Economic Perspectives

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Prof. Stefan Dercon, a Professor of Economic Policy at the Blavatnik School of Government, recently published a book under an interesting title ‘Gambling on Development’.
From his book, in the last thirty years, the developing world is cited to have undergone tremendous changes with overall poverty having fallen and people living longer and healthier lives. He describes that despite the economy being transformed many countries have simply missed the boat. Why have some countries prospered, while others have failed? Well the book captures this phenomenon.
Intrigued by his economic perspective, Capital’s Groum Abate caught up with Prof. Stefan for an inside understanding of his thoughts on the country’s economy amid the swarm of challenges faced, amongst other fascinating economic topics. Excerpts;

 

Capital: Tell us about yourself?

Prof. Stefan Dercon: I am a Professor of Economic Policy at the Blavatnik School of Government at the Economics Department, and a Fellow of Jesus College. I also serve as the Director of the Centre for the Study of African Economies at the University of Oxford.
Over the years of my work experience, I have combined my academic career with work as a policy advisor, providing strategic economic and development advice, and promoting the use of evidence in decision-making. Between 2011 and 2017, I served as the Chief Economist of the Department of International Development (DFID), the government department in charge with the UK’s aid policy and spending. Between 2020 and 2022, I was the Development Policy Advisor to successive Foreign Secretaries at the UK’s Foreign, Commonwealth, and Development Office.
My research interests concern what keeps some people and countries poor: the failures of markets, governments, and politics, mainly in Africa, and how to achieve change.
Interestingly enough, my first job was at Addis Ababa University in 1992, I remember meeting the first IMF mission that came at a time when the macro economy was quite unstable. So back in the day we worked and researched Ethiopia, usually with the university and the Ethiopian Economic Association.

Capital: How are you currently working with the Ministry of Finance?

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Prof. Stefan Dercon: Since 2005, I have been working with the Finance Ministry with regards to the country’s development plans primarily as part of the sounding board.
There have been positives and great strides achieved over the years, in terms of the implementation of development plans and growth as well. So my role largely was as part of the sounding board where we discussed and deliberated on key areas of development where I and the team placed quality critical advice for the success of the country.
The UK Aid has also been a great supporter on the developmental parts and also in giving advice. I suppose my own original speciality was working on agriculture. This was crucial, and then I followed closely on industrial parks work as well.
I drew from my extensive work experience where I was an advisor at various levels of capacity in the UK in weighing in on opinions for the Ministry as I did in the UK with Ministers and the Ministry of Foreign Affairs.
I am genuinely happy to share my knowledge and experience on economic matters for the advancement of the country. I don’t have to get paid by anyone to do it.

Capital: What is your view on the liberalization and privatization of development agencies especially the telecom sector?

Prof. Stefan Dercon: When such strategies are deployed it is most times a gamble. A gamble in the sense that you have to be very lucky that all the activities planned out go according to plan. More often than not, there are delays owing to infrastructure development and supply response.
For the success of such initiatives, there needs to be a very fast private sector response to all these kinds of measures, and somehow or another it has to add up and it was always going to be tricky to add up.
For instance, if you see East Asian development states they need a lot of resources. To obtain such resources, they generate it domestically, simply through high savings rates. Bringing this to Africa you will find that the saving rate is simply low. Thus from the basic economic principle, if you can’t get it home you have to go abroad and you have to actually borrow. You have to be very dependent on external finance to the Goodwill’s of donors as well as the goodwill of markets to give you the credit whether it’s Chinese banks or southern banks. So that was always the risk and everything had to work well.
Arguably for a while everything worked very well and the growth was very high, but it was a risk on the macro economy. My views of the privatization also stem from the whole homegrown economic reform agenda from 2019. In my opinion, it makes logical sense because the government can’t just generate the resources to finance these very resource intensive models. You need to rely more on the private sector to try to come and invest here. There is vital need of Foreign Direct Investment and a more vibrant private sector and this was spurred from 2018 under the leadership of Prime Minister Abiy Ahmed.
At any point in progress you need to be market driven. Privatization then fits in a sense that you want to create more dynamic markets forms of competition. I don’t see it as a big source of generating resources for the government. I see it more useful in the end as creating more dynamic competitive forces.
And actually if things don’t work well, and the telecom works well it will still be a great boost to the economy. But you can’t use these resources simply to generate revenue for government. They need to become part of the backbone of the dynamic private sector and the privatization and liberalization of the sector is one important step in achieving this.
The question of how best can we achieve this is also another matter to consider but nevertheless, there is no right, wrong approach. The approach the telecommunication sector took is encouraging, and although its progressing slowly, it is a significant step in the right direction since it did not come at a time where the environment was conducive.
I’m quite hopeful now that we can get back into this space. But I don’t want to see privatisation simply as a way of generating resources but rather as a gateway to more competition in certain sectors.

