.

Be that as it may, as an economist, I would like to point out some of the major economic issues that need to be considered for lasting political and economic ties with Eritrea. This requires understanding the real cause of the war and the cost of the war which will illuminate the policy direction that needs to be pursued so as not to repeat previous mistakes. 

Cause of the War

In the study my colleagues and I conducted in 2005, we found the real cause of the war was not a border dispute. Rather it is an economic one. The Eritrean government’s attempt to squeeze beneficial policies out of Ethiopia reached its limit on the eve of the conflict which ignited the war. Second, although scientific evidence was hard to come by, insider informants noted unhealthy competition between the two leaders as one of the major culprits behind the conflict. 

Ethiopia and Eritrea signed cooperation agreements following Eritrea’s independence in 1993. After that, 80Pct of Ethiopia’s foreign trade passed through Eritrean ports (which are “free ports” for Ethiopia - however, how “free” they were was not defined in an explicit and transparent manner). Ethiopia was a market for about 80Pct of Eritrea’s exports and the two countries commonly used the Ethiopian currency, the Birr. They also shared the oil refinery at Assab port. 

However, there were obstacles to the implementation of the agreements. Whether deliberately or due to negligence by the Ethiopian government, Eritrea took unfair advantage on Ethiopia.  The trade agreement allowed tax-free mutual imports of products from each country, although commodities which were sources of foreign exchange earnings were excluded from the agreement. When imported commodities passed through each other’s country, they were considered to be in transit and free from customs duties.  The agreement on transport stipulated that Ethiopian Airlines flew to Asmara. Eritrean nationals residing in Ethiopia were also allowed to live and work in Ethiopia with similar status to that of Ethiopians and vice versa.

Ethiopia complained that the agreement was abused by Eritrea. When the US dollar was exchanged at ETB6.25 in Ethiopia, its value in Eritrea was ETB7.2. Contrary to the trade agreement, Eritrea bought coffee and oil seeds for re-export. In addition, the Eritreans allegedly sold untaxed commodities (imported as goods in transit) in Ethiopia, excluding Ethiopian traders from the market. Furthermore, grievance was generated because the Ethiopian government had committed itself to the reconstruction and rehabilitation of the Eritrean economy, before Eritrean independence, signing a USD18.1 million worth of Special Drawing Right loan agreement with the World Bank, without passing on the debt to Eritrea. 

On the other hand, Eritrea argued that Ethiopia was being protectionist and discriminating against Eritreans engaging in the Ethiopian Economy. In particular, Eritrea has blamed the northern Ethiopia region of Tigray (where the core of the ruling elite in Ethiopia, including the late Prime Minster Meles Zenawi, came from) for Ethiopia’s protectionist stance and its refusals to accept the Eritrean currency with a value on a par with the Birr. These were the key economic reasons for the conflict 

There was also a problem of coordinating macroeconomic policy. The two countries adopted two different development strategies; Eritrea was outward-oriented while Ethiopia was inward looking. Monetary union in such a context strained macro and fiscal policy co-ordination, which was apparent just before the onset of the war. When Eritrea issued its currency, the Nakfa, in November 1997, the Ethiopian government took a position that economic relations with Eritrea should be identical to its other neighbouring countries, using the US dollar as the medium of exchange through letters of credit. This also became one of the major causes of the outbreak of the conflict. 

Considering the above factors, one can argue that the Eritrean military drive to the border might have been motivated by an attempt to threaten the Ethiopian government so as to obtain favourable policy, on the assumption that the Ethiopian government was a weak, minority-based government fragmented along ethno-linguistic lines (which was not an unreasonable assumption at that time). The frustration of these assumptions, an impasse on the border, coupled with the arrogance and stubbornness of the leadership in the two countries, led to the war. Thus border dispute was just a pretext.  

What should be done? 

From this as well as the theory and experience of regional integration in Africa, I recommend the following so as not to repeat the mistake that EPRDF made before the war in dealing with Eritrea. First, Free movement of labour and capital should wait the theoretically highest stage of integration such as “Customs Union”. For instance over 800,000 polish migrants alone came to UK following free movement agreement reached between the two countries . This move changed the whole politics of the UK including it’s exist from Europe Union. In a poor country like Ethiopia, free movement of labour and capital will have inflationary (food and rent among others) consequences and could generate Xenophobia for Eritreans and derail the peace process.

Secondly, until things are sorted out in the coming one to two years through negotiation and institutionalization, Eritrean business person should be treated like any business person from Kenya which should come through foreign direct investment (FDI) channel having a hard currency to invest. Eritrean business person should be treated like any business person from Kenya which should come through FDI channel having a hard currency to invest. Individual Eritreans need also work and resident permit to work/reside in Ethiopia.

In the theory of regional integration free movement of capital and labour is the last stage of union the precondition of which includes macroeconomic convergence criteria (such deficit as share of GDP, inflation and exchange and interest rate target). Only when that happens, say using the COMESA/IGAD convergence criteria that Ethiopia needs to go to the free movement of capital and labour stage.

