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Economics
as a discipline is concerned with the allocation of scarce
resources to satisfy human needs, and economic policy deals
with finding solutions to a variety of economic problems.
That is why economics is regarded as the highest expression
of politics, by whose yardstick politicians are judged.
This is
the very first cardinal principle that every democratic
government must recognize. The raison d’etre of any
government is the welfare of the people it governs. Rightly,
therefore, the current public concern on soaring costs of
living can only be explained judiciously by linking
underlying development problems with policies, and
evaluating their impact on the welfare of the people.
Rate of
economic growth is generally accepted as a measure of the
health of an economy, and not necessarily of people’s
welfare. Inflation, interest rate, budget, market . . .
(macro economic indicators) are inanimate phenomena,
possessing greater power than the highest authorities of
states do, and no court has jurisdiction over them. Yet,
they are wrongly demonized, battered, and blamed for the
misfortunes of many. There are no mysteries about them; they
are all man-made and are, by and large, results of public
policies, or lack thereof, hence subject to public scrutiny.
The
attainment of a high rate of economic growth relates to the
performance of the national economy, and does not
necessarily imply fair distribution of national income and a
corresponding growth in the standard of living of the
people. The average per capita income is a hypothetical
concept, far away from reality. What count most to the
ordinary citizen are disposable income and the level of
prices, which determine purchasing power.
If, for
example, the major source of growth were agriculture, as it
is in Ethiopia, it would be reasonable to expect an increase
in average income in this sector. Hence, income growth
becomes proportional to the sector’s share in investment.
Unless there are deliberate efforts through policies
(fiscal, monetary, and investment) to distribute income, the
market mechanisms would take several years to make such
desired adjustments.
The
impact of rate of economic growth and eventual
transformation can best be understood if viewed in terms of
its long-term sustainability. Not surprisingly, the
double-digit rate of growth achieved during the past few
years has evoked euphoric public response if the economy has
grown by at least 40pc; it is natural for people to expect a
change in their living condition, including employment
opportunities for youth.
Stability
in prices and improvement in income are not unreasonable
expectations. Creating and managing expectations are
difficult for any government.
Why is it
that the economy has grown by so much, and yet it is not
visibly felt in the lives of the people? Why is the economy
getting fatter, while we are growing thinner?
These are
legitimate questions.
An
economy consists of different sectors: agriculture,
manufacturing, mining, energy, transport, communications,
banking, tourism, etc. The contribution of each sector to
the growth of the national economy depends upon the size of
investment and its output. For instance, if there is a real
and significant increase of marketable production, farmers’
income would increase; demand for industries go up,
employment rises, taxable capacity equally moves upward, and
non-farm consumers benefit from either stable or reduced
prices. However, in spite of a large increase in production,
prices increased.
What may
have happened?
The
figures announced may have been overstated, and the source
of growth not fully explained. It could also be the figures
may be correct, but the mouths to be fed may have been
understated (increase in population); or farmers’ per capita
consumptions may have been increased.
Whatever
the cause, the reality is that production was not sufficient
enough to meet needs. Demand has outstripped supply. As a
large proportion of the income of the individual is spent on
food, any income rise is wiped out by inflation. Recent
price increases for basic food products may not have
benefited farmers either, as much as grain traders. Future
expectation of similar prices by farmers may not lead to
price reductions in the short term.
Farm
consumption surveys should be regularly updated and
production forecast improved. Already, we are seeing signs
of cracks in production and export objectives, as manifested
by high prices for staple foods. If the agricultural sector
is the major source of the double-digit growth, the
contributing factors need to be explained.
Is there
a breakthrough with new technology? Growth in farm income
will increase effective demand for industrial products. How
did the local manufacturing sector respond? What are the
backward and forward linkages to this growth? How would
increase in fertilizers’ prices affect costs and prices? How
would the government mitigate such situations?
The
methodology, frequency and reliability of surveys should be
closely examined. Estimation of marketable supply should be
determined.
At an
average annual rate of a population growth of 2.5pc,
population grows by approximately two million per year. If
the agricultural sector is expected to feed 80 million
people, and an additional two million each year (meeting
minimum caloric and nutritional standard), as well as
generate surplus for export, a fundamental change in the
structure of agricultural production, combined with sound
population policy become necessary and urgent.
The
economic history of Europe and the United States demonstrate
that unless large-scale commercial farms are promoted
aggressively, the country’s ability to feed itself - let
alone other countries - remains a piped dream and it could
not extricate itself from perennial food-aid syndrome. Oxen
technology and fragmented smallholdings will not advance
agriculture to meet the growing needs of the country. While
rain-fed agriculture will continue to play its role, there
is a need to develop a new water culture, that includes
water harvesting, controlling soil and water erosion,
developing small-scale irrigation and heavy investment in
irrigation, wherever feasible, must be a priority.