Capital: In recent reports to parliament, the central bank’s management pointed out that remittance is dropping highly, and that the disparities of Forex are alarmingly widening. What are your thoughts on the future of Ethiopia on the matter?

Prof. Stefan Dercon: There is no doubt that over the coming six to 12 month we have to find steps towards the unification of the exchange rate. Remittance is also highly dropping because of the black market rate which is very attractive.
From the government’s angle, in line with their model of development, they require the dollar for their infrastructure project development such as finishing all the dams.
The fact of the matter is that it is easier for the private sector to have access to the dollar because of their access of the parallel market. So we need to find ways for the unification exchange rate for the benefit of the country at large.
Incidentally, the high inflation is of course related to the balance payments problems since a lot of monetary finance is happening. Inflation, the exchange rates and the government’s financing situation are intertwined in one way or the other. When remittance is dropping, similarly the official market transactions go down and tax revenues come down. Thus unification is vital to combating these disparities and remittance-related challenges.

Capital: What do you mean by unification?

Prof. Stefan Dercon: By unification I mean that we need to go back to a situation that anyone who wants to buy foreign exchange can do it and we need to get back to a situation where we have only one price of foreign exchange than two markets.
Unification means we strive to bring these two markets together. So basically, you move to create a situation where either you have a floating exchange rate purely market driven or something similar that actually has a clear path towards having one single exchange rate.
This process on one hand can be very tricky and on the other very easy to implement depending how best it is approached. Because if you’re not careful this unification can be very inflationary; why is it inflationary? It’s simply because of the shift of government from suddenly buying at a rate of 53 to 75 and the difference of course will drive inflation.
To have a stable unification, an analysis of the demand side versus the spending side ought to be keenly looked into and the government on its end will be required to tighten the belt because otherwise this process will not be successful.
It has actually been done before in 1992 or 1993, and it was done more on overnight. Following unification, inflation was negative because most of the things that we buy from the markets were already at the black market exchange.
All in all, unification is basically getting one single market and we need to do it.
And arguably, one of the things that people like me are discussing with senior officials is; how to do this, what are lessons from other countries, how to manage this well, because it’s a shock to the system. We need to be prepared for that but I’ve no doubt that it will have to happen.

Capital: Do you see this happening in the near future?

Prof. Stefan Dercon: It’s is not a case of when will it happen but rather it must happen, otherwise it will be really damaging for the economy if you don’t do it. I have no doubt that senior policymakers in the country recognise that and they are looking for the best way to carefully do it.
As we know, there is a lot of pride involved in the country. Here among the economists including my academic friends say, ‘Surely we’re not going to ask for help from the IMF. We’re not doing that. We have never done that.’
The point is it will actually be helpful in that it can bring temporary extra resources to cushion the blow. And these resources are actually quite healthy. So I see it happening.
I as well as senior people in government are very keen that we need to do this by the help of the IMF. The reason is really because it will get locked in easily and the markets will respect it. It will actually be a brief shock to the system mainly on government services but not so much for the economy.
This is certainly a priority because low remittance means low bank reserves. But we look at the data and you know reserves are low because the remittance is not coming in to reserve the central bank. If we are not careful we can be in a situation down the road in six months where we may not be able to pay the bills for fuel or something. So that is why such corrective measures are required.

Capital: Currently excess amount of money is circulating in the market which is ramping up the inflation. What do you think the reason behind this is? What is the involvement of the government?

Prof. Stefan Dercon: Inflation comes with three facts. One is some of the inflation in imports such as fuel prices, food prices have gone up internationally owing to the Ukraine crises and so on, so you can’t really control that easily.
The second one is this is still kind of a market that has some structural features where transmission of price signals don’t work well. The government calls these, structural factors. The third one is simply the idea of putting too much printing leading too much money.
Printing too much money is linked to the way government tends to finance its expenditures. Before the tax revenue, the government gets loans from the central bank. The problem now is that because revenues are going down you actually end up printing relatively speaking far too much money. We call this monetary finance. The government’s role is very key on the third one. And we worry about the third factor since it is increasingly important in inflation, which makes it even more important and the government needs to recognize we need to find a way of getting exchange rates unified.
A strong relationship between the Ministry of Finance and the central bank needs to be forged. The government has to spend less, even if it’s just for a temporary period, it has to maybe delay certain expenditures, which of course has an impact on the economy but it’s reducing the kind of pressures on prices. This basically reduces the demand for goods by the government side to actually get it to slow down.
Ethiopia will not be the first country to do so. Historically, many countries have to do it all the time. It’s nothing extraordinary but it’s just a little bit tougher.
At the moment, we have a situation of macroeconomic instability, catalyzed by high fiscal deficit, high monetary financing and overvalued exchange rate; in addition to the black market premium being high, similar to inflation.

