የኢትዮዽያውያን ዴሞክራቶች ድረ-ገፅEthiopian Democrats' Website

Building Institutions to Ensure Sustainable Growth

By: Abis Getachew Makuria:  abisgetachew@yahoo.com

Though there are different factors that determine the economic growth, economists agree that huge capital accumulation is the source of economic growth in the proximate growth models. Some countries are able to attract massive capital while others fail to do so. According to the principles of fundamental sources of growth, political, legal and in general institutional setup are the most important factors in attracting foreign direct investment (FDI).

Ethiopia is exhibiting an average of 11.5% of economic growth attracting large amount of foreign investment for the last 5 years. Is this because of the institutional setup that prevails in the country? By looking at the institutional framework of Ethiopia it is possible to reject this hypothesis. The essence of institutional framework refers to stability, market predictability, smooth flow of information and enforcement of law.

Stability:  refers to both political and economic stability. In Ethiopia it is very hard to say there is political stability that can attract huge FDI from abroad. Political instability is not expressed on street protests or the existence of gorilla fighting, but having 99.6% of the parliament seat by the hand of the ruling party shows that there is political instability in the country one way or another.

The high and volatile inflation that is becoming one of the characteristics of the country’s economy is the other evidence of the macroeconomic instability in the country. Such instabilities reduce the confidence of investors to come. Even commercial banks face difficulties in incorporating the volatile inflation on the interest rate they charge from the lender that makes them have tight lending policy. (Fortunately, due to interference of government on banks this transmission is not much visible). In general, instability reduces the optimal point of achieving economic growth.

Market predictability: Different markets (the goods and the labor market) are not predictable in our country mainly due to the government interventionist policies. To name some of these policies; the unprecedented price cap and the large and unexpected amount of tax that is levied on the business community. These measures created panic on all stakeholders in the business chain; from the producer to the consumer. In an economy full of such panics it’s difficult to get the expected FDI.

Flow of information: Flow of information from policy makers/government bodies to the business community and the ordinary citizens is not smooth. A good example for this is the recent land lease policy. Government bodies, even at the ministerial level, couldn’t explain well about the policy. This creates uncertainty on citizens. In a situation where citizens are uncertain about their country’s policies, it is unwise to expect foreign investor to come and invest in the country.

Law enforcement: In the New Institutional Economics, governance is all about enforcement of the law. Having laws, regulations and rules by themselves do not ensure the rule of law. Investors and citizens become confident when the rule applies to all without any discrimination. But the fact on the ground shows that the judicial body of the government is under complete control of the executive branch. There is no guarantee for an investor to be protected from injustice that may be committed on it by the executive branch. And it has become a norm to see the aristocrats doing injustice on citizens and non citizens alike.

Having these in mind one can say that Ethiopia is far away from fundamental sources of growth that help to attract FDI. In contrary, the data reveals that the country is attracting huge FDI. This “Ethiopian Paradox” is a great puzzle for all? The writer of this article forwards two hypotheses for the growth highly linked to the global phenomenon.

The first is the transfer of the global economic power balance from West to East. China and India are the top foreign investors in the country, by number of investments they have. China is currently the second big economy in the world and with the current growth trend it is expected to be the first before long.

China with ill suited institutions is highly attracted by not only the natural resources of Ethiopia but also with the ideological match between the ruling parties of both countries. China has invested in many African countries but apart from natural resources sector, Ethiopia has the lion’s share of China’s investment in Africa. Though it has to be appreciated that we are attracting investment, it is up to the government to check the wellbeing and sustainability of the economic growth.

Secondly, the East with high reserve in their Central banks is left with no choice of investment. The financial crisis and the debt crisis in the West, has forced the rising giants in the East to tighten their financial investment in the West. This situation invited the East to involve in real investment which is Africa well suited for such investments. Our country is one of the preferred African countries with the reason of the virginity of its land and proximity to market. Though the institutional setup is incomplete, it is mainly the lack of choice that has made Eastern countries to turn their face to us. This lack of choice of course has given a “policy space” to our government.

This global situation is good chance for our country to sustain the started economic growth by building institutions. By doing so, investment can be attracted from different parts of the world. If investment is attracted from one or two countries then any kind of economic downturn in these countries will have a direct negative impact on ours too. Thus, by creating institutional system it is possible to reduce the risk associated with dependency on one or two countries FDI.

Any rational man doesn’t doubt the strong commitment of the government to tackle poverty and to achieve high economic growth. There is also a wide consensus among all Ethiopians that there exists an economic growth. But the concern comes when its sustainability question is raised.

It is known that any concern of citizens will have a direct negative effect on the capital accumulation process. Thus, to ensure the sustainability the feeling of belongingness must bear in all citizens. In order to achieve this, strengthening the institutional system is of no choice. Democratic style of governance is one way of institutional framework. Such a system is not only a deal of majority vote, but must also include sense of individual liberty and freedom of citizens to comment on any issue about their country without any fear. The world has experienced that an institutional setup developed in a democratic system is the most sustainable way of ensuring economic growth, so that development can follow. This is the best time that Ethiopia can learn from the world and from its history for the wellness of its children.

The author of this article is responsible for this commentary.

By: Abis Getachew Makuria   abisgetachew@yahoo.com