Macroeconomic Conditions and the Political Economy of Growth in Ethiopia

1. Macroeconomic Conditions and the Political Economy of Growth in Ethiopia (Lecture for Defense College) Alemayehu Geda , Dept of Economics, Addis Ababa University Addis Ababa 2007.

2. An Overview of the Presentation • An Overview of Globalization & Africa • Trade, Growth and Poverty in Africa • Prospects of the Global economy and Africa • Impact of Emerging Economies: China and India (Surge in Commodity price, Industrialization etc) • The Ethiopian Macro Context • The Political Economy of Growth in Ethiopia • Conclusion: Challenges and Opportunities for Africa

3. References used for the Lecture • Macroeconomic Performance in Post-Derg Ethiopia, Journal of Northeast African Studies (Michigan Univ. Press, 2005) • The Political Economy of Growth in Ethiopia (Cambridge African Economic History Series, 2007) • The Impact of China and India on Africa: A Framework Paper, AERC, Nairobi, 2006

4. The Global and African Macro Context The Global and African Macro Context

5. Trade, Growth and Poverty in Africa • Africa is linked to the world economy through trade and finance • Its share of the world trade has declined (about 2%) and finance is largely aid related/debt creating • This small amount of trade and finance is central for Africa (about 60% of GDP) • With globalization we noted growth in Africa • However, poverty has increased (& inequality might be the culprit).

7. Prospects of the Global Economy • Slow down in the US Economy, Japan (but EU ok) • Global commodity prices expected to increase • Global finance for Africa is also expected to grow • US deficit, oil price (for importers) will continue as a problem

8. Emerging Economies: China and India’s Impact on Africa

11. Emerging Economies: The Asian Drivers and Africa • The impact of the Asian Drivers (China and India) is a challenge and an opportunity • Trade b/n African and China surged from $3 billion in 1995 to $32 billion last year, estimated to over 50% this year ( though Africa make up only 2.3 % of China’s world trade). • Currently close to $400 billion/2014

12. Emerging Economies ….Cont’d • This constitutes about 10% of Africa’s world trade. This trade is expected to more than double by 2010. [it does already1] • For some it is important: in 2005: for Sudan 70% which was 10% in 1995, Burkina Faso about 33% which was none before; Ethiopia about 13% which was none before.

13. Emerging Economies ….Cont’d • China is also contributing about $1 billion out of 15 billion foreign investment Africa received in 2004. • For some China’s investment is huge. China promised to invest about $4 billion in Nigeria (in return for oil rights) • offer Angola $4 billion concessional credit – debt being to be paid in oil

14. Emerging Economies ….Cont’d • pattern of trade is shifting from traditional partner the EU away to Asia/US • EU declining from 44 to 32% & US increase from 11 to 19% - 1995-2005). • We look at it through the vector of trade and FDI.

15. Impact Analysis: Trade and FDI Impact • There is a need for Impact Analysis (see AERC, Nairobi) • Trade Impact: The Asian Drivers and African Manufacturing • FDI Impact: The Asian Drivers and African Manufacturing

16. The Political Economy of Growth in Ethiopia

17. The Ethiopian Macroeconomic Environment • Gebre-hiwot: Conflict & unequal Trade

18. Major Patterns of Growth and Periodization • Political economy factors matter a lot (see below) • Growth (in particular its sustainability) depends on external shocks too ( Agrl, Weather, trade shocks) • Poor policy accentuated poor growth Performance

19. Three distinctive regimes • Imperial (lose control) --1974 • Derg (hard control) – 1974-1991 • EPRDF (Fairly liberal) 1991-now

20. The Macro-Growth Performance • GDP and Sector Growth and Forecast

21. Figure 1 : GDP and Agr Growth Rates

22. Figure 2: Rainfall and GDP Growth

23. 2.1 The C-B Growth Accounting

24. 2.1 The C-B Growth Accounting • Capital explains / Goes with periodization • Capital’s role decelerated in the latest 2 regimes • Contribution of Education/worker weak across regimes • TFP virtually weak – correlates with weather

25. Table 2.3: A Growth Accounting Exercise for Ethiopia in the Last Decade (2000-2010)Note: The growth accounting is based on the result of econometric estimation reported in Alemayehu and Befekadu (2005) and Alemayehu et al (2008). Using various models (both macro and micro) these studies have come up with the capital share coefficient (β) that ranges from 0.28 to 0.36. We have used 0.30. The capital stock is generated using the perpetual method (Geda, 2013/14).

