Non-dogmatic, Pro-private Sector

One of the young leaders that bolted to the front after PM Abiy’s reformist administration took power in 2018, is Fitsum Assefa (PhD), Minister in Charge of the National Planning and Development Commission (NPDC). She successfully maneuvered in the struggling economy to replace the previous GTP II with the Homegrown Economic Reform program. For the last two years, she led 12 studies preparing the Ten-Year Perspective Plan (TYPP), involving domestic and foreign institutions like the Korea Development Institute. The overambitious TYPP document is almost ready for implementation now.
Prior to her current appointment, she occupied different administrative positions at Hawassa University including Dean of the College of Business and Economics and also chaired the committee charting the university’s five-year strategic plan.She studied regional and local development studies at Addis Ababa University College of Development Studies and her doctoral at Justus-Liebig University in Germany.
Avoiding attachment to singular ideological frameworks, Fitsum designed the TYPP trusting market forces and allotting room for flexibility. She argues Ethiopia can grow at 10Pct in the coming years even in the aftermath of COVID-19 and pertinent macro-economic instabilities inherited from failed previous plans. EBR was granted an audience with the Minister in Charge.

Tell me about the time it took and procedures followed in preparing the Ten-Year Prospective Plan (TYPP)?
Preparations took almost two years. First, 12 studies were conducted to find the baseline. These studies clearly identified the current nature and level of Ethiopia’s economy. Then we started to craft the pillars, visions, and targets of the economic plan.

Some of the targets of the TYPP are similar with the first and second phases of the Growth and Transformation Plan (GTP I & II).
The unrealized targets of GTP I are carried forward and added into the TYPP. The terminal evaluation for GTP II is currently in the final stages.

That is this why the TYPP seems ambitious like GTP I & II.
The growth Ethiopia has been registering for the last decade is the result of public-led investment in infrastructure. But the growth potential of other productive sectors has not yet been touched. This means we can achieve more under existing circumstances. For instance, we can at least double agricultural productivity in the next ten years.

Manufacturing industries are currently operating at less than 60Pct capacity. Without having to invest in new manufacturing plants, maximizing the capacity utilization level of existing operations to over 80Pct would be a huge leap forward in itself.

Technically, high growth is possible because we have not reached high productivity levels. Many sectors including ICT, tourism, and mining are almost starting from scratch. Plans should be ambitious enough to keep you working. To significantly slash poverty, we must grow by at least 10Pct.

The TYPP states that two-thirds of investment in the next ten years will come from the private sector. Do you think this can help the country register previous-type growth?
If you look deep into the investments of the past decade, there was a lot of inefficiency. South Korea’s capital formation was around 30Pct but they grew by 10Pct and became a high income nation. Ethiopia invested 37Pct of GDP but did not grow satisfactorily. If public sector-led investment can bring that much growth, with all its inefficiencies, the private sector can do better with less capital.

How can you expect so much from the private sector, which is still in its infancy?
This is true and relevant. But pursuing sustainable development is a multi-dimensional task. Maintainable growth should primarily be led by a strong domestic private sector. Of course, foreign capital and skill are equally important. But unless you have strong domestic actors, advancement cannot be sustained and its dividends trickle down to its citizens. One way of ensuring shared prosperity is to engage homegrown private players in the development process.

The domestic private sector is in its infancy; every country has passed this stage. Ethiopian private businesses are 30 years or less young. Government should still support them so as to enable them to take the lead. However, alongside we have to engage FDI for capital inflows, experience sharing, and knowledge transfer. With proper policies in place, the right balance between domestic and foreign actors will be secured. The newly introduced investment regulation opens the majority of sectors to foreigners to work in tandem with homegrown companies.

The other TYPP target is the construction of 4.4 million houses. Considering previous poor performance, do you think this is possible?
The figure only indicates expected demand for houses in the next ten years. Of the total 4.4 million houses, only 10Pct is going to be developed by the government. The balance will be constructed by the private sector.

