Cart before the Horse?

Cart before the Horse?

By Teferi Mergo, PhD

The Ethiopian government has recently announced – rather unexpectedly – that it aims to fully or partially sell the government-owned manufacturing and service industries to the private sector. The assets that are being put up for sale include the country’s flagship carrier, Ethiopian Airlines, and the hugely under-performing Ethiopian Telecommunications Authority. Many seem to be shocked by the news, while a few have welcomed it with understandable glee. Shortly after the announcement was made, the Wall Street Journal argued that the move, if implemented, “presents one of the biggest business opportunities in Africa to foreign and domestic private investors.” The wholesale opposition in certain quarters to privatization of inefficient public enterprises is typically ideologically driven, and not based on a proper understanding of the measure’s impact on social welfare. Yet, the planned episode of privatization by the ruling party in Ethiopia is ill-timed and likely motivated by political goals, not economic efficiency concerns.

The dizzying and generally poorly-established criticisms leveled by many against market liberalization policies notwithstanding, societies do better in settings where individuals can pursue their choices and interests, with governments concentrating on regulating and addressing various manifestations of market imperfections and failures. The insights gained from mainstream economic theory and the economic history of numerous successful countries are hardly ambiguous about the adverse implications of extensive state interventions in economic matters. Stable and prosperous societies are those where the political elites generally stay out of economic decision-making that is better left to the private sector, and the government focuses on designing and overseeing optimal, transparent and accountable institutions (laws, regulations, the enforcement mechanisms, etc.), with the primary objective of enforcing the property rights of citizens.

Therefore, it would be difficult to oppose the planned partial or full privatization of state-owned enterprises in Ethiopia based on the first principles of economics. In fact, a future representative government in the country may have to prioritize getting rid of a number of publicly-owned assets (many of them are believed to be highly inefficient and have been drains on the limited financial resources of the country), after a careful appraisal of their worth by independent experts.

However – aside from the legitimate concerns that may be raised about the impact on social equity of the planned partial or full liquidation of the publicly-owned assets (the measure is anticipated to benefit a few perhaps at the expense of many) – the initiative, if executed under the prevailing circumstances, may end up costing the public a fortune, potentially adding fuel to the still-burning political fire in the country. Further, it is improbable that the ruling party in Ethiopia was motivated by economic efficiency considerations when it announced the initiative. The move is rather likely prompted by a need for political preservation, with the regime facing a potential currency crisis set in motion by four years of relentless and widespread protests and civil disobedience centered in Oromia (the largest state in the multinational federation), which shattered the previously carefully crafted and managed image of the country as the ‘African lioness’ with significantly enhanced economic prospects.

These political developments have hit Ethiopia’s balance of payments position more severely than formerly thought, with the latest reports indicating that the country’s foreign exchange reserve can only finance a month’s worth of imports, despite successive installments of devaluations undertaken by the central bank to improve the country’s balance of trade. With Ethiopia’s imports continuing to outstrip its exports by several factors, and with foreign investors and lenders signaling that they might be ready to abandon the ‘African lioness’ ship, the country is one wrong move away from a foreign-exchange crisis, that could choke vital economic activities and bring down the entire political system.

The sale of these public enterprises, if executed, will likely give the government the opportunity of building up its depleted foreign exchange reserve, by luring potential investors that might be attracted by the terms of the planned fire sales. Still, the government’s declared privatization policy is fundamentally misguided in its conception, because it seeks to offer, at best, a temporary solution to a deeply structural problem that has been the source of many of the other problems in the country, including the impending currency crisis. In a way, by deciding to sell some of the country’s most prized assets – apparently abandoning its long-standing and poorly-anchored ‘developmental state’ ideology – the Ethiopian regime is signaling that it seeks to pursue the ‘Kitchen Sink Strategy’ rather than face a graceful political exit.

Seeing that the regime has run out of options when it comes to dealing with the looming currency crisis, potential financiers might also be demanding that the government undertake these reforms, indicating that the anticipated transactions will be conducted under duress, and may result in a significant undervaluation of the assets. Therefore, the socially responsible course of action to take would be to table the intended privatization scheme, and to focus on opening the political space unconditionally, with the goal of transferring power to the duly elected representatives of the people as quickly as possible. Let a more representative government make the critical decisions regarding the privatization of the state-owned enterprises, after the necessary assessment of their appropriate market values by experts. Anything else amounts to putting the cart before the horse, and will entail undesirable consequences of first-order magnitude.

Teferi Mergo, PhD

Assistant Professor of Economics
University of Waterloo, ON