In his position, Tesfachew Taffere is responsible for reducing difficulties that developing nations such as Ethiopia face in international trade and development. His job is vital, since the gap between poor and wealthy nations continues to grow. Tesfachew was in Addis Ababa to launch the 2015 Trade and Development Report for the United Nation Conference on Trade and Department (UNCTAD), which deals with making the international financial architecture work for development. He says that while the ambitious development goals of some countries are impressive, many lack an integrated approach to developing their economies, which ultimately hurts achieving the goals set out in the plans.Tesfachew holds a PhD in development economics from University of Sussex, United Kingdom. EBR’s Amanyehun Sisay sat down with him to learn about what UNCTAD does to help least developing countries in their economic growth endeavours and on the structure of international trade, which is presently uneven and a hindrance to fair competition and puts developing countries at a disadvantageous situation. The following is an excerpt.
EBR: What does the UNCTAD do in Least Developing Countries (LDCs)?
Tesfachew: We do three things. [The first] is conducting policy analysis. We do this because one of the most difficult things in those countries is having the right policies. Implementation, training and policy coordination are also other challenges. Secondly, we provide technical assistance.
Trade for us is a cross-cutting issue. It is one of the difficulties that LDCs face. If you go to the Ministry of Trade to discuss what Ethiopia produces, the production capacity and what entrepreneurs and exporters do, they may say ‘this is the Ministry of Trade and the production is under the Ministry of Agriculture or Industry.’ Developed countries do not do business this way, because you cannot trade if you cannot produce. Therefore, the design of the trade policy has to be coherent and linked to investment, production, and human skills. We try to introduce an integrated approach in policy-making in LDCs.
We help them with their customs and trade facilitation. [The] challenges in Africa’s trade are logistics, administering, procedural, and other challenges [that] producers and traders face.
In LDCs, if you want to export, the challenge you face is much more complicated than the challenges you face to produce. The UNCTAD supports these countries in easing trade facilitation. We do not physically go and produce or construct the roads and logistics, but we help them in designing good trade facilitation policies by identifying the problems.
We also help them on their debt management, because one of their difficulties is how to monitor their debt. In several LDCs, if you ask for how much debt the country has to pay, they may need two weeks to prepare a report. We provide them software to monitor and update their debt payment system. It also helps them understand exchange rate issues that they need to know and how it affects their payment.
How much has Ethiopia been a beneficiary of these services?
Ethiopia has been benefiting in many ways. For example, now we are doing the Trade Diagnostic Study for [the government], as part of the second phase of the Growth and Transformation Plan (GTP II). It is about how to make the trade policy implementation in the country coherent. This is very important [because] the GTP II is designed to be trade-augmented growth by identifying three sectors: leather, textile and agribusiness. The government wants to create an export-driven economy like China by increasing the export revenue in five years.
Ethiopia earned nearly USD3 billion last year in export revenue, which marked the end of the first phase of the GTP I. Now the government plans to earn USD12 billion in five years, which is a fourfold growth. Do you think this is achievable?
Yes, the ambition is good. We do not discourage their ambition, but it is going to be tough. Those three sectors are good because the country has a comparative advantage. The good thing about being ambitious is that if you aim at four times but succeed in twice, that will still be great.
What is the merit of planning if a nation doesn’t take into consideration its actual resource base and limitations? Countries have to prioritise spending on projects where they can get a maximum return on investment. What good is planning if you do not have the means to achieve what you set out to do?
That is right, but sometimes [you have to] plan ambitiously. [You] may or may not achieve it but [you] can plan. What they have to do is look at the plan, how are they planning to achieve it, is it coherent or not, does it make sense or not? Then you can say this ambition is useless, if there is something missing.
Now, when we come to the Ethiopian case, the way the government is planning in paper is correct. For example, one of the big challenges for industrialisation in this country is energy, and they are trying to solve that by investing in hydro-power projects.
The second one is skill. Countries [like Ethiopia] are trying to get into sectors like leather, textiles and so on; [all they need is] trainable young people. In Bangladesh, textile employs four million people. These people are not all university graduates; they are just trained, hard-working people. In Ethiopia, 1.4 million people join the labour markets that are willing to work and learn [every year].
The problem in Ethiopia now is a constraint in the supply chain. Take the leather sector. Chinese, Turkish, Indians and other investors are already here. Nevertheless, there are gaps in the chain between having cattle and exporting women’s gloves, quality bags, and shoes to the US or China. The cattle, the veterinary and the skin have to be looked after properly to develop the sector. The slaughtering has to be regulated because if people slaughter [the cattle] at home, the chance of their skin being damaged will increase. The tanneries now tell us that up to 60Pct of the hide they get are rejected because it is already damaged.
In addition, if animals are raised in the wild, their skin is exposed to shocks and damage, so it affects the quality of the end product. These are what need to be done before the final product is complete. Now the question must be if the government is thinking about all these in an integrated way or not.
Ethiopia plans to be a powerhouse in textile, but there is an acute shortage of cotton locally; and the foreign currency shortage hinders easy import of the raw material. I am wondering if industrialisation can be realised without developing agriculture first. I think there must be an agricultural surplus to be processed in industries; or is it the other way round that works?
Our LDCs report next month will be exactly about that. We will have a chapter on non-LDCs that have done well like China, Chile, Mauritius, and Vietnam, which brought growth and structural transformation, and that LDCs can take as lessons.
One thing we learn from these countries is that their industrialisation process started with agriculture. They used to be producers and exporters of sugarcane. Productivity improvement in agriculture is critical. Even more important is diversification in the sector.
Non-farming rural activity is not developed in LDCs. In other countries, we observe that before farmers go to cities, there are always alternative employment areas. About 70Pct of LDCs’ population live in rural areas. That is why rural development is very important.