The other is concerning with the use of Eritrea’s ports. In the past, Ethiopia had a free port agreement with Eritrea. But the agreement has never been clear and transparent. Now, it should be defined clearly. Ethiopia should inquire how different is this from Djibouti? Is it cheaper? From our national interest point of view, we need the two countries to compete in the short run. In the medium run we need to develop our own port (such as near Assab or Djibouti) on a long lease, say 30 to 50 years, basis as Dubai’s DP world is doing where we don’t pay a penny. In return, Ethiopia needs to offer an equivalent benefit for Eritrea/Djibouti. This is crucial for lasting peace.

The geopolitics in the area that includes the UAE and Saudi Arabia in the ports of Eritrea, Djibouti and Somali land; as well as The Turkish and Iran in Sudan should also be brought in the negotiation with Eritrea for both mutual advantages. In addition, the Chinese interest in Djibouti port as part of its “The Silk Road” initiative need also be considered in Ethiopia’s strategy. 

Currently China owns over 82Pct of Djibouti’s debt in 2016 and offers over a billion-dollar loan to such a small country in the last two years that is equivalent to 75Pct of Djibouti’s GDP according to the Economist. This means if Djibouti fails to pay, it might hand over its ports (or significant share) to China as did Sri Lanka last year with implications for Ethiopia. 

On top of this, the West is watching all this being nearby in one of the naval bases. This will make Ethiopia strategically vulnerable. It has to be recalled that similar China’s loan to Ethiopia has already made Ethiopia strategically vulnerable implicitly entrenching in its sovereign decision making of its prized assets such as the Ethiopian Airlines, Shipping line and Telecom (most likely to China). This geopolitical trajectory needs to be the centre of the negotiation with Eritrea and Djibouti too.

 

In a nut shell, any agreement and decision need to be evaluated against the principle of mutual benefit and strategic security issues. If it is not mutually beneficial, it needs to be avoided. It has also need to be given all the seriousness that it deserves by going beyond the casual peace accord and the current euphoria.


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ag112526@gmail.com (Alemayehu Geda (Prof.)) Commentary Sun, 16 Sep 2018 03:00:00 +0000
Equality for All? http://www.ethiopianbusinessreview.net/index.php/commentary/item/5986-equality-for-all? http://www.ethiopianbusinessreview.net/index.php/commentary/item/5986-equality-for-all?

Last month, I was invited to speak at the York Festival of Ideas, an annual forum for debating alternative, predominantly progressive policy goals. I talked about my work on asset-price stabilization. Andy Wood of the consultancy Grant Thornton spoke about inclusiveness in business, Neil McInroy of the Center for Local and Economic Strategies discussed local organizing, and Ander Etxeberria of the Mondragon Corporation told us about their employee-owned cooperatives in the Basque Country. But, most importantly, Wanda Wyporska of The Equality Trust gave a fascinating talk about the principle of “equality for all.”

 

Few on the left or the right nowadays would actively advocate inequality for all. Rather, the divide is between conservatives who promote equality of opportunity and progressives who promote equality of outcomes. This is an important distinction. But whatever your definition of equality, the bigger question is how best to achieve it.

After World War II, the world adopted the Bretton Woods system, whereby countries maintained fixed exchange rates against the dollar, and capital was largely immobile at the international level. When tourists from the United Kingdom traveled to France, Italy, or Spain, they faced restrictions on how many francs, lire, or pesetas they could buy; and international investment was constrained by a pervasive system of capital controls.

With the breakdown of the Bretton Woods system in 1971, the world embarked on a bold new adventure in globalization. The result was a massive reduction in global inequality, as capital flowed to places where wage levels were a tiny fraction of those in Western democracies. Economic theory predicts that when two countries engage in trade, both will emerge better off. But it does not tell us that every inhabitant of those two countries will be better off. On the contrary, it predicts that globalization will generate winners and losers, and decades of experience have borne that out.

The liberalization of international capital markets has been unequivocally good for 800 million unskilled Chinese workers. It has been unequivocally good for Westerners who derive their income primarily from renting their physical and intellectual capital to the highest bidder. But for Westerners whose primary source of income is the sale of their unskilled labor to the marketplace, the era of globalization has coincided with decades of wage stagnation.

Though the nation-state is not a perfect institution, it has provided Western social-democratic parties with the tools to improve living conditions for their fellow citizens. Western democracies did not always provide pensions and health care to their citizens. Laws governing working conditions, prohibiting child labor, providing free education, and granting universal suffrage to all adult men and women did not emerge from nowhere. They were the results of reform movements and political conflict – often violent – over the course of 200 years.

The post-Bretton Woods liberalization of capital controls, in the absence of equivalent protections for workers, led to predictable results. Labor unions that had long protected the rights of workers in Western countries lost their bargaining power, and with it the ability to negotiate for more humane working conditions and higher wages at home.

When opinion-makers in Western democracies promote the free international movement of capital, one could say that they are advancing the cause of global equality by raising the wages of workers in developing countries. But, of course, Western elites also benefit from higher salaries and increased profits when intellectual and physical capital flows to low-wage countries with weaker labor protections. When they promote globalization as a universal leveler, they are generally not thinking about the welfare of unskilled Chinese workers so much as their own self-interest. If Westerners benefit from less expensive Chinese-made cell phones and consumer electronics and South Korean-made automobiles, then so much the better.

