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