Ethiopia’s Economy Needs New Thought and Policy Design

The Ethiopian economy has been at the same level of growth and productivity for the last four decades. Economic growth, transformation, and development could not keep up with the speed and pressures of population growth. Unless population takeoff is backed by economic takeoff at the same time, the consequence is dire crisis. The population of the country has grown fast in these decades making Ethiopia the second-most populous country in Sub-Saharan Africa with a population of over 100 million. Currently, the Ethiopian population is increasing by over two million people a year. Past and current economic policies could not provide a mechanism for the country to take advantage of its human and natural resource endowments. It is not fair to transfer the blame of poor performance on policy implementation alone. Large amounts of energy and resources are spent on implementation with little or no thought given to the subject of policy choices and design. Rather, Ethiopia’s growth and development problems are related to approaches of economic policy analysis and economic thought used to shape choices and design.

There are at least three challenges related to policy choices and design: identification and definition of the problem; how to design solutions to the problem (missions, strategic goals, and means); and the actors leading and administrating the policy. These questions are answered through the application of two branches of action theory and philosophy of economics: positive and normative economics. Policy makers look to these two branches of economics to conduct policy analysis (identify problems) and guide and design policy choices.

Identification and definition of the economic problem
In economics problem definition, diagnosis and the finding of an optimal solution is often explained using economic theories. This branch of economics which studies cause-and-effect behavioral relationships is called positive economics. The analysis of positive economics focuses on what it is and how it works. An example would be the production functions and mathematical models used in growth accounting theories and cross-country studies.

In a recent interview on the Ten-Year Perspective Plan (TYPP), Fitsum Assefa (PhD), Minister in Charge of the National Planning and Development Commission (NPDC), stated that 12 preparatory studies were conducted to “identify the current nature and level of Ethiopia’s economy” (EBR № 94). It could be interesting to know the research issues, baseline models, and data used. These studies, however, do not tell by themselves right from wrong. As the minister said, the studies are used as inputs “to craft the pillars, visions, and targets of the economic plan.” The question is what values NDPC used when considering alternative views.

The starting point (moral, values, and welfare thinking) matters for finding alternative outcomes. If policy-makers have no idea or principle of helping the people, then positive economics (theoretical investigation) is of no value whatsoever. If policy-makers start from the principle of helping the people (who know what ought to be done), then positive economics provides them with facts on what constitutes harmful actions.

In the case of Ethiopia, it is positive economics which is often used for problem identification. There are abundant theoretical model-based research works, and sector performance analysis used for economic problem identification. These research works explain how the economy currently functions and some tell policy choice consequences. As I see it, there is normative blindness. Policy makers do not share the same idea on what the economy ought to be. For example, some emphasize industrialization, while others strive for expanding the tourism sector, and still others focus on expanding agriculture or infrastructure. Given resource limitations, there is no consensus among researchers and government policy makers on what ought to be done.

The experience of other countries shows that most policy disputes are resolved in normative economics, not through causal/ theoretical investigations (12 studies). The Ethiopian government needs normative thinking (well-being values or idea of what ought to be done) to determine which policies are most efficient—that is, which policies most increase welfare. For countries with a fast population growth, I propose Sustained Economic Growth, Transformation, and Development (SEGTD) as a solution. It is beyond the scope of this article to discuss justifications for and determinants of SEGTD.

Identification of missions, strategic goals, and policy means
The absence of normative analysis makes it difficult to design solutions to economic challenges. What is the overall purpose of economic growth, transformation, and development in the country? Again, this requires the application of normative economics which provides reasons for choosing a particular mission and the value that the mission serves. Depending on the ideology of the researcher or policy makers, there can be different missions that address different needs. Is the overall mission to raise living standards of the people, human development, protect the environment, cultural, and/ or political? The selection criteria for the areas of the mission depends on societal priorities and negotiation of stakeholders. What are the criteria used to identify mission statements of the Ten-Year Perspective Plan of the government?