But while globalization has narrowed the gap between rich and poor countries, the gap between the rich and the poor within Western democracies has widened, owing to stagnant growth in median income. Economists disagree about the causes of this divergence. Part of it is likely due to new technologies that increasingly replace workers who carry out repetitive tasks. But research by MIT’s David H. Autor and others finds that a large part of the widening income gap reflects increased competition from China.

That finding presents a dilemma to those who seek to promote equality for all. The world as a whole is not a democracy and is unlikely to become one in the foreseeable future. If politicians in Western democracies continue to promote policies that erode the boundaries of the nation-state, they will be voted out of office by working- and middle-class citizens who are in direct competition with low-skilled workers in the developing world. Equality for all is an admirable goal. But in striving to achieve that goal, we must not risk the domestic equality gains that two centuries of social progress have delivered.


6th Year . Sep 16  - Oct 15 2018 . No.66


 

 

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Roger@gmail.com (Roger E.A. Farmer ) Commentary Sun, 16 Sep 2018 00:00:00 +0000
Restructuring Ethiopia’s Insurance Industry http://www.ethiopianbusinessreview.net/index.php/commentary/item/5987-restructuring-ethiopia’s-insurance-industry http://www.ethiopianbusinessreview.net/index.php/commentary/item/5987-restructuring-ethiopia’s-insurance-industry

Just like any other aspects of the economy, the insurance industry had been significantly affected by the overall economic and other policies existed in Ethiopia. Though the potential for growth is strong, the insurance industry is not delivering as expected due to structural bottlenecks and challenges at macro as well as micro levels. 

 

Hence, to develop the industry, and achieve the growth envisioned, deeper understanding of the realities on the ground and enabling legal and regulatory framework is needed. On top of these, broader understanding of the industry perspective through the value chain, establishing industry conduct that will enhance consumer trust, identifying growth avenues and by crafting right strategies is also required. Above all liberalizing the sector in every aspect is needed to emancipate the industry.

Industry Performance 

According to the National Bank of Ethiopia (NBE), written premiums of the 16 insurance companies operating in Ethiopia totaled ETB8.4 billion (about USD300 million), as at 30th June, 2018, up from ETB7.4 billion in June 2017. General insurance accounted for 94.5Pct of the total written premiums, with motor vehicle insurance representing the largest portion of general insurance – constituting 51.8Pct of total insurance premiums and 54.8Pct of the gross written premiums under general insurance class of insurance. 

The loss ratio at industry level also stood at 76Pct while insurance penetration, defined as the ratio of premiums written to gross domestic product (GDP), remains below one percent– the same as in 2017. Insurance density, the amount of premium written compared to total population also remains low. Total capital of the insurance companies reached ETB5.4 billion, of which 74.6Pct was that of private insurance companies. Overall, in light of other insurance industries operating in the continent, the Ethiopia’s insurance industry performance lagged behind. In order to make the insurance industry competitive at continental level, the following issues should be addresses by responsible public and private institutions. 

Overhauling the Regulatory landscape

Proclamations and directives that governs the insurance industry sets minimum capital requirements, registration, assets, liabilities, solvency and investments, inspection, rates, claims, ownership structures, brokers and other auxiliaries, reinsurance and other aspects. However, the industry requires a significant regulatory shake-up. Following the recent decision of government to privatize some of the state owned institutions, the “closed door” policy of the government should also be applied to the insurance industry by liberalizing the sector, which is crawling for over a century.

This would significantly help to minimize gaps in knowledge, experience and capital to improve the growth of the sector. To foster reforms, independent regulatory agency dedicated to insurance is also needed. The change in regulatory independence and regulation by itself would allow professionals with better experience to improve the sector and harmonize industry rules and practices with counterparts in eastern part of Africa to ensure that the local insurance industry is more regionally relevant, at least in the short run.

Getting Closer to the General Population

There is massive growth potential in Ethiopia considering the more than 100 million population size and untapped market. However, apart from offering suitable insurance product and satisfying local need, addressing the large protection gaps revolves around three key consumer factors: awareness, affordability and access. 

In this regard, insurers need to made great strides in extending financial services to the wider population through the innovative use of technology and adaptations of existing products. Since the products of insurers mainly do not translate well to low-cost models specialized institutions are needed to develop successful products suitable for low-income and rural population to enable them deal with the many risks that reinforce poverty.

Filling Capacity Gap

Insurance is actually one of the industries in Ethiopia that has a real shortage of capable work force. To curb such challenges a strong institution is required with the objective to promote professionalism through education, training, research and development. Organizing insurance and risk management courses and seminars for the insurance industry and the public also helps.  

Surprisingly, there is no strong institution in the country to meet such demand and there is no single qualified actuary operating in the market developed by the industry. Currently, the actuarial functions are entirely outsourced entirely to foreign professionals, mainly to companies based in Kenya.  

With education and training, it is believed that professionals will bring the required change and will be committed to maintaining the highest standards of technical competence and ethical conduct. Moreover, this would also help to develop professionals and industry that could understand the concept and real wit of insurance and develop market where the best interests of the consumer are to the fore, ongoing learning and expertise are cherished, and the highest standards of ethical behavior are embraced.

