Abiy’s Ethiopia not quite an Indian summer

Abiy’s Ethiopia not quite an Indian summer

BY RONAK GOPALDAS

(businesslive)–The reform agenda pursued by Ethiopian Prime Minister Abiy Ahmed since he came to power in 2018 has been sharp, sudden and strategic. Indeed, the pace of change has sent shock waves through the global investor community, which is now priming itself to capitalise on Ethiopia’s “India moment”.

Potential investors are drawn to the country’s population size and youthful demographics, its strategic location and its newfound liberalisation agenda, which have made it one of the world’s fastest-growing economies. In this regard, clear parallels are evident with the reform agenda pursued by India, where the Indian National Congress government undertook deep and meaningful reforms in the 1990s that turned about the country’s economic fortunes.

At face value the similarities between the two countries are evident. Both had large, ethnically diverse populations, and alarmingly high levels of poverty. Strong governing parties and militaries were defining features, while regional tensions and unstable security in neighbouring countries turned both into regional power brokers.

At the time of their turnaround, both had limited levels of integration into the global economy and were characterised by state-centric economic approaches. Importantly, the governance models that had been in place for decades had begun to show signs of unravelling, with minority groups demanding greater representation and liquidity issues and political pressures steadily building to unsustainable levels.

India’s economic reforms, which promised a commitment to a free-market system, a drastic reduction in the intrusion of the state into economic life and a sudden embrace of foreign investment, began in 1991 when the Congress government, facing a severe balance of payments crisis, embarked on a programme of short-term stabilisation combined with longer-term comprehensive structural reforms. Catalysed by the economic fallout from the Gulf War, the reforms recognised the need for wholesale change, involving liberalisation of government controls, a larger role for the private sector and foreign investors, and greater global integration with the global economy.

Under Ahmed, Ethiopia has similarly initiated a number of processes that have piqued investor interest. Politically, Ahmed has in effect dissolved the governing EPRDF coalition, released activists, invited back opposition groups, and increased the representation of women in positions of power.

He also promised to open the economy for private investment, kick-started a green initiative to transform the capital, Addis Ababa, and rolled out a visa-on-arrival push for African travellers. And diplomatically there has been a rapprochement with long-running adversary and neighbour Eritrea. These changes are significant and bold and indicative of a more liberal policy orientation.

Such a comparison may be somewhat premature. Instead, it is far more useful to assess progress made in India under Rajiv Gandhi in the 1980s for an accurate assessment of where Ethiopia under Ahmed actually is. Gandhi was widely hailed as the architect of modern India and credited with setting the foundation for economic transformation through wholesale political reforms between 1984 and 1989.

During his five-year tenure as prime minister Gandhi signed peace accords with insurgent groups. He also made constitutional changes, introducing 33% reservation for women in Panchayati Raj (a system of decentralised local government), and lowered the age of voting to 18. Gandhi was also hailed as the father of India’s information technology and telecommunications revolution due to his focus on computerisation and connectivity. The changes set the foundation for a more inclusive and modern India, which had been reeling from years of political stasis.

Like Gandhi, Ahmed assumed leadership of his country in his early 40s. Their ambitious agendas threatened vested interests in the establishment. Like Gandhi, Ahmed has embraced modernity and pledged to disrupt the status quo with a radical and bold vision for the future. While Ahmed’s reforms are not a complete renunciation of state political and economic centralisation, they represent a distinct change in attitude by an establishment historically hostile to such policy positions. Indeed, this is what has enthused investors, in much the same way that Gandhi’s reforms in the ’80s did.

However, investors should be cautious of irrational exuberance and take heed of India’s lessons. First, it is important to understand that reform is a process rather than event. Ahmed will need to carefully and nimbly manage a number of threats to his agenda, including those from within his own party and the military. This will require compromise, skill and deft manoeuvring. The considered approach by Ahmed’s administration thus far is therefore not surprising. For example, the country’s legislative and policy frameworks are in their infancy and may struggle to handle such wide-reaching financial reforms.

Moreover, in addition to the fact that sweeping privatisation is inconsistent with the administration’s state-centric ideology, it would also constitute one ball too many for Ahmed to juggle amid a volatile political environment. While there is little doubt about the need for privatisation given the subpotential performance of parastatals such as Ethio Telecom, it cannot happen hastily or haphazardly. The governing class will also want to avoid sociopolitical blowback and weaponisation of the privatisation narrative by interests seeking to maintain the status quo — especially in a country that places huge pride in its “crown jewel” parastatals and never before being colonised.

Second, economic transformation and modernisation is unlikely to fully materialise until the necessary political reforms have been consolidated. The national election in August 2020 will be a watershed for Ethiopia; ensuring a fair and transparent process is crucial for the country’s credibility, prospects and investment attractiveness. While progress has been made with regard to peace and pluralism, there has been apparent sluggishness with regard to privatisation and broader economic liberalisation. Since the June 2018 announcement that the country would loosen its grip on strategic sectors by offering minority stakes in key state-owned enterprises, very little has been done towards this end, with the government still establishing the policy groundwork and specifying targets for privatisation.

Third, on a continent plagued by poor leadership and so desperate for good news, investors should be careful of deifying Ahmed. While the trajectory of Ethiopia under Ahmed is certainly positive, he is no messiah and progress under his leadership is unlikely to be linear.

Ahmed’s administration will need to consolidate political gains before being able to achieve its ambitious economic agenda. As was the case with India, the reform process will need to be sequential, with political progress front-running economic efficacy. Investors waiting for India’s 1991 moment would be well advised to moderate their short-term expectations.

Ahmed’s Ethiopia is far more likely to resemble Rajiv Gandhi’s India of the 1980s than India of 1991.

Gopaldas is a director at Signal Risk and a fellow at The Gordon Institute of Business Science.