The whole paradigm of provisioning housing in the country will thus be shifted from ownership oriented to access oriented. The private sector will develop houses through joint ventures with the government. It is also open to real estate developers, both domestic and foreign. To facilitate this, government will introduce and encourage various innovative methods and arrangements. For instance, mortgage banking is now coming to Ethiopia.

Another ambitious target included in the TYPP is growing total cultivated land from 33Pct to 100Pct of arable land by expanding farmlands to lowland areas.
Lowlands have not been touched for long, despite huge potential. These areas are now targeted to mainly produce animal feed but other crops like wheat are also expected to be farmed in the lowlands. In fact, encouraging results have already been registered vis-à-vis wheat in Afar and Somali states, amongst other regions.

So, this and other targets look ambitious from a business-as-usual perspective but are achievable. The private sector will take the leading role in cultivating crops in lowlands while government will create an enabling environment.

Commercial banks usually finance the most lucrative businesses. But the agricultural sector is not a well-paying sector. So, how do you plan to solve this mismatch?
Banks operate in areas where there is profit. Government, on the other hand, prefers financial resources to be directed into development endeavors. So, finding the middle ground is essential by introducing different incentivizing instruments, not by dictating.

In the past, government used to dictate banks. Government-owned banks were forced to channel finance towards state-owned enterprises and this crowded out the private sector. Private commercial banks were forced to buy NBE bills to finance public projects. That will not happen anymore.

In the last decade, Ethiopia experienced high inflation rates which continues to this day. Is there a strategy in place to tackle this problem?
We have been studying inflation for the past two years. The general understanding is that inflation is high in Ethiopia as demand is growing much faster than supply. Hefty demand was caused by the way in which the economy was financed in the past ten years. Inflation was consistently rising in this period and requires a lot of work to stabilize. Ethiopia’s inflation is not a short-term phenomenon.

In developed economies, when there is excessive inflation, they use fiscal and monetary tools as they don’t have supply-side problems. But for us, productivity is very low in every sector, especially in manufacturing and agriculture. Especially agricultural production and productivity must grow to solve inflation.
Of course, there are other non-productivity factors driving inflation in Ethiopia. Market chains must be modernized and valueless intermediaries must be removed. There is also the issue of imported inflation mainly resultant from the price of oil in the international market.

What was the major challenge hindering structural transformation of the economy?
One of the huge failures of the past ten years was government’s inefficient bureaucracy and the existence of weak public institutions. Instead of supporting development endeavors, they ended up being obstacles to development. We have to reform the civil service to make it merit based, efficient, and capable of handling the TYPP and meaningfully cooperate with the private sector. The government failed big in this area but has implemented, this time around, key performance indicators to ensure implementation and accountability.

What was the share of the informal economy to GDP while studying to prepare the TYPP?
It is a huge portion. The informal sector should be formalized for the sake of the sector itself. It must get finance to expand into the formal domain. Even if it doesn’t generate tax, the informal sector generates employment. To formalize and benefit from its potential, we need to tread slowly.

Government has been emphasizing industrial parks for industrialization. But they are underperforming mainly because they were built based on a regional quota basis rather than through viable raw material and logistics convenience. Do you think industrial parks are contributing fittingly to the sought-after structural transformation?
The structural transformation, though slow, is happening and is coming from the parks, especially with regards to manufactured exports. Production of and share of industrial parks in the export of manufactured goods is picking up slowly.

Any future government investment will not be like the past using rationing and quotas. It must be based on economic viability including, as mentioned, the prevalence of raw material and logistical expediency. The importance of industrial parks remains strong but resultant to minimal backward linkage with farmers and raw material suppliers, too much input is imported. Further, from now onwards, every foreign company in parks will be transferring knowledge to domestic private companies to be located in the same venue.
With the proper solutions from government, IPs’ problems including power, raw material, and foreign currency will be solved. IPs will be instruments of structural transformation.