Developing Visionary Leadership 

There will always be risk and there will always be a need to manage that risk. Ethiopia has plenty of opportunities to grow and innovate across the entire spectrum of insurance business. But to realize this, the business requires specialist knowledge and there is an urgent need to develop a strong and diverse talent pipeline and visionary leadership. With this the Ethiopian insurance landscape can have the potential to grow locally and create a solid base for reaching other markets outside Ethiopia. 


6th Year . Sep 16  - Oct 15 2018 . No.66


 

 

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fikru.tsegaye@yahoo.com (Fikru Tsegaye) Commentary Sun, 16 Sep 2018 00:00:00 +0000
How to Utilize Eritrean Ports http://www.ethiopianbusinessreview.net/index.php/commentary/item/5989-how-to-utilize-eritrean-ports http://www.ethiopianbusinessreview.net/index.php/commentary/item/5989-how-to-utilize-eritrean-ports

Prime Minister Abiy Ahmed (PhD) signed a Joint Declaration of Peace and Friendship agreement with Eritrea in Asmara, on July 9, 2018. The Declaration explicitly allows resuming transportation, trade and communications between the two countries. This opens the door for both countries to utilize the Assab and Massawa ports for their mutual benefit. 

 

Currently, Ethiopia uses the Djibouti Port to transport 95Pct of its import and export commodities. Due to the increase of import-export trade, which costs Ethiopia close to one billion dollars every year in port service fees, utilizing alternative ports in the region is almost inevitable. However, this does not mean that the Port of Djibouti will cease to be the main entry and exit point for Ethiopia’s exports and imports. 

Under international maritime laws signed and ratified by Ethiopia, any landlocked nation has the right of access to and from the sea for the purpose of exercising the rights provided to landlocked states in the United Nations Convention on the Law of the Sea, ratified in 1982. These rights include freedom of navigation; freedom of over flight; freedom to lay submarine cables and pipelines; and freedom to construct artificial islands and other installations. 

To this end, land-locked Ethiopia has the right to use ports located within the territories of transit states in the region [example: Djibouti, Eritrea, Sudan, Somaliland and Kenya] by all means of transport. However, the terms and modalities for exercising freedom of transit should be agreed between the land-locked and transit states through bilateral, sub regional or regional agreements. But, transit states have the right to take all measures necessary to exercise their full sovereignty over their territory and ensure the rights and facilities provided for land-locked states in no way infringe their legitimate interests. Although this international maritime convention governs the relationship between landlocked and transit countries, due to the fact that Eritrea is not a signatory nation, practical and detailed agreements are needed between Ethiopia and Eritrea. 

Although the use of Eritrean ports has been long awaited by many Ethiopians, port utilizations are not something a government should dive into without proper economic feasibility studies. Luckily, the Eritrean government policy in maritime sector reflects its strong interest in adopting more commercial management practices, by contracting new port structures which can be implemented through concessions to private companies. In addition, Eritrea has a plan to enhance the competitiveness of Eritrean ports in handling regional transit traffic through improved customs and cargo clearance procedures, improved transit agreements, and increased capacity of multi-modal transport systems. 

Beside the offers that have been surfaced by Eritrean Authorities for the use of Port Massawa, this policy potentially smoothen up things for Ethiopia to prelude with the negotiations of both transit and port utilization agreements. 

Moreover, the government of Ethiopia through its Maritime Affairs Authority has to visit both port cities and observe the infrastructures and facilities of the port before starting negotiations, on top of studying investment, financial, tariff and labor policies in line with their legal structure. 

As a landlocked nation, obstacles of trade transiting through other territories are very common. So, Ethiopia should evaluate the adequacy of transport service and infrastructure, and the efficiency of institutional and operational transit frameworks in Eritrea. Efficiency of maritime business depends on the distance to the sea and travel times; as well as regulatory arrangements for transit and the cost of transit. 

Status of Eritrean Ports 

Eritrea has only two main ports: Massawa and Assab. In the past, Massawa was one of the leading ports in the country. But currently, its transport networks and infrastructures have been destroyed, both through neglect and as a result of the 1990 war. At present, the port has six general-purpose berths with an overall length of 907 meters and four specialist berths that comprise two for oil, one for cement and one for salt. 

The port of Assab was constructed in 1964. Ethiopia made investments in the development of Assab. As a result, the port generally served as the main entryway for most Ethiopian inland cargo in the past. The port has seven general-purpose berths with an overall length of 1,025 meters, and four specialized berths, three oil terminals and one salt loading terminal.

Both the ports of Assab and Massawa lack adequate operating facilities to provide efficient services to Ethiopian transit cargo. The operational equipment used is obsolete. Furthermore, the ports have no specialized container terminals, even though containerization of cargo transport is indubitably important in the shipping industry. The number of berths is few, and the draft is usable only by small and medium ships. So, there is a need for expansion of specialized berths that can accommodate big ships.

Ways of Utilizing the Ports

It is unquestionable that Ethiopia needs additional ports for its escalating transit cargos and Eritrea as well have policy to contract new port structures which can be implemented through concessions to private companies. These two interests can be combined and nurtured for economic development of both nations. 