Modernizing the livestock sector is confronted by numerous
challenges, which require special attention. The experience
of successful countries clearly demonstrate that modernizing
the livestock sector is linked to controlling animal
diseases, and the development of animal feed industry, which
in turn is hinged to a well-developed cereal production
base. This sector can make an enormous contribution to
future growth in income and transform agriculture.
On the
short term, reserving a green belt around the city of Addis
Abeba for intensive feeding of livestock and production of
other vegetable and food crops may alleviate food shortages
by encouraging commercialization.
In almost
all countries (China and India included), that have achieved
double-digit growth, foreign direct investment (FDI) has
increased pronouncedly. In Southern Africa, FDI in the
textile sector has expanded cotton cultivation considerably.
Why did
Ethiopia fail to attract sizeable FDI in the agricultural
sector, in spite of a large potential market? Is
sustainability being questioned? Are ownership of lands,
price control measures, and bureaucratic impediments scaring
foreign investors? Why are more local investments, including
those of the Diaspora, flowing into real estate and not to
agriculture?
The
relative size of FDI flowing into a country is an indication
of not only opportunities, but sound policies and
sustainability.
It is not
difficult to note the huge contribution that the policy of
removing restrictions on home ownership has made in urban
investment and development. This should serve as reliable
encouragement to the government to pursue vigorously
privatization of public enterprises. The strong and
unassailable argument in favor of privatization is
productivity and efficiency.
Telecommunication and housing should claim top priority. The
country should not be forced to adopt such a policy to
appease the World Bank, the IMF or other multilateral
organizations. The need must emanate from within. The
underlying causes of inefficiency, incompetence, high costs
and low returns cry for change, and privatization in terms
of management or ownership, appear to be the only way out.
Experiences of Eastern Europe after the fall of the Soviet
Union and neighbouring countries have demonstrated the
enormous impact of privatization in attracting foreign
direct investment and stimulation of economic growth. Where
state ownership is strategically justified, competent and
competitive management must be installed.
Price
Control or improving the market?
Increases
in prices of products are manifestations of a shortage of
supply, relative to demand or increase in costs of
production. The policy, choice and approach, therefore,
should be in tackling the underlying problems.
In a
market economy, the attempt by the state to influence the
market through price control will not only distort market
forces, but also aggravate the impact of rising prices
through hoarding at all levels of the supply chain.
Reduction of prices, motivated by fear, is usually
short-lived. An intervening state, to be effective, must be
part of the market players by creating an institutional
capacity to release supply of selected products to control
prices.
Encouraging farmers to increase production on one hand, and
telling them at what prices they should sell is an
incongruent policy that neither promotes production, nor
controls prices. In view of the present international market
circumstances for agricultural products and the short term
inability of Ethiopia to tackle the underlying problems of
production and be self sufficient; rising prices will
continue to be belligerent.
Improvement of market information, reduction of transaction
costs, proper licensing of warehouses and transportation
efficiency could contribute towards reduction of prices and
proper functioning of the market.
When we
talk about the market, it is important to recognize the
distinction between production and supply. In Ethiopia, over
80pc of the population is engaged in subsistence
agriculture, most of the production is consumed there, and
what is left over is brought to the market. It is that
portion called marketable supply which influences prices.
There may be a significant increase in production, and yet
the marketable supply might have contracted. These may be
because of increase in per capita consumption of the
farmers, feeding enormous increase of population in the
rural areas, and a build up of stocks.
For the
peasant farmer, what he markets depends upon what he
essentially needs to buy. With increases in farm income,
improvement in the caloric and nutritional intake and a
better standard of living may be expected, for an increase
in marketable supply will largely depend on the increase in
the quality of life (purchasing power) of the peasants. An
increase in production is a result of a corresponding
expansion in areas under production, the level of inputs and
management. Any one of these factors influences the size of
production. The peasants are rational producers.
If they
can maximize their income by limiting the acreage on
cereals, and increase the production of cash crops (pulses
and oil seeds), they would do so. Allocation of areas
depends not on national needs, but largely on obtaining
higher income (the market). The challenge, therefore, is to
what extent government policies can influence the mix. What
is definitely evident is that it would be very difficult to
influence allocation of crops on widely scattered and
fragmented smallholdings.
Even if a
sustainable average of 10pc annual economic growth is
achieved over the next 20 years, in 2030, estimated GDP will
reach 76 billion dollars, and the size of the population 125
million. The average per capita income will be 630 dollars.
Nonetheless, this will by no means translate into a major
transformation of the economy and improvement of the
people’s welfare.
What this
implies is that due to the huge backlog, Ethiopia must have
a highly expanding modern agricultural sector (including
agro-processing), to raise meaningfully the average income,
reduce poverty, achieve the foreign exchange objective and
provide resources for the other sectors of the economy. We
should not be oblivious to the fact that goal posts are
moving daily in this globally competitive economy.
True,
peasant agriculture would continue to play a role in
Ethiopia, and still has an in-built capacity to grow. But
the enormity of production expectations is such that
alternative solutions must be sought.
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