The paradox in the Ethiopian Economy

By Mastewal Dessalew

It is a cliché from the Ethiopian government that the Ethiopian Economy has recorded a double digit growth in the past eight or nine years. Though there are many who questions the rate, the government is adamant to accept a rate less than double digit. It asserts its argument by citing the construction of roads, hydroelectric dams and sky scrapers in big cities as indicators of fast economic growth in the country. On the other hand, unbridled inflation is deteriorating the real income and the purchasing power of the people in the same period; for example according to index mundi inflation rate in the country in the past decade was increasing and in its climax it was 25 percent in 2008 and 36 percent in 2009. Why the living standard of the people is deteriorating amidst the presence of fast economic growth? The defunct Prime Minister Meles was asked this question 7 years ago and he responded “the inflation is caused by the economic growth itself and the growth itself will solve the problem in the long run”. Yet after seven years, the problem is getting worse than showing improvement. Thus, why the problem persists? Even though the problem has different sources, it can be broadly categorized in to two: first, the source of the economic growth and second the economic and political structure of the country.
In short economic growth means creating additional wealth in the economy. If we closely scrutinize the additional wealth created in Ethiopia, it is mainly roads, hydroelectric dams and buildings in cities. On the other hand, if we see the source of the funding of this projects, it is mainly either from foreign aid, loan and printing of currency. Following the emergence of Islamic courts union in Somalia in 2006 and its heir Alshabab since then, Ethiopia has garnered billions of dollar every year from the west by making itself a strategic partner in the fight against terrorism. The influx of such huge amount of money to the Ethiopian economy could not bring significant structural change in the industry and agricultural sector of the economy, instead it lead to the bulging of the service sector. Lack of significant change in the industry and agricultural sector of the country while enormous amount of money is injected in the economy resulted in high inflation. The national bank of Ethiopia is also criticized for fueling the inflation by recklessly printing currency to finance projects.
Even though the money spent to finance infrastructural projects has brought inflation, it has also helped to decrease the cost of production and transportation cost by improving the infrastructure. In addition, based on the economic principle of money creates money, the money injected to the economy has created additional wealth mainly in the service sector. Yet the wealth created is not managed by strong political and economic institutes that resulted in most of the wealth to end up in the hand of few. Those few people who are able to amass the wealth do not want to invest it in relatively risky and competitive industry sector rather they create alliance with corrupt officials to easily get expensive urban land for the construction of buildings in urban areas to be used or rented for the burgeoning service sector.
On the other hand, rampant corruption in the urban land administration system of the country is impeding newly emerging potential entrepreneurs not to easily get land for their business. This makes the competition ground for new comers versus established businesses to be highly unleveled and then hinder the emergence of new innovative businesses. In addition, most of those wealthy people and big companies are in one way or another related to the ruling party and they are paying less than the amount of tax they are expected to pay. They are also wary of future political upheaval and change and then prepare for it by depositing their money in foreign banks; corrupt officials also do the same. Here it is worth mentioning that according to financial transparency international coalition Ethiopia had lost 11.7 billion dollar from 2000 to 2009 due to illicit financial flow.
To sum up, if the economy of Ethiopia has to grow healthy, the economic and political institutes that regulate and directly affect its economy shall be improved. Heavy dependence of the country on foreign aid and loan shall also be systematically decreased by offsetting the gap through improving internal revenue collection performance. Part of the money gained from aid and loan shall also be directed to improve the industrial and agricultural sectors side by side with infrastructural expansion. The national bank of Ethiopia shall also act responsibly based on economic principles when it mints currency. Most importantly the ever increasing trend of corruption in the country shall be halted by strengthening transparency and accountability through transition to multi-party system as well as establishing independent judiciary and mass media.

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