Furthermore, Ethiopia can benefit from investments in port assets which can have strong direct and indirect multiplier effects on the entire national economy. However, the challenge that can face both Eritrea and Ethiopia from investing on port development could be the lack of critical resources needed to invest and build a port. Both initial construction and port expansion require large amounts of capital. As a result, this may lead to the invitation of investors from the commonly known friends of the region (Gulf States). That’s why; many countries with ports encourage the co-development of various value-added services through franchising, licensing, and incentive leasing. 

Developing Eritrean ports in cooperation can take various forms. One is to make them a landlord port by which the port authority remains an actor of regulatory body and as a landlord, while port operations (especially cargo handling) are carried out by private companies (in our case this could be Ethiopian Shipping and Logistics Service Enterprise). In this case, infrastructure is leased to private operating companies or to industries such as refineries, tank terminals, and chemical plants. Companies also purchase and install their own equipment on the terminal grounds as required by their customers. In landlord ports, dock labor is employed by private terminal operators, although in some ports part of the labor may be provided through a port wide labor pool system.

The other way is by privatizing the ports fully. In this case the state no longer has any meaningful involvement or public policy interest. Port land is privately owned and this requires the transfer of ownership of such land from the public to the private sector.With the sale of port land to private interests, some governments may simultaneously transfer the regulatory functions to private successor companies. Then privatized ports are essentially self-regulating. 

Some may argue the risk of sale of land to private ports may affect national security issue. But advanced countries like the United Kingdom decided to move to full privatization for three main reasons: to modernize institutions and installations, to make them more responsive to the needs of the users, to achieve financial stability and financial targets, with an increasing proportion of the financing coming from private sources and achieve labor stability and a degree of rationalization, followed by a greater degree of labor participation in the new port enterprises.


6th Year . Sep 16  - Oct 15 2018 . No.66


 

 

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anne@gmail.com (Anene Kejela Wodajo (LL.M)) Commentary Sun, 16 Sep 2018 00:00:00 +0000
Privatization of Public Enterprises is Against the National Interest http://www.ethiopianbusinessreview.net/index.php/commentary/item/5963-privatization-of-public-enterprises-is-against-the-national-interest http://www.ethiopianbusinessreview.net/index.php/commentary/item/5963-privatization-of-public-enterprises-is-against-the-national-interest

It is an Africa-wide fact that the policies of the World Bank (WB) and the International Monetary Fund (IMF) such as structural adjustment programs (SAPs) through what is called the “Washington consensus”, which includes privatization across Africa, have been the cause of African stagnation and poverty so far. Apart from liberalization, which includes devaluation and related macroeconomic policies, privatization was one of the key policies that Africans need to undertake in order to get aid from the WB and IMF and through their seal of approval from the Western countries. 

These neoliberal policy packages brought about disaster in Africa in the 1980s and 1990s which led the Economist Magazine to label those decades in Africa as “the Lost Decades”. During the period of SAPs, not only did African economic growth decelerate to below two percent a year (in strongly adjusting countries this was as low as minus eight percent) but structural transformation also remained elusive. In addition, the number of poor in sub-Saharan Africa (SSA) increased from 163 million in 1981 to 313 million by 2000;while during the same time, in East Asian countries where the developmental state brought about structural transformation, poverty declined by 63 percentage points, from 77Pct to 14Pct. 

It has to be recalled that in every negotiation the Ethiopian government had with these institutions in the last 27 years, the IMF and the WB have pressured the Ethiopian government open up the economy, including the financial sector for their investors. Although in some of the public firms such as Ethio telecom the government failed to bring about competition and good service for the masses, to its credit, unlike many governments in Africa, the government did not accept the proposals. 

However, the government was willing to agree with some of the recommendations of the WB and IMF, which brought adverse effects on the economy. For instance, in the last three years the WB advised Ethiopia to devalue its currency to turnaround its export growth while swearing that this would not have inflationary consequences. I was writing in local media against this policy for the last three years arguing that it will not improve exports but lead to inflation, which will hurt the poor. With the benefit of hindsight, we now know their policy advice was utterly wrong (just look at our export performance and the inflationary effects of the last devaluation). 

This indicates that Ethiopia doesn’t have to listen to their advice given their credibility both across Africa through SAPs as well as our own experience. It appears their advice is motivated by the neoliberal ideology and the national interest of the West with little regard to our national interest and real economic analysis. 

Despite this, the administration of Prime Minister Abiy Ahmed (PhD) announced it had decided to partially and fully privatize key public enterprises such as the Ethiopian Airlines recently. I don’t understand why the Prime Minister seems to obey to the pressure coming from the WB and IMF today. I argue that by deciding to accept SAPs through wholesale selling of Ethiopia’s prized assets, the Prime Minister is falling right in the hands of neoliberals, as well as China, which might need a stake in our public enterprises proposed for privatization.

In this commentary I will attempt to show why the neoliberals advise us to privatize our prized assets and what the likely consequence of such a policy would be, including the danger of privatization of the state and challenging national sovereignty. I will also suggest a smart, not a wholesale, privatization that is attuned to our national interest.