Capital: Inflation around the world is of course high, however, in context can we say that the inflation in Ethiopia is Unique?

Prof. Stefan Dercon: Inflation rates are high because of the import inflation which government can only do so little. But studies have shown that increasing inflation is exceptionally high here partly because of that third that I described. Ghana has the same problems as Ethiopia. Both countries have done very well in the last 20 years, with double GDP per capita but at the moment, we have very similar economic crisis. Some other countries such as Senegal have inflation but it is not that much of a problem. So it’s important to understand the nature of the inflation. If we go to Britain, inflation is high. It’s virtually entirely imported and again that’s a problem for the government but in a different nature. So the adjustment that you need to do is actually different. All countries struggle with inflation, but this particular type of path of inflation typically requiring attention because otherwise that can get control.

Capital: One of the issues is that Ethiopia doesn’t have resources such as oil and other major items which are imported. With a lack of this resources so to speak, how can we manage to double GDP or cope up with the inflation?

Prof. Stefan Dercon: If you go back a little bit into the strategies that were used, when we look at the agriculture strategy, initially 50 years back it’s all a continuum. 15 years ago it focused on the staples. I think that’s important. But for a while there was a bit of neglect of coffee and so on. Coffee now is doing much better which is a good export corpus.
Of course in recent times, there has been a shift from agriculture to industrialization. For instance the industrial parks are doing well with exports increasing. Similarly, Ethiopia has started to export electricity which is important for the country’s growth. The country also has a home grown economic reform agenda which also gives focus on export, which is paramount. Any country would love to have all the resources, but the fact of the matter is that you will have some resources in abundance where you can export where others you will have to import.
It’s not easy, but Ethiopia should be able to break higher grounds. I think it is very unfortunate with COVID and with the conflict which have hurdled the process when the investment climate in Ethiopia really should have been at its peak. So at the moment we are recovering, and there is need for a macro economic recovery which in turn changes these factors as well.
I’m actually pretty hopeful Ethiopia will develop. There has and will continue to be a time where firms will quite happily invest in industrial parks.
In perspective, it is quite remarkable. People shouldn’t underestimate that actually getting an investment climate of a foreign investor, especially one that’s used to Asian now investing in Africa. This in itself is proof that achieving a better GDP is possible as there are many countries who have found ways of being in a better position. Ethiopia has excellent labour and I think it is well within reach.
And I think improving must include getting the macroeconomic under control and trying to get the investment back in. It should be possible but it’s going to take a bit of time. Despite the unexpected world crisis I have hope in Ethiopia because it has a considerable export portfolio to the West which is a big consumer market. Because of politics they don’t really like to buy from China. These kinds of darkness in the classes bring opportunities as well.
So all you need to do is stabilize the micro and macro economy and get the exchange under control, as well as controlling the government deficit that will help you with inflation and getting the economy stable. If you couple that with investment then everything will be smooth sailing.

Capital: In your book you have an argument that some countries will fall and some rise. How did you come up with this? And what is Ethiopia’s status on that front?