26. 2.2 Chenery-Syrquin/Structural change: • No structural change • Performance half below expectation

27. 2.2 Chenery-Syrquin/Structural change:

28. Figure 3: Structural Change

29. Macro Stability and Macro Policy • Macro Stability in Ethiopian is related to: • Rainfall • External Shock (World Coffee and Oil Price + Aid) • Regional Security • Macro Policy (eg. Money SS/Printing) • Policy Implications of this contracts with US and EU (Fiscal and Monetary policy is no central)

30. 2.3 Augmented Solow & the Conditional (O-N) Models: • Growth below prediction • Significant Negative (2nd) and Positive (3rd) time dummy • O-N show same but dramatically • The Base variables are the most important • Public spending within the policy variables is important • Policy improved but not unsustainable

31. 2.3 Augmented Solow & the Conditional (O-N) Models:

32. Political Economy (of Growth in Ethiopia) • Politics matter: History: war with different ideology • Land is the dynamics behind politics/regime shift • External shock can trigger / oil crisis • Detrimental effect: abrupt change, running by new owners, disruption • Shaped the natures of state (militaristic) and institutions which are not developmental (but aimed at controlling power & resoruces) • Reform and politics: • Int’l context/cold war, • external endorsement/ shattered economy, decentralization

33. Political Risk & Percapita Income

34. Politics shaped: Markets, Institutions and agents behavior • Product Market: Mover from controlled to liberalized over time • The Labour Market: Urban Phenomena/Informal sector is crucial • The Land Market: • Land is as much political as economic • Shadow land market • Financial Market: Build=> Nationalize=> Privatize

35. Politics & Policy shaped Micro Level Agents behavioru • General: Risk increased over time: policy, shock/regime shift • Rural: (see next slide) • Natural risk • Frequent Distn of land • Inputs are important (credit/fertilizer) • Urban: very small, shock by Nationalization

36. Evidence on Micro Aspect/Agrl/

37. Conclusion on Ethiopia & Note on Botswan • Growth modest, but structural change absent • Political & Institutional factors fundamental (regional distribution) • Pattern of growth, nature of control and TFP correlated but: TFP is worst in the 2nd (Controlled )regime • Growth is associated with external shock too (in the context of weak markets). Thus Unsustainable growth (owing to shocks!)

38. Botswan: Lesson from African • Botswana exhibited most of the problems identified for Africa’s growth problem • yet grew at 6% for last 35 years, & with export success, • why? • Maintained good institutions (historic factor) • Botswana chose prudent fiscal and macroeconomic direction

39. Botswana …Cont’d • avoided 'Dutch-Disease'-by not engaging in excessive spending of the export windfalls • It managed a stable exchange rate • Its participation in the SACU limited lobbying for favours in the trade arena (agency of restraint) • The public sector allocated resources based on economic and social returns • was successful with foreign investors; and state investment in education,

40. Botswana …Cont’d • Why Botswana had good policies while other African do not? • good policies were complemented by good institutions-what they refer to as institutions of private property • Four factors have contributed significantly to the formation and preservation of these institutions • (1) possessed relatively inclusive pre-colonial institutions that put bounds on how the political elite functioned. • (2) The second is the minimal impact of British colonialism on the traditional institutions that scrutinized how the elite behaved. T

41. Botswana …Cont’d • (3) after independence, the elite in Botswana found it in their best interest to preserve the institutions of private property. • (4) Botswana was rich in diamonds, the export profit of which created enough rents for so that no group found it in its best interest to challenge the status quo.. • Success of Botswana depended on good institutions is only a proximate answer . • why has Botswana such good institutions when the rest of Africa is devoid of them?

42. Botswana …Cont’d • well-enforced property rights were in the interest of the Botswana’s political elite in the aftermath of independence • By the mid 70’s the income from diamonds outstripped that of ranching income, but the elite did not rush to expropriate , particularly, two reasons. • One was that the elite did not feel threatened by the prospects of growth (slim chance that the elite became political losers deterred them from working towards the destruction of the good institutions – • The little risk that the Botswana elite faced in pursuing developmental policies was not shared by other African countries, where developmental policies only worked to dispossess traditional political institutions

43. Botswana …Cont’d • second constraints placed by institutions such as the Kgotla may have ensured the accountability of institutions; forced the elite to opt for the enforcement of their property rights. • These institutions assured that there were no political instabilities. ( leaders forging an unlikely coalition between tribal chiefs, cattle owners and the BDP-the ruling party against colonialism) • good policies promoted rapid accumulation, investment and a socially efficient exploitation of resource rents.

44. Botswana …Cont’d • Botswana’s growth has been a juxtaposition of good institutions-good policies-resource rents [primarily the export of diamonds, and export incomes from cattle ranching prior to the 70’s]. • Harvey (1992): rural origin of political leadership that contributed to export agriculture escaping the ‘wrath of tax policy’, unlike other SSA where the social origins of the elites are urban and export taxes are exorbitant. • END (See Next Slide for Conclusion)

45. Botswana …Cont’d