What Can Ethiopia Learn from China’s Economic Reform?

1978 was one of the defining years for China. It was the year the then leader of China, Deng Xiaoping, who took power after the death of Chairman Mao Zedong, launched the economic reform that made China the global powerhouse of today.

41 years since its initiation, the economic reform has lifted over a billion people out of poverty, and transformed China from one of the poorest countries, into the world’s second largest economy. China’s economy grew very rapidly with a 9.5Pct on average annually. In the late 1970s, more than 90Pct of the Chinese population was living in extreme poverty. By 2015, that number plunged to 0.7Pct. Not only have the Chinese people escaped the poverty trap, but many of them are doing quite well. Per capita income grew by 62 times, reaching USD9,770 in 2018 from just USD156 in 1978.Due to the agricultural productivity growth, people moved vastly into cities. Now, about 60Pct of the population live in cities in comparison to 18Pct in 1978. With rapid industrialization and a GDP of USD13.6 trillion, China has now become the global industrial powerhouse.

Key Lessons for Ethiopia
The private sector was nonexistent in China before the economic reform. Industrial output was produced by collectively owned enterprises. Beijing started reforming the state-owned enterprises (SOEs) through undergoing big structural changes, turning them into private firms or closing them down.

The liberalization of agricultural farms as well as the restructuring and privatization of the SOEs laid the foundation for the market economy. The establishment of special economic zones (SEZ) further enhanced the journey to the market economy by attracting foreign investment.
Now, the private sector in China accounts for 60Pct of the gross domestic product (GDP). It is also responsible for 70Pct of the innovation and 80Pct of employment as well as contributing 90Pct toward exports. In contrast, over 10 million people in Ethiopia remain unemployed while an additional two million people join the workforce each year. The government cannot create millions of jobs unless the private sector is developed and able to absorb the enormous employment demand. In addition to the government’s effort to expand the role of the private sector through attracting foreign investment and constructing industrial parks, small and medium enterprises should also be supported enough to play their role.

Ethiopia’s recent decision to liberalize the economy and privatize state-owned companies in telecommunications, sugar factories, railway, electricity, aviation, and maritime transport and logistics is a big step, shifting from a public sector-led to a private sector-led development. It will also be crucial for the country’s economic growth to establish a stock market and join the World Trade Organization (WTO).
The second lesson Ethiopia should learn from China is regarding the involvement of foreign banks in the economy. Until now, the Big Four state banks operating in China dominate the banking business while foreign banks account for less than two percent of the total banking asset. The Big Four Chinese banks are also the largest commercial banks in the world.

Full opening of the Ethiopian financial sector to foreign investors will have an adverse effect on the economy. It is worth to note, the Asian Financial Crisis (1997-98) was mainly caused by the wrong speed and full external financial liberalization. Foreign capital inflow in the form of short-term commercial bank loans initially caused economic boom and an asset bubble in East Asian emerging markets. But later as the economy got worse, foreign investors pulled out their money causing currency speculation which eventually resulted in huge currency depreciation. This hindered loan repayment to foreign banks. The banking system froze up and demand dropped severely resulting in an economic recession. However, China was not hit by the crisis as it had not opened up financially.

The lesson, Ethiopia can open up its financial sector, but gradually and in the right order. Before external financial liberalization, the local banks and the banking supervision system must be strengthened.

The other lesson relates to the promotion of good quality education and knowledge transfer. The higher education system in China suffered tremendous losses during the Cultural Revolution. It had avoided and humiliated intellectuals and leaders who advocated for the western education system and labeled them as anti-communist and remnants of capitalism. However, Xiaoping reversed this and sent tens of thousands of young people to go abroad and study.

Moreover, the education reform in China expanded enrollments, with the objective of achieving universal primary and secondary education, increasing the number of schools and qualified teachers as well as developing the vocational and technical education.
Ethiopia’s success in expanding education is not deniable. Gross primary school enrollment grew from 22Pct in 1993 to 102Pct in 2015 while gross secondary enrollment rose from 11Pct to 35Pct within the same period. The number of tertiary students jumped from 34,000 in 1991 to 860,000 in 2017.

Despite these, the quality of the education system has been highly criticized. The new education road map, which is under formulation, must address the issues raising the criticism.

When it comes to lessons regarding improving agricultural production and productivity, China started the economic reform within the agricultural sector by scrapping the communist policy of collective farms and liberalizing the agricultural market. The government replaced the collective farming with a household-based system. Chinese farmers were given a plot of land for a certain period of years on a lease contract. The agricultural reform in China brought substantial agricultural productivity, and played an important role as the leading sector for the development other sectors. In addition, it influenced the growth of the township and village enterprises (TVEs), which became the engines of the rural industry. As labor productivity improved due to the agricultural reform, about half of the rural workforce was not needed anymore. TVEs then became important in accelerating growth by absorbing the rural surplus labor and contributing to the economy’s export performance.

It appears that Ethiopia’s Agricultural Development-Led Industrialization (ADLI), a policy which plans to achieve the initial industrialization through robust growth in agriculture, was adopted from China. But China’s plan on agricultural reform was very successful within less than a decade. The ADLI, however, which was implemented since 1994, fails to bring food security and structural shift towards industrialization, making the country still dependent on food aid. To note, agriculture provides about 85Pct of employment and close to 90Pct of export proceedings. This demonstrates that ADLI’s focus on agriculture, land ownership insecurity, absence of large-scale commercial farms and other weaknesses must be revised. In addition, Ethiopia needs to transform its traditional rain-fed agriculture technology

The final lesson is about the need for experimentation, which was one of the chief factors in the growth of China. Xiaoping’s‘ philosophy dubbed ‘Crossing the river by feeling the stones’, became the guiding principle of the Chinese economic reform. Each reform initiative starts on a small scale in a few provinces, tested and if proven successful, would be scaled up throughout the country. When breaking-up the collective farms, the government started in a few provinces. Observing the high productivity of those farms, it then rolled out the strategy throughout the country. Similarly, the opening up of industrial zones was first started in two provinces and then expanded to 14 provinces.

Not only is it experimental in terms of geography, but the different features of the reform also evolved through time.

While similarities and lessons for Ethiopia are evident, it takes a collective input to continuously forge a customized reform path that with ensure the country’s sustainable economic and financial growth.

8th Year • Aug.16 – Sep.15 2019 • No. 77

Tamrat Abera

who holds an MBA from the University of Bologna in Italy, is a financial expert. He can be reached at tamrat.amboma@gmail.com

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