What will be the impact of the piling external debt on government’s financing endeavors? Most of the external debt is from China. Will this affect Ethiopia’s relationship with the divergent western and eastern blocks?
Finance is like oxygen to the economy. The way we financed our development in the past ten years was unsustainable as it was funded with commercial loans bearing excessive interest. One of the sources of the current macroeconomic instability is high debt distress. But it’s getting better now because we have completely stopped borrowing from those sources. We will be employing policy reforms to modernize and broaden tax collection and formalize the informal economy. There are also other revenue sources.

For instance, the proclamation to establish a capital market was just enacted two weeks ago, by the Council of Ministers. There will be expansive potential for equity finance. Public Private Partnership (PPP) programs, remittances, and FDI are also among our sustainable development finance mechanisms. Past growth was not sustainable, because of the reliance on public investment in infrastructure ending up in macroeconomic instability. The source of growth this time must be on the productive side, addressing supply side problems. Sustainable development financing, shared prosperity, private-sector led economy, and institutional capacity are few of the ten major pillars of the TYPP.

In terms of the east and west blocks, just like ideology, Ethiopia’s future won’t categorize countries as ‘these are our friends, those are our enemies’. Our principle creates friends. Our foreign policy commences with the creation of economic inclusion with neighboring countries through shared infrastructure in the transport and power fields. Also to be noted that there is a shift in global cooperation from aid to sustainable finance. Our views of our friends will not be dichotomized by the division into east and west blocks.

The government did not engage independent experts and scholars in preparing the TYPP. Why?
Experts working in different sectors and professional associations like the Ethiopia Economics Association were included. Those 12 studies mentioned earlier were undertaken by experts. Foreign and international consultants including the Korea Development Institute and one from the UK were engaged. Domestic research institutes, consultants, individuals, and personalities were also involved. All in all, over 100 experts partook. A lot of experts were given the plan and have forwarded their comments on the draft.
Government also established the independent Economic Advisory Council with which we will hold quarterly meetings.

What will be the exact task of this council?
Advising policy makers on economically relevant matters. They can pick an issue, discuss, and forward policy alternatives. The government might consider their advice or not.

But members of the council did not have a role during the crafting of the TYPP.
The council was established after the TYPP was finalized and approved by the Council of Ministers. But more than five of the 16 members were in the planning process of the TYPP. They participated separately, not at the capacity of the council.

When will Ethiopia join the World Trade Organization (WTO)?
Joining the WTO has taken us a very long time relative to other countries. We are fast-tracking it now. In the coming year or two, we will definitely be joining the organization.
Such opportunities unlock a lot of potential. But the WTO is of no use if we don’t have something substantial to trade. There are a lot of bottlenecks regarding productivity and competitiveness in Ethiopia.

Government cannot protect local industries once it joins free market agreements. How difficult will it be for Ethiopia to achieve import substitution and industrialization under globalization?
It won’t be easy in the era of globalization. But the model for ensuring structural transformation, development, import substitution, or any other economic developmental path is not ‘one kind fits all’. Even in the developed world, governments are doing a lot to protect their domestic industries.

We know it will be difficult for us. But we will implement many workings to create new knowledge and acquire appropriate technology to enable low-cost production and sell better quality products to the world. Technology supports productivity and development. Industrialization, import substitution, structural transformation, and development are not easy to achieve under globalization. But it is not impossible.

While crafting the Homegrown Economic Reform and TYPP, we avoided allegiance to any specific ideology. There is no need for that. Most of the time, we are deceived into thinking any solution to a problem at hand should subscribe to a single ideology. We are rather following a pragmatic mode of doing things and the solution is dictated by the problem at hand. We set out the TYPP as an overall overarching goal to ensure sustainable development and shared prosperity. To grasp our goal, the policies crafted as well as the models used to engage the private and public sector all depend upon the problem at hand. EBR

9th Year • Jan 16 – Feb 15 2021 • No. 94