Government says growth is there - citizens don't seem to see it

People in the street noted in interviews after interviews on the national television that the cost of basic goods has increased faster than wages, making it increasingly difficult for ordinary low income families to afford to even eat two meals a day. Citizens are claiming that life is getting tougher, and getting worse.

Now if you think things are tough for low income workers and the poor? Well, open your heart. Consider the plight of the affluent. Rent for three bedroom villa starts at ETB 12,000, and the price of a BMW is topping ETB one million. This time the affluent are doomed to chasing high-priced luxury objects that will be beyond their income all of their lives. Unfortunately for the poor, it looks like luxury goods are also pulling up prices of basic necessities.

In the past few weeks, if you spend a small amount of time each day reading the Government newspapers you could easily come away with the impression that there is a positive correlation between growth and prices. Officials seem to say that "growth causes higher prices". How can this be?

Economic growth is the production of more goods and services, so it should be intuitively obvious that unless the money used within the economy is somehow being devalued then economic growth will generally lead to lower, not higher, prices. Or, putting it another way: it should be intuitively obvious that unless there is a change in the value of money then economic growth will result in the same money chasing a greater supply of goods and services, with the result being downward pressure on the general price level. In determining the true reasons behind an economy-wide rise in prices the overriding focus must therefore be on the things that alter the value of money, chief among these being changes in the money supply and, by extension, the central bank.

Many of those interviewed in the street seem to suggest that the price hike was the result of recent increases in fuel price causing prices to rise throughout the economy. This is debatable. But more probably simple economics theory, as explained earlier, suggests that in the absence of an increase in the total supply of money a price rise in one area of the economy (the energy sector in this case) would have to be offset by a price fall somewhere else. If that is the case one could argue government must be printing money. There are indications this is the case.

The whole argument advanced by officials associating price increase with economic growth is right if real growth were driven by increasing consumption, if that is true it is possible to make the case that both the money supply and the general price level could be pushed upward by increasing aggregate demand. However, it should be obvious that in order for someone to consume more they must first produce more. Farmers in the past few years have been doing just that.

In the past successive three years, Ethiopia has experienced growth averaging over 7%. Growth is fundamental to development and thus the advancement of human welfare. Some argue that an expanding economy can coexist with problems of income inequality and poverty. They point out that economic growth does not always lead to improvements in say, health and education, and conversely that improvements in health and education are not necessarily dependent on economic growth.

Now, the most important question to answer is whether Ethiopia registered growth that causes the gap between rich and poor to reduce (converge) or to increase (diverge). If growth causes convergence, the country's poor communities will "catch up" with the nation's richest. If it causes divergence, the rich will get richer and the poor, poorer. If growth is more concentrated in the rural areas why then international reports indicate that Ethiopia is witnessing an increasing gap between rich and poor, pervasive corruption, and higher levels of poverty.

For now, we say the official line that economic growth causes price hike may not be off the mark. But people need more persuasive arguments for understanding that growth is there, but more needs to be done to satisfy urban needs.