In fact, even for industrialisation, for service sector development and creating employment, rural diversification is essential. Now the GTP II is trying to push manufacturing growth based on agriculture, which is a good thing.
Do you recommend countries to first develop their agriculture to industrialise or go for manufacturing to boost agricultural productivity?
If you look at fast-growing economies, they have done that together. If you say let us develop the agriculture sector first, then move to manufacturing or service, the problem will be that the moment you focus on agriculture, productivity will improve, and labour will be released. In addition, you have to find a way to employ the released labour [when industrialisation occurs]. Two [or maybe one person] will do [a job that once was completed by many people] when you move to invest in machineries and engage in industrialisation. What will the released people do then? That is the problem.
That is why the Chinese, Vietnamese and other developing countries have done it together. When you push agricultural productivity, labour will be pushed and you have to create employment opportunities for the released labour in the services or manufacturing sector. Therefore, the typical emerging economic model is to take it together.
Do you see that happening in Ethiopia?
They [the government] go for agricultural development-led industrialisation. They focus on agriculture; and no doubt productivity has improved in the sector and it is releasing labour. That is why [young farmers] cannot get jobs in rural areas and rather move to cities or go abroad.
The two sectors have to go together. For instance, Ethiopia wants to push on textiles; the companies are already here, but do they get cotton? Now farmers can shift to producing cotton; and this will lead to commercial farming too.
Let us take it the other way around; if you develop cotton first, it would be exported if there are no textile factories. One way is developing cotton without involving textile [companies], and the other is using textiles as the pull to go to cotton farming. There is always a debate on which should come first.
Another issue is if there is investment in agriculture and more products are available – for example, hide – then entrepreneurs come for it to make leather goods.
The UNCTAD says trade is the main driver of development. I would agree if it were about fair trade. In the current set up, LDCs export primary products whose price is either stable or declining. What’s more, developed countries subsidise their agriculture massively, which makes competition in the global market unfair. Furthermore, developed countries export industrial goods and services, the value of which constantly increases. This puts developing countries at a comparative disadvantage. For many, trade that takes place in such circumstances is a means of exploitation; what has the UNCTAD done to promote fair trade?
Trade is an engine of growth; no doubt about it. The question is how to make trade contribute more. Look at recently developed countries like China, Korea and Malaysia. What’s made them develop fast is trade. It is proven. The question is why some trade has helped some countries in creating employment and income surplus for investment, while other countries are trading but not creating employment, not reducing poverty fast.
For example, In Ethiopia, if you go to the coffee or teff growing areas, their income difference is [stark]. This is because coffee is exported and the farmers get higher prices. The problem with exporting agricultural products is someone else decides the price for the producer. That is why manufacturing is very important. If I am producing it with innovation and slight value addition, then I can sell it with a better price.
Trade definitely will generate opportunities for employment, income through foreign exchange, and allows countries to develop. We are learning that not all trade is [beneficial] and that is what we have to understand.
We know how Europe and America subsidise their farmers. That affects farmers in LDCs. What has UNCTAD done to change that?
This is why UNCTAD is always working with developing countries, helping them with the WTO negotiations by pointing out exactly this fact. A few thousand cotton growers in America get USD3.5billion a year in subsides [and thus] sell their production cheaper in the international market because they are highly subsidised.
Nevertheless, cotton growers in Burkina Faso or Chad with no subsidies are constrained to be competitive. Our role is highlighting this.
On the trade negotiation side, the WTO is the main forum. However, we do capacity building for LDCs and do the background for the negotiation so that they negotiate on these issues.
How do you see the cooperation between UNCTAD and the Ethiopian government? Are you welcomed or does the government usually keep its policy space tight and push you away?
No, it is the contrary. Our document [has been talking] about developmental states for a long time. We always advocate that countries should design their own policies, depending on their own constraints and capacities. Governments like this have respect for our work and Ethiopia is one. The way the government implements its policies, is more or less in tune to what we outline. For example, in our LDC report [from last year], we argued that public investment is critical for them to grow. That is in line with their thinking.
We did not do that to please the Ethiopian government. We believe in that. Public investment brought growth in Europe, China, and the USA. The infrastructure, roads, institutions, and universities once they are developed, they will contribute to the growth [of the economy].
In addition, the private sector is very important, as it produces wealth. It produces innovatively, creates huge jobs too. The sector might not be able to do the energy, roads and railway projects; [the government] has to do these investments so that the private sector later enjoys the advantages of the infrastructure.
I think the issue is striking a balance by making public investment in a way it does not discourage or crowd out the private sector.
Usually that is right. Nevertheless, sometimes, when the public sector sucks liquidity to do all these things, then the amount of money or liquidity left for the private sectors will be quite small. The government is also using development banks to target the private sector. They are allowing people to import whatever they need. These are efforts to encourage the private sector.
Sometimes when inflation goes up, government uses two types of instrument, to stop the inflation before it hurts too much. Occasionally it might take up money from the economy to contain the inflation. Because of that, they restrain the liquidity available for the private sector. The problem is how to balance the long-term interest of the country with the short-term costs.
Public investment is a long-term investment. The dilemma for people involved in policymaking is to understand these issues. They have to ask, ‘should we build this road now so that it encourages trade, even if it means using all the money we have, or, should we just simply start business activities so the road will come afterwards, maybe after tax?’ The problem would then be people complain saying there are no roads. It is the same as the agriculture issue. What makes policymaking difficult and complex is the need to get the balance, always seeking the balance.
Those Asian countries whom we think have it right usually laugh when we tell them that they have done it. They really tell us that they made many mistakes. The main thing they were good at was they learned fast and did not repeat mistakes. Otherwise, trial and error is part of the learning process. EBR
4th Year • October 16 – November 15 2015 • No. 32