Macroeconomic Conditions and the Political Economy of Growth

in Ethiopia(Lecture for Defense College)

Alemayehu Geda , Dept of Economics,

Addis Ababa University

Addis Ababa 2007.

An Overview of the Presentation An Overview of Globalization & Africa

Trade, Growth and Poverty in Africa Prospects of the Global economy and Africa

Impact of Emerging Economies: China and India (Surge in Commodity price, Industrialization etc)

The Ethiopian Macro Context The Political Economy of Growth in Ethiopia Conclusion: Challenges and Opportunities for Africa

References used for the Lecture

Macroeconomic Performance in Post-Derg Ethiopia, Journal of Northeast African Studies (Michigan Univ. Press, 2005)

The Political Economy of Growth in Ethiopia (Cambridge African Economic History Series, 2007)

The Impact of China and India on Africa: A Framework Paper, AERC, Nairobi, 2006

The Global and African Macro Context

The Global and African Macro Context

Trade, Growth and Poverty in Africa Africa is linked to the world economy through trade and

finance Its share of the world trade has declined (about 2%) and

finance is largely aid related/debt creating This small amount of trade and finance is central for

Africa (about 60% of GDP) With globalization we noted growth in Africa However, poverty has increased (& inequality might be

the culprit).

Table 1.2: Regional Percapita Income as Share of High Income OECD Countries OECD Countries Per Capita Income (1995 constant US$, percentage) Region 1980 1981-

1985 1986-1990

1991-1995

1996-2000

2001

sub-Saharan Africa 3.3 3.1 2.5 2.1 2.0 1.9 South Asia 1.2 1.3 1.3 1.4 1.5 1.6 Middle East & North Africa 9.7 9.0 7.3 7.1 6.8 6.7 Latin America & Caribbean 18.0 16.0 14.2 13.5 13.3 12.8 East Asia & Pacific 1.5 1.7 1.9 2.5 3.1 3.3 High income non-OECD 45.3 45.3 48.2 56.1 60.2 59.2 High income 97.7 97.6 97.6 97.9 97.9 97.8 High income OECD 100.0 100.0 100.0 100.0 100.0 100.0

Source: Alemayehu (2006b)

Prospects of the Global Economy

Slow down in the US Economy, Japan (but EU ok) Global commodity prices expected to increase Global finance for Africa is also expected to grow US deficit, oil price (for importers) will continue

as a problem

Emerging Economies: China and India’s Impact on Africa

Emerging Economies: The Asian Drivers and Africa

The impact of the Asian Drivers (China and India) is a challenge and an opportunity

Trade b/n African and China surged from $3 billion in 1995 to $32 billion last year, estimated to over 50% this year ( though Africa make up only 2.3 % of China’s world trade).

Currently close to $400 billion/2014

Emerging Economies ….Cont’d

This constitutes about 10% of Africa’s world trade. This trade is expected to more than double by 2010. [it does already1]

For some it is important: in 2005: for Sudan 70% which was 10% in 1995, Burkina Faso about 33% which was none before; Ethiopia about 13% which was none before.

Emerging Economies ….Cont’d

China is also contributing about $1 billion out of 15 billion foreign investment Africa received in 2004.

For some China’s investment is huge. China promised to invest about $4 billion in Nigeria (in return for oil rights)

offer Angola $4 billion concessional credit – debt being to be paid in oil

Emerging Economies ….Cont’d

pattern of trade is shifting from traditional partner the EU away to Asia/US

EU declining from 44 to 32% & US increase from 11 to 19% - 1995-2005).

We look at it through the vector of trade and FDI.

Impact Analysis: Trade and FDI Impact

There is a need for Impact Analysis (see AERC, Nairobi)Trade Impact: The Asian Drivers and African

ManufacturingFDI Impact: The Asian Drivers and African

Manufacturing

The Political Economy of Growth in Ethiopia

The Ethiopian Macroeconomic Environment

Gebre-hiwot: Conflict & unequal Trade

Major Patterns of Growth and Periodization

Political economy factors matter a lot (see below) Growth (in particular its sustainability) depends on

external shocks too ( Agrl, Weather, trade shocks) Poor policy accentuated poor growth Performance

Three distinctive regimes

Imperial (lose control) --1974 Derg (hard control) – 1974-1991 EPRDF (Fairly liberal) 1991-now

The Macro-Growth Performance

GDP and Sector Growth and Forecast

Figure 1 : GDP and Agr Growth Rates

Figure 2: Rainfall and GDP Growth

2.1 The C-B Growth Accounting

2.1 The C-B Growth Accounting

Capital explains / Goes with periodization Capital’s role decelerated in the latest 2 regimes Contribution of Education/worker weak across

regimes TFP virtually weak – correlates with weather

Table 2.3: A Growth Accounting Exercise for Ethiopia in the Last Decade (2000-2010)

Note: The growth accounting is based on the result of econometric estimation reported in Alemayehu and Befekadu

(2005) and Alemayehu et al (2008). Using various models (both macro and micro) these studies have come up with the capital

share coefficient (β) that ranges from 0.28 to 0.36. We have used 0.30. The capital stock is generated using the perpetual method

(Geda, 2013/14).