I suggest using people-centered and place-based approaches to identify the missions of sustained economic growth, transformation, and development in Ethiopia. These are: increasing GDP per capita, job creation, regional development, macroeconomic stability, and environmental sustainability. I use population growth drivers and impacts as a framework to determine the missions.

Following the mission, there is a need to identify strategic goals, which answer the question “what should we do?” to achieve the respective missions. Strategic goals are the things that should be achieved to attain the overall purpose and they are accomplished over a long time frame. I suggest the following strategic goals: industrialization, economic structural transformation, spatial transformation and integration, and stability. The TYPP is not only spatially blind, it does not clearly state which sector path to take for growth: services or manufacturing. Which matters more for growth and job creation?

Policy design procedure
Policy design procedure specifies who does what, how, and when. The procedure is launched after formulating the strategic goals. The sequence of steps includes a study of the functions of the identified strategic goals, underlying causes of their respective progress, identification of action plans at different levels, knowing responsible actors, study of organization capacity, and resource availability to implement chosen instruments. I have to conduct interviews on the procedures used to design economic policies. But my reflection on the inward/ outward orientation of the industrialization policy indicates problems of policy design (see EBR № 88).

The process of industrialization must be adapted to the particular situation of the country. In countries with fast population growth, industrialization has two basic functions. First, it supplies the internal economy with manufactured articles and capital goods required for economic development. But the export-oriented industrialization policy of the government encourages export trade and activities to supply the internal economy with imported manufactured articles. But a country cannot depend on export trade to import manufactured products and capital goods, since exports tend to increase less intensively than import requirements. The second function of industrialization is absorbing the surplus labor caused by population growth and stagnation of the agriculture economy. But the agricultural-led development strategy, which gives priority to smallholder agriculture, makes the country miss the opportunity for labor intensive industrialization. The industrialization strategies of the government show that there is no proper understanding and consensus on the functions of industrialization in Ethiopia. That means there is no agreement on the determinants of industrialization and consistency in the choice and use of industrial policy instruments. All roads do NOT lead to Rome.

The actors leading and administrating the policy
Designing policy packages also requires a study on policy means. This includes courses of action gained from experience and favorable institutions, organizational capacity, and resource availability to implement the policy. By definition, policy means action and any intervention has objectives and actors, both public and private, who are involved in the process. There is a theoretical debate as to who promotes growth and development. The Ethiopian government argues for the importance of the state’s role in promoting economic growth and development. Some economists favor a non-interventionist state, based on the assumption of the ability of the market to achieve efficiency and equilibrium. I advise the use of the cost-benefit approach to interventionism—compare the effectiveness of market intervention against state intervention. This means that the case for interventionism differs on the theoretical arguments and values of the researchers and policy makers.

What is needed
Experiences from developed countries tells us that facts about how the economy works and beliefs about what policies are good are inherently connected. Even though both normative and positive economics are necessary for problem identification and design of solution, my observation is that in Ethiopia economic policy, design is based mainly on facts (12 studies as in the case of the Ten-Year Perspective Plan), not on explanation of reasons and values about what ought to be done (normative economics). The choice for policies is not justified by reasons about what policies are good for the country. The government does not take the effort (use normative economics) to explain and justify the kind of policies it decides to implement. There is normative theory blindness, lack of discussion on what the economy ought to be. Once again, all roads do NOT lead to Rome.

Consequently, the people of the country do not see incentives to participate in the policy. The government’s economic policies have not yet convinced citizens to aim at the desired changes (prosperity and growth). The choice of policies does not provide incentives to carry out actions whose aggregate consequences brings about growth and prosperity. Citizens do not have an idea on what those aggregate (ambitious targets) consequences of policies may be. The policies do not provide and state clearly incentives for individuals to make a choice and act or be part of the policy.

People understand the need to support the national defense force to thwart external aggression and ensure internal stability. There is a national consensus and agreement on this issue. Unfortunately, people do not find one that unites them on economic issues. For growth and development to happen, citizens should share a common guiding policy and direction.

9th Year • Feb 16 – Mar 15 2021 • No. 95