Prof. Stefan Dercon: I have a big chapter on Ethiopia. It was actually quite hard to write about the country because I was writing it first in the pandemic era and also when the war broke out I had to kind of rethink because I was going to write an incredibly optimistic chapter about Ethiopia.
I wanted to capture the economy from the 90s and the progress made over the years. In my book I talk about 30 different countries. I kind of look at those people who have power and influence and I don’t simply mean the Prime Minister or the Finance Minister but I look at the military class, senior civil servants, business community, civil society, journalists, opinion makers who shape the story of the country’s economy.
I think every country has a reasonably stable elite bargain. I call it a deal between an implicit deal which is like a set of shared ideas about how society should be run and what’s right and so on. For instance, DRC or Nigeria, what you would see from the leading party is simply focused on the right to take control of all the resources and line it with their pockets. In fact in Nigeria if all the oil revenue was spread out equally they would have about 200 to 400$ per person per year which is not that much. If you control it with 100,000 people which I think is what’s happening in Nigeria you each have a million dollars per capital. So 100,000 people control that country and I call them the elites, the people connected to the politics and finance.
In the DRC the number is even smaller but they are the ones who control the economy. These are either kleptocratic states where the leaders wants to steal from everybody or you could call it deeply clientelistic which translates to, if I get power I just rewards my friends with contracts and with jobs. Actually I think Malawi is a bit like that. It’s a democracy where nothing ever happens and the economy is flat. Niger is similar in that nothing happens. So these are elite bargains that you know when you get power. Whether its autocracies or democracies, what they lead us with is nothing or just lies. And I might want to make a strong statement that if you want development and growth in an economic society you need to have some kind of a shared commitment to a shared narrative.
So if I look across the world in the last 30 years, I find countries that indeed have double or triple GDP, where extreme poverty goes down and where development indicators improve. None of these countries are pretty countries, in the sense that they’re all perfect. Sometimes politics is strange and there are autocracies, democracies, flawed democracies, and all kinds of stuff. If you go to China or Bangladesh, or Indonesia, and in Africa to Ghana, Ethiopia or different countries that actually unlike the Congo’s or Nigeria’s or Niger, or Senegal or several other countries where actually nothing has happened are in different leagues.
The elite bargain has to involve a deal about politics and a deal about economics. About how we’re going to run the state, who controls the State House and the economics of who gets access to resources and who decides to get access to resources, and how to distribute it. I think every society somewhere or another has ways of doing it. So in Malawi I could have a democracy that I can decide who is in charge but once they are in charge they just use it to line their pockets; more often than not, the economics and politics go together.
Here in Ethiopia in the 1990s different economic models were tried which came about after the war with Eritrea and during the drought in 2002. This is then followed by the time of the elections of 2005. You got somehow a real shift not unlike something that happened in China. This is the political deal in the country. The lead bargain was maybe quite narrow with a small group of people, EPRDF, could hardly be called a full representative of everybody. It has a form of representation of different nationalities, but we know enough to tell it is the dominance of one group. It was a weak political bargain. But actually underlying, across the EPRDF of course, the late PM Meles Zenawi was quite strong. There was a deep commitment of the need to get the economy to grow with these plans and to get development goals. And we can’t deny the economy grew very fast. You know, I’m one of the people that often gets quoted as having questions on the growth figures but it was maybe 9% or 11% but it was not as if it was 0%. There was some inflation in the growth figures but not dramatic. This economy was one of the fastest growing ones.
There’s a singularity with what happened here with China. In fact, when Deng Xiaoping came to power it was a surprise because he had initially not a very strong coalition. The Chinese leader was trying to keep ideology at the center of all policymaking. And we should say President Xi has brought it back. Deng Xiaoping back in the day said actually it doesn’t matter whether the cat is white and or whether it is long or big as long as it catches mice.
In my book I was tempted to interpret what PM Meles Zenawi did which is actually seeking legitimacy. Similarly, President Kagame of Rwanda sought legitimacy for the regime through economic development. And so in a sense the economy was actually a regime that actually was committed to growth and development albeit as a part of seeking legitimacy from the population. There were enough calculations that if we can grow the country side we’ll have people that will keep on supporting us.
I think that of course, the narrative in this country it wasn’t totally pure. Of course, there were certain groups that may have benefited more. I’m tempted to say it was more that certain groups that controlled more of the decision making rather than the economy.
For example in Indonesia, where there were still all kinds of things going on, nevertheless, there was enough emphasis in the state of trying to get the growth and the development going. That actually was genuine growth. There was progress in poverty reduction and health education.
For me during the time of Hailemariam Desalegn there was very much this political bargain. One of the triggers of the early demonstrations was an excellent economic plan. The others are a master plan, but a very bad political climate was a hurdle.
The political bargain was weak. Everything was pushed on the economy and the economic master plan technically was actually a very brilliant plan but forgot about the people and the politics of the people. And what you got was ultimately this elite bargain broke down at the level of the politics, not the level of the economy.
So my book makes the argument also for Ethiopia probably needs to go for a new elite bargain and asses the politics between leading groups in all the fracturing that has happened that’s not totally over.

Capital: Can we find a way of doing that together?

Prof. Stefan Dercon: Yes, because on the economy, there’s a lot of positive things to be said. There’s a lot of future there. Development could be delivered as long as these elite bargains are developed.
As our neighbors Kenya put it, ‘it is my time to eat’. One nationality says you’ve been able to eat a lot and now it’s my time to eat. It was your time to eat until 2018. Now it’s my time to eat after 2018.So if it all becomes simply about capturing the state and capturing the rents from the state that’s not going to be good for development in the economy. So you need to find a balance of getting an accommodation of all the nationalities or the Old National question. Because if you have that there’s huge potential in the economy, but it could be still fragile at the moment.
So in my book I didn’t know where this was going and of course the conflict was raging. But I always stayed quite hopeful.