Economic Related Reasons for Privatization

From an economic point of view, we can see two factors for the privatization of these public assets. The first is the neoliberal argument that the private sector is more efficient than the public sector so privatizing will bring efficiency (same output at low cost) through competition and by implication excellent service at low price for consumers. The second, and perhaps most important reason for the government’s change of heart regarding privatization today must be related to the shortage of foreign currency and the swelling level of debt (that latter reached 60Pct of GDP) which itself is the result of past macroeconomic mismanagement and corruption. 

For the notion of privatization to lead to efficiency through competition, first the ground for competition needs to be created. Changing, say, telecom ownership from public monopoly to private monopoly actually can hurt the consumer because the private sector is not accountable for the price that it will set as well as where it spends its profit. Yet, in areas like telecom where technology is changing fast, opening to private operators makes sense. However, the pre-requisite for efficiency is first to strengthen Ethio telecom through selling minority holdings, which will fulfill the dual objective of getting foreign currency now and strengthening the company for upcoming competition (by the way this is a short term solution for the foreign currency shortage because the foreign firms which are now being invited need to repatriate their profit in hard currency soon without generating one; and, hence, could eventually aggravate the foreign currency shortage). 

After this, the country can allow three or four other telecom service providers to operate in Ethiopia and compete with the new Ethio-telecom. Vodaphone (a British firm) and the Kenyan public telecom union that became Safaricom are excellent examples of privatization to emulate from. Not only that, there is no reason to just pass that huge revenue generated by Ethio telecom to private sector which invariably takes it out of the country (with potential foreign currency stress) or becomes unaccountable about how it uses this profit even if it remains in the country. Ethio telecom’s profit calculated as percentage of total income stood at 54.6Pct in 2015/16, according to the annual report of National Bank of Ethiopia (NBE), which is much higher than the five or 15Pct profit margin observed in the western countries. Therefore, such significant profit could be used for the public good when the government has a majority stake in it. 

In addition to such smart privatization of the telecom that needs to be supported by high standard regulatory body and a contractual agreement biased to the poor in rural areas, privatization of loss making firms such as the sugar companies or running them on a public-private partnership framework could be beneficial. Even there, the government needs not to totally get out of the business but rather allow other firms to work alongside it or with it so that it will have an influence on the price to be set by such firms.

When it comes to Ethiopian Airlines its performance in the last 70 plus years has been great. Given the gross operating profit of the Airline as a percentage of revenue, which stood at 13.5Pct in 2015/16, there is no economic or efficiency reason to privatization the Airline. Its profit margin that stood at seven to 13Pct in the last three years, more than double compared to world class airlines. For instance, the top seven largest American airlines registered a profit rate of just nine percent last year.

Not only in terms of profits but also in terms of dollars earned per passenger, Ethiopian Airlines is better than most Europeans and North American airlines. In fact, in a study that I conducted with a colleague on the Airline and its capacity to handle global competition through opening the sector in order to prepare itself when the government decides to join the World Trade Organization, we found that it can be competitive and capable of any global competition. Thus, privatizing the Airline on economic grounds is pure nonsense. 

Political, Cultural Dimensions

In addition, apart from the economic arguments, there are also political and cultural arguments not to privatize the Airline because it is Ethiopia’s (or perhaps also Africa’s) pride. It is the one thing that Ethiopians manage to do great on the world scale; the Airline is a symbol that black African public institutions can be run by Africans and be efficient on the world scale as long as they are properly and independently managed. Thus, this is an institution from which other Ethiopian and African public sectors need to learn and emulate. Ethiopian Airlines is one of Ethiopia’s institutions (like our churches and mosques) that has kept the country’s sovereignty and continuity surviving various regime shifts. 

The political aspect of privatization has two dimensions. The first one relates to control of major aspects of the economy with implications for sovereignty and distribution of income. In the context of Ethiopia, this means several things. First, if our strategic sectors are owned by foreigners that may threaten our sovereignty. Second, since some of the firms for sale are very profitable, it will be effectively transferred from the public purse to private purse where it can be spent without any accountability for people. Third, a developmental state normally uses such firms to guide the economy (e.g. through selected credit policy using public banks) as well as to offer services at affordable price for the poor (e.g. Electricity). By privatizing such firms, the government loses these important policy tools. 

The second political and economic aspect relates to the question of who would be buying these companies. As has been witnessed in Russia, it was the elites that bought many state enterprises. In the Ethiopian context, this means corrupt officials as well as party affiliated companies are the ones that will buy these companies because they are the only ones with the capacity to do so. If this happens, it will be privatization of the state by the elite that wants to dominate the economy and politics as well as legalize their illegally acquired wealth in a roundabout way. This needs to be avoided.

In conclusion, in principle any privatization of Ethiopia’s prized assets needs to be evaluated first through the lens of whether the act brings about competition and excellent service at low price for consumers, and does the country have the regulatory capacity to ensure this. Second, will the act transfer profits from the public purse to private purses to the detriment of the poor and will it threaten its sovereignty in meaningful way? If the privatization act can’t pass these litmus tests we need to recognize that the decision is against the national interest and welfare of Ethiopians.


