Ethiopia should learn the boom and bust in East Asia

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Shimelis Araya
In 1989, J. Williamson, a British economist designed ten economic policies used as a standard packages for developing countries. Whatever the merits of these policies, the “Washington consensus”, as he called it due to the huge backing by international and government institutions in the United States, proved not good enough and attracted countless controversies. Almost 25 years, these prescriptions are hammered in J. Studwell’s influential book called How Asia Works. The book loudly explained that half of the Asian region is characterized by most extraordinary developmental success story; the other half ends up with a paper tiger. Why the northeast Asians such as Japan, South Korea, Taiwan, and now China are richer while the southeast counterparts of Thailand, Philippines, Malaysia and Indonesia are relatively poorer? Is the later failed because of their geography or climate or due to wrong-headed economic policies?
Studwell concluded that poor economies can prosper the recipe with just three ingredients. The northeast Asians have been effectively used these recipes and produced the quickest progressions from poverty to wealth that the world has witnessed. The first intervention is to maximise agricultural output through a highly labour-intensive technique. The use of surplus and cheap labour in a poor economy pushes up total yields to the highest possible levels, even though the labour productivity is tiny. The overall benefits of agricultural surplus primes the demand for industrial goods. The second intervention – he called it the next ‘stage’ – is to direct entrepreneurs towards manufacturing. To quicken transformation, there must be a shift of focus towards the expansion of the industrial sector. As the saying goes no more a vegetarian tiger and they gradually shifted the profits from a developed agriculture towards manufacturing. This is due to the fact that manufacturing makes the most effective use of the limited productive skills of the workforce who migrate out of agriculture. In a learning by doing approach, unskilled labourers create value by working in factories. The governments in the northeast Asians initiated and directed technological upgrading through subsidies based on export performance. This is what he called it ‘export discipline’ that took the pace of industrialisation to a level never observed before globally. Finally, it is also mandatory for the state to intervene in the finance sector to direct the precious capital serving smallholder intensification agriculture and manufacturing initiatives in order to accelerate economic transformation. Accordingly, the state’s role is to keep money targeted at a development strategy based on national interests that produces the quickest possible technological learning instead of spending on short-term returns and individual consumption.
To sum up, the northeast Asians restructured smallholder agriculture, focused their modernisation efforts on manufacturing, and use the financial sector to serve these goals. By doing so, they changed the structures of their economies in a manner that is impossible to return to an earlier stage of development. By contrast, the Southeast Asians have begun with the same ambitions for development but failed to adopt similar policy prescriptions in a consistent manner. Despite their long periods of impressive growth – governments did not fundamentally re-organise agriculture, did not create globally competitive manufacturing. In addition, they accepted bad advice from the IMF/WB experts to open up their economy to foreign firms at an early stage, as Studwell argued. The policy inconsistency resulted in unsustainable growth of yield even though they are able to achieve fast growth for a period. Accordingly, the policy choice created – and will probably further widen – a developmental gap across the dynamic Asian region.
Studwell’s explanations are a warning to nations like Ethiopia to learn lessons from history. Only those nations with context-based policies are capable to make it, he argues. The current government has put in place its latest economic plan as it has been called ‘Home-grown Economic Reform’ a month ago. The reform document says ‘the country’s macroeconomic, sectoral and structural problems’ are key drivers for the policy change and context-based prescriptions are needed to cure the economy that suffers with chronic pain. However, some of the economists in the country have forwarded their views that the reform was purposefully designed to resolve the chronic foreign exchange problems by opening up the economy to foreign firms instead of providing a genuine solution to the real economic problems.
Unquestionably, agriculture is the key sector in Ethiopia. However, it has been characterized with a very low productivity mainly due to limited intensification efforts. The goal should be to use the cheap labor to maximize yield per hectare in a smaller intensively farmed plots. Maximizing yields can serve several goals: farmers earn money and spent on local manufacture products; higher food production help saves the foreign exchange spent on food imports; increased supply of food reduces high food inflation that has been for a longer time, and farmers’ savings can be recycled for industrial expansion. In short, the rural abundance creates room for an export-led manufacturing growth. For this, the state must nurture SMEs instead of quickly opening up the economy and forced them to compete with giants. In this regard, for instance, the situation of the likes of domestic cultural cloth producers (ጥበብ አምራቾች) requires urgent action. Domestic producers are forced out of market due to the fake products that are imported from China and also sold at a relatively far lower price. In addition to the impact on culture, it has numerous detrimental effects on local economics. To protect infant domestic producers, the government should highly tax such products and control the considerable sum of foreign exchange spent. As a condition for such support, domestic producers must be obliged to generate foreign currency through exports. Such foreign sales also provide an external test for a further progress. As a last recipe, the government should undertake strict financial control and directed these precious resources towards development activities that have huge national impact instead of spending on imports of luxurious and unnecessary individual consumption. The government should control the forex spent on ‘human-hair’, as an example.
The practical three-step doctrine of Studwell’s piece is less controversial than the Washington consensus packages. Due to its powerful insights, let me invite you to read this vital book.

The writer can be reached, araya.gedam@gmail.com