POWr Social Media Icons

Sunday, September 8, 2013

Pragmatism seems to be a typical trait in the EPRDF camp, even if it has been declining lately. Since coming to power in 1991, the Revolutionary Democrats have gone through what can arguably be described as a rough policy ride. It is all connected to the timing of their ascendancy to power.
The end of the cold war, which saw a dichotomous world of ideological submissions, followed by the collapse of the Soviet Union, brought the economic model of the West to the fore, with no meaningful competition. Capitalism became the buzzword of the day, while democracy is considered the peerless system of governance.
Devoted socialists themselves, the EPRDFites were faced with a confusing global reality that made making choices all the more difficult. On the one hand, their long overdue socialist inclination provided them with ideological instruments to bash the fundamentals of capitalism in all its forms. On the other, the rise of capitalism was a force impossible to ignore for any force aspiring to govern a nation.
This confusion was visible in the policy choices of the EPRDFites during their early days. Whereas they declare their system as ‘white capitalism’ – to mean that it sticks to the fundamentals of a market-based system – they didn’t want to drop their socialist distaste to small government. Pushed by the tide of time, however, they eventually declared the liberalisation of most sectors of the economy to the private sector.
One aspect of the declaration was the privatisation of enterprises owned by the state. Of course, the push factor for the effort came from the powerful Bretton Woods Institutions, the International Monetary Fund (IMF) and the World Bank (WB), which attached conditions to their loans. Even then, the local economic reality was more forceful than the international push to make the EPRDFites settle for a deregulated future.
Shedding public enterprises from government ownership started with a relatively grand ambition. Projections at that time were so optimistic that the whole project was envisioned to be completed within 20 years.
This seemed to provide some comfort for the bureaucrats at Bretton Woods, persuading them to release some funds to the insolvent EPRDFites. The resistance of the ruling Revolutionary Democrats to liberalise the financial and telecom sectors was by far the biggest hindrance to the release of all possible funds by the financial institutions.
Of course, as was revealed later, the pivotal role in the resistance to the demands of the institutions was played by the late Meles Zenawi, who was the president of the nation at that time. As if to show his disappointment by what happened, Meles had been fighting hard for a relatively wider policy space, free of the influence of both the IMF and the WB, in every opportunity he had until his death.
The privatisation project that started under ideological confusion and external imposition has transferred 285 enterprises to the private sector until 2010. Its speed is decreasing, with 211 of the enterprises transferred between 1995 and 2000, and the other 74 between 2005 and 2010.
Apparently, this transfer has provided the government with a total of 5.5 billion Br in revenue. After 22 years of implementation, however, the effort is yet to be completed. Many enterprises are still in the hands of the government.
An event even more confusing unfolded in 2009. A change in approach was introduced, whereby the agency delegated with the responsibility of implementing orderly privatisation – the Privatisation & Public Enterprises Supervising Agency (PPESA) – was given a new mandate of helping the establishment of new public enterprises, including fertiliser and edible oil factories. This turn in approach was a showcase of the changing mindset of the EPRDFites towards the role of the state in the economy.
If anything, it was the developmental approach to privatisation. It goes like riding a cart pulled by two horses facing different directions. It involved transferring some enterprises to private owners, while establishing other new ones.
If one is to go by both textbook economics and the latest research evidences, government is neither fit nor efficient in managing profit-oriented enterprises. Managing such beasts is better done by the private sector.
This has a lot to do with the inherent incentives of economic engagements. Optimising profits is the inherent incentive of private businesses. A government focusing more on profit, however, will face a serious conflict of interest with its inherent objective of guarding the social good.
A bureaucratic complexity true to any government also reduces the efficiency factor of managing enterprises. A reduction in the efficiency factor will eventually have an impact on the profit margin of enterprises, which in turn, defines the viability of a given management arrangement.
Cognisant of the inherent limitations of government, it is widely believed that private enterprises are the best fit to manage profit-oriented enterprises. Government, on the other hand, is the best fit for regulating the market and correcting market failures. A system arranged on such a division of labour, wherein both markets and the government undertake tasks which they are effective and efficient at, has the highest probability of sustaining growth.
For a developing economy, such as Ethiopia’s, sustaining growth requires unleashing every possible opportunity of enhancing productivity. No doubt that letting the privatisation train go full steam could be one way of enhancing the productivity dividend of the Ethiopian economy.
There seems to be some positive signals from the EPRDF camp that full-swing privatisation is their preferred approach. Their choice of adopting the transfer of enterprises through full ownership, rather than joint ventures and renting, could be a showcase to this changing trend.
But, the speed of privatisation is still slow in comparison to the early days. Further complicating the whole issue is the establishment of new profit-oriented enterprises under the PPESA.
So much as the EPRDFites have now found the chance to witness the benefits of market-based reforms, ushered by their freewill, they ought to make a better choice for the sustainable growth of the nation’s economy. Sustainable economic growth could be facilitated if the whole privatisation project is reoriented towards limiting the government to its fitting task of regulation.
Trying to ride a cart pulled by two horses facing different direction will only inflate the cost of the ride. Analogously, it is costly, ineffective and unviable to run a privatisation project in parallel to a public enterprises establishment scheme.
What would instead be fitting and viable is to give the market its due by enabling the whole privatisation effort to go at full-speed. Instead of creating new breeds of enterprises, with little or no corrective impacts on market failures, the EPRDFites ought to refocus the state they lead towards its regulatory role.
If anything, the current trend of the privatisation project requires the revolutionary pragmatism of the 1990s, which favoured the private sector.