6th Year . Aug 16  - Sep 15 2018 . No.65


 

 

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ag112526@gmail.com (Alemayehu Geda (Prof.)) Commentary Thu, 16 Aug 2018 07:43:23 +0000
Will Foreign Banks Be Beneficial for Ethiopia? http://www.ethiopianbusinessreview.net/index.php/commentary/item/5962-will-foreign-banks-be-beneficial-for-ethiopia? http://www.ethiopianbusinessreview.net/index.php/commentary/item/5962-will-foreign-banks-be-beneficial-for-ethiopia?

In early June 2018, the Ethiopian government announced it would allow domestic and foreign investors to take stakes in Ethio Telecom, the state-owned telecoms firm and Ethiopian Airlines, the state-owned carrier. Other state-owned enterprises (SOEs) up for grabs are Ethiopian Power and Maritime Transport and Logistics Corporation. The state would still retain majority stakes in them, however. Regardless, it is a huge change in policy. In a speech to parliament in June, Abiy Ahmed suggested that any sale would be gradual, however; over 10 to 30 years. He was probably being mindful of political sensibilities. A serious plan could not be that long winding certainly.

The government added a caveat, however, asserting it would need to do a study over a year or two before any policy move. No such profound pronouncement has been made on the financial services sector, however. For the banking sector, there have been some participation by foreign niche players. 

In February 2015, Ethiopian banks launched mobile money services with the help of foreign fintech firms: “helloCash” by BelCash, a firm based in The Netherlands and “M-Birr” by MOSS ICT, another fintech firm from Ireland. Another example of a foreign financial services company long operating in the country, albeit in partnership with Ethiopian banks, is Visa, a credit and debit card company. Since 2004, it has been providing card services to customers of Ethiopian banks. Despite its vintage in the country, however, it has long asked for room to do more.

And as early as 2015, the government indicated it wanted to develop a secondary fixed income market.

There have been some changes in the financial sector, nonetheless. In June, a new governor was appointed for the National Bank of Ethiopia (NBE), the central bank. There is not much to suggest Governor Yinager Dessie. Besides, the government already allows some foreign participation in the banking sector. In April 2016, for example, the Ethiopian legislature made amendments to its banking laws as it joined the African Trade Insurance initiative.

Some foreign banks seized the opportunity when the rules were first relaxed. The European Investment Bank opened an office in July 2015, for instance; lending to mostly state-run infrastructure projects. So did South Africa’s Standard Bank months later in October 2015. Other foreign banks in Ethiopia are Commerzbank, a German bank; the Export-Import Bank of India; Bank of Africa, and so on. The trailblazer was Turkish state-owned Ziraat Bank, however, opening an office in April 2015.

That said, there was similar enthusiasm about these sectors being opened up in early 2015. At a summit in Addis Ababa, organised by The Economist, it was the telecoms sector then that seemed like the government had no plans to consider foreign investment in at all. Instead, it indicated that it would be more receptive to liberalising the banking sector. 

Besides, any liberalisation of the banking sector would have to be clear on whether banks would still be required to deploy almost a third of their funds to government bonds. There is also the fear that any privatisation programme could be marred by corruption, as has been the case in other African countries, and in fact, elsewhere.

Regardless, something drastic has to be done to stem the country’s economic troubles. China, hitherto a reliable foreign partner for the erstwhile socialist-styled Ethiopian government, has lately been less enthused. 

Perennial difficulties in securing foreign exchange and tapped out indebtedness by the Ethiopian government to its Chinese counterpart, are reported to be making the Asian nation slow down the pace of its investment in what has perhaps been an exemplary African country; especially in terms of its industrialisation and infrastructural development efforts. In the most recent decade, the Chinese have provided loans to Ethiopia in excess of USD13 billion, which were used to develop various infrastructure projects: Roads, railways, dams, industrial parks and so on.

There might be other reasons that China is cooling on Ethiopia. Its ambitions in Africa are expanding. And it is likely finding investments elsewhere to be paying off more. Its first army base in Africa is in neighbouring Djibouti, for instance; a nation which Ethiopia incidentally depends on for a way to the sea. Thus, Djibouti is a more strategic partner than Ethiopia.

If the Ethiopian government is indeed serious about tackling the FX shortage problem, and there are indications it is, the Abiy administration at least, then the two sectors that it must liberalise at the earliest time possible are the telecommunications and banking sectors.

Expertise, Capital and Jobs

A couple of foreign banks have representative offices in the country but are not licensed to conduct plain vanilla banking services; that is, collect deposits and issue loans. The reformist Abiy government has raised hopes that this might change, however.

The key question is whether allowing foreign banks to participate in a country’s financial services sector engenders financial inclusion. The evidence is mixed. In fact, there is probably not much that they do in this regard. There are a few good stories, of course. For instance, some foreign financial firms specialise in microfinancing. 

But they are usually a drop in the ocean and not necessarily cheaper or more sophisticated than the local ones. The Ethiopian government is right to prioritise financial inclusion. 

According to the World Bank, it is “an enabler for 7 of the 17 Sustainable Development Goals (SDGs)” and reckons it to be crucial to poverty alleviation and shared prosperity. To this end, it has set a global goal of Universal Financial Access (UFA) by 2020, just two years away. Would this goal be reached by then? Probably not. But much progress is being made. More relevant here is whether foreign commercial banks help with this goal.