 

Year

GDP Growth The Contribution of Capital

The Contribution of Labour

The Contribution of Total Factor Productivity (TFP)

2000/2001 7.4 0.6 2.6 4.2

2001/2002 1.6 0.8 2.7 -1.9

2002/2003 -2.1 1.0 2.6 -5.7

2003/2004 11.7 0.7 2.7 8.3

2004/2005 12.6 1.2 2.6 8.8

2005/2006 11.5 1.1 2.7 7.7

2006/2007 11.8 1.5 2.2 8.1

2007/2008 11.2 2.1 2.2 6.9

2008/2009 9.9 1.8 2.3 5.9

2009/2010 10.4 2.7 2.2 5.5

Average(2003/04-2009/10) 11.3 1.6 2.4 7.3

2.2 Chenery-Syrquin/Structural change:

No structural change Performance half below expectation

2.2 Chenery-Syrquin/Structural change:

Figure 3: Structural Change

Macro Stability and Macro Policy

Macro Stability in Ethiopian is related to:Rainfall External Shock (World Coffee and Oil Price + Aid)Regional SecurityMacro Policy (eg. Money SS/Printing)

Policy Implications of this contracts with US and EU (Fiscal and Monetary policy is no central)

2.3 Augmented Solow & the Conditional (O-N) Models:

Growth below prediction Significant Negative (2nd) and Positive (3rd) time

dummy O-N show same but dramatically The Base variables are the most important Public spending within the policy variables is

important Policy improved but not unsustainable

2.3 Augmented Solow & the Conditional (O-N) Models:

Political Economy (of Growth in Ethiopia)

Politics matter: History: war with different ideology Land is the dynamics behind politics/regime shift External shock can trigger / oil crisis Detrimental effect: abrupt change, running by new

owners, disruption Shaped the natures of state (militaristic) and institutions which are

not developmental (but aimed at controlling power & resoruces) Reform and politics:

Int’l context/cold war, external endorsement/ shattered economy, decentralization

Political Risk & Percapita Income

90

100

110

120

10 20 30 40 50 60

Political Risk Index (PRI)

Pe

r C

ap

ita

In

co

me

In

de

x (

PC

YI)

PCYI = 94.0+0.40(PRI)t-value (21.7) (3.1)

R^2=0.39

Politics shaped: Markets, Institutions and agents behavior

Product Market: Mover from controlled to liberalized over time

The Labour Market: Urban Phenomena/Informal sector is crucial

The Land Market: Land is as much political as economic Shadow land market

Financial Market: Build=> Nationalize=> Privatize

Politics & Policy shaped Micro Level Agents behavioru

General: Risk increased over time: policy, shock/regime shift

Rural: (see next slide) Natural riskFrequent Distn of land Inputs are important (credit/fertilizer)

Urban: very small, shock by Nationalization

Evidence on Micro Aspect/Agrl/

Conclusion on Ethiopia & Note on Botswan

Growth modest, but structural change absent Political & Institutional factors fundamental (regional

distribution) Pattern of growth, nature of control and TFP correlated

but: TFP is worst in the 2nd (Controlled )regime Growth is associated with external shock too (in the

context of weak markets). Thus Unsustainable growth (owing to shocks!)

Botswan: Lesson from African

Botswana exhibited most of the problems identified for Africa’s growth problem

yet grew at 6% for last 35 years, & with export success,

why?Maintained good institutions (historic factor)Botswana chose prudent fiscal and macroeconomic

direction

Botswana …Cont’davoided 'Dutch-Disease'-by not engaging in excessive

spending of the export windfalls It managed a stable exchange rate Its participation in the SACU limited lobbying for

favours in the trade arena (agency of restraint)The public sector allocated resources based on

economic and social returns was successful with foreign investors; and state

investment in education,

Botswana …Cont’dWhy Botswana had good policies while other African

do not?good policies were complemented by good institutions-

what they refer to as institutions of private propertyFour factors have contributed significantly to the

formation and preservation of these institutions(1) possessed relatively inclusive pre-colonial institutions

that put bounds on how the political elite functioned. (2) The second is the minimal impact of British colonialism

on the traditional institutions that scrutinized how the elite behaved. T

Botswana …Cont’d(3) after independence, the elite in Botswana found it in their

best interest to preserve the institutions of private property. (4) Botswana was rich in diamonds, the export profit of

which created enough rents for so that no group found it in its best interest to challenge the status quo..

Success of Botswana depended on good institutions is only a proximate answer .

why has Botswana such good institutions when the rest of Africa is devoid of them?

Botswana …Cont’dwell-enforced property rights were in the interest of the

Botswana’s political elite in the aftermath of independence

By the mid 70’s the income from diamonds outstripped that of ranching income, but the elite did not rush to expropriate , particularly, two reasons.

One was that the elite did not feel threatened by the prospects of growth (slim chance that the elite became political losers deterred them from working towards the destruction of the good institutions –

The little risk that the Botswana elite faced in pursuing developmental policies was not shared by other African countries, where developmental policies only worked to dispossess traditional political institutions

Botswana …Cont’d second constraints placed by institutions such as the

Kgotla may have ensured the accountability of institutions; forced the elite to opt for the enforcement of their property rights.

These institutions assured that there were no political instabilities. ( leaders forging an unlikely coalition between tribal chiefs, cattle owners and the BDP-the ruling party against colonialism)

good policies promoted rapid accumulation, investment and a socially efficient exploitation of resource rents.

Botswana …Cont’dBotswana’s growth has been a juxtaposition of good

institutions-good policies-resource rents [primarily the export of diamonds, and export incomes from cattle ranching prior to the 70’s].

Harvey (1992): rural origin of political leadership that contributed to export agriculture escaping the ‘wrath of tax policy’, unlike other SSA where the social origins of the elites are urban and export taxes are exorbitant.

END (See Next Slide for Conclusion)

Botswana …Cont’d

too)here Clture addmay (we

Causes lFundamenta Rodrics

Causes Proximate sRodric'