Quite frankly, financial inclusion cannot be the main reason for allowing foreign banks into a country. Their advantages relate to the new capital they bring for the use of local and foreign firms doing business in the country. They also allow for more seamless trade. 

It is much easier to do business with a bank in-country as well as abroad for international trade, for instance. But pushed rightly, foreign banks can help with such idealised goals as financial inclusion. They certainly are able to deplore the latest technologies in this regard. 

That is as far as most would go, though. Brick and mortar branches add on unnecessary weight. And increasingly, when foreign banks make a foray to another country, they rely on local deposits to fund local loans.

Their real advantage for a country are big ticket transactions. It is easier to get financing for mega projects by firms if foreign banks operate in the country. 

True, while foreign multilateral development financial institutions do provide some funding, commercial ones not backed by their country’s government rarely do. Besides, there is need to differentiate between foreign banks that are from other African countries and those outside the continent. Although, it is the latter than tend to get all the attention, the former have their advantages too. 

In any case, South African banks remain dominant on the continent. The largest, Standard Bank, is excited about the Ethiopian opportunity, certainly. With a Chinese bank in its shareholding, it is increasingly the go-to-bank for transactions with the Asian nation. At least, it likes to portray itself as such. That is probably where the opportunity is. That is, pan-African banks looking to expand to Ethiopia.

Otherwise, Western banks have been cutting back on their African exposure. Barclays, a British bank, is a recent example. Curiously, even these Western types might be interested in an Ethiopian venture. Investment banks are certainly keen. A capital market is virtually non-existent. Technology and expertise would probably be the key benefits.

For these to be realised, the Ethiopian government would need to liberalise the sector as quickly and as widely as possible. For if there is any whiff of uncertainty or hesitation in whatever liberalisation policy is announced, there might not be many foreign banks willing to take the risk. Potential investors would also be looking to see a more institutionally-directed and sustainable shift towards reform.

Do Foreign Banks Help?

What has been the actual experiences of countries that allow foreign banks to participate in their financial services sector, African ones especially? International banks have been pulling out of Africa lately. Some of the reasons include a realisation that local banks have a greater edge. 

Another is how shallow most African markets still are. Trade finance was the main draw for the increased interest of foreign banks up until the global financial crisis in 2007-08. When commodity prices slumped, however, it became writ large how susceptible most African economies remain to the volatile commodity markets. With problems of their own, international banks began to roll back their African operations to what they deemed to be more realistic levels. And quite frankly, foreign banks were a little surprised by how hard it was to beat local ones.

That said, some remain firmly in place; more agile operations are the norm, though. The few global banks, which seemed determined, are treading carefully nonetheless. In November 2011, JP Morgan, an American bank, started offering some services in South Africa and announced it planned to open representative offices in Nigeria and Kenya. That chief executive Jamie Dimon was still talking about JP Morgan’s plans for Kenya in January 2018, seven years after, speaks to the mixed case for international banks in Africa. Credit Suisse preceded JP Morgan in South Africa, setting up an office in January 2011.

Barclays also moved its Africa headquarters to the continent from the United Arab Emirates in 2012, buying a controlling stake in ABSA, a South African bank; albeit its optimism was short-lived: It recently sold the African business. Another was China’s ICBC, opening an office in South Africa in November 2011.

What was the major attraction? Developed economies were either in recession or growing very slowly and yields were extremely low or negative. But here was a continent with more than 1 billion people, with millions unbanked and much more underbanked. Adding to that, it seemed Africans were beginning to prosper: A supposedly growing middle class was much vaunted. 

But the main driver for most global banks’ resilience about their African vision was a desire to hold on to all of their clients’ businesses in every part of the world. Why should a client be allowed to go to another bank for its African business and risk losing it in the process, it was reasoned. It proved to be dearer than planned: The clients did not necessarily do frequent transactions for and with their African subsidiaries. Or better put, the volume of transactions was not so much that they could not be undertaken from the banks’ hub branches, a central African location or both.

Research suggests that foreign banks do not always help the financial development of poor countries. According to an IMF working paper in 2006, in countries with more foreign banks, credit to the private sector and access to credit in general tend to be lower. Consequently, there is also usually slower credit growth. The paper argued that foreign banks tend to be more beneficial to advanced countries. Thus, the Ethiopian government’s caution is not entirely out of place.

However, there are documented benefits for poor countries as well. Arguments in favour range from better economies of scale and supervision, more advanced technology, greater perception of safety by depositors, and lower corruption. Of course, there have been cases lately about the susceptibility of foreign banks too. But in general, these are the exceptions and not the norm. “Several studies find that foreign banks in lower income countries (LICs) lend predominantly to the safer and more transparent customers, such as multinational corporations, large domestic firms, or the government.” This remains largely the case. And when the specific case of African countries is explored, other studies still find that to be the case. Still, it is argued that local banks become more efficient from copying the practices of their foreign competitors; by the adoption of better technology and banking practices, for instance. So, the Ethiopian case, when opened up, is not likely to be any different.


6th Year . Aug 16  - Sep 15 2018 . No.65


 

 

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Rafiq@gmail.com (Rafiq Raji) Commentary Thu, 16 Aug 2018 04:43:23 +0000