(Merkeb Negash)
One of the grave, yet common, mistakes in the discussion of the Ethiopian developmentaliism is that analysts and international financial institutions usually try to diagnose the developmental state model with a [neo] liberal lab. This erroneous diagnosis leads to another erroneous prescription to fixing the economy or/and state. The IMF’s recent recommendation to “reduce and streamline the role of the public sector in the economy and developing a strong and vibrant private sector in Ethiopia” is just the recent example of such erroneous prescriptions. While the financial institution admitted that “growth has been propelled by huge public spending on infrastructure”, it calls for a reduction in public spending “to prevent growth rates from falling” and so as to encourage more private sector investments.
This recommendation emanates from the assumption that a cut on government expenditure leads to higher private investment and higher growth rate. No empirical research, including those done by the IMF itself, shows that this is really the case. In fact, evidences show the otherwise. In this regard, Joseph Stiglitz, a Nobel Prize winner and former senior vice president and chief economist of the World Bank, and others in their “Stability with Growth” plausibly argue that evidences overwhelmingly show “cutting government expenditures leads to lower GDP in both developed and developing18 countries… Expenditure reductions forced on Argentina and East Asia in the 1990s did not have the positive effects promised by the IMF, but instead produced the negative effects predicted by the more standard Keynesian models.”
On the other hand, Stiglitz et al argue, an increase in government investments that complements private investment (for example, spending on infrastructure) can increase returns in the private sector and stimulate private investment and the economy as a whole. The success of China’s expenditures during the East Asian crisis provides a case in point. Part of the reason for China’s success was that current expenditures drew upon a set of strategic investment plans that focused on improving infrastructure. The improved infrastructure increased the returns to private investments. This, in turn, encouraged productive investments that stimulated China’s long-term growth.
In addition, one of the defining features of a developmental state is the commitment to the expansion of human capacity development and investment in social policy and programs through high expenditure on broad national priorities – infrastructure and human capital. In Botswana, for example, government expenditure has been one of the largest in Africa with the government’s spending amounting to roughly 40% of GDP on social development, primarily infrastructure, health care and education. In most East Asian economic models, too, provision of basic services such as education, health care and housing have always been important ingredients in the success of the developmental state.
Ethiopia currently has the highest capital expenditure share in government spending in Africa. The share of total spending on poverty-targeted sectors increased from about 42 % of total expenditure in 2002/03 to over 64.1% by the end of 2007/08. This has resulted in significant strides towards meeting the MDGs and in human development generally. For the GTP period as a whole, the total government spending is planned to reach Birr 1.26 trillion which is about 41 percent of GDP per year. The public investments pursued so far and planned for the coming five years could, thus, be regarded as putting in place the necessary hardware and software needed for the entrenchment of a developmental state.
So, IMF, if such huge public spending in infrastructure means a lower growth rate in the coming years (which actually is not) – then so be it!
********
* The author, Merkeb Negash, is a Lecturer of Political Science and International Relations at Jimma University. He is a bloger in this blog and can be reached at [email protected]
I didn’t say I knew everything. I quoted Joseph Stiglitz and others (STABILITY WITH GROWTH, 2006 : 82). Have a look at this :
“According to conservative economists, government spending leads to lower private investment because investors see the rising deficits, lose confidence in the economy, and decide not to invest. Only resolute government action to counter the deficit can restore confidence, increase investment, and quickly restore the economy to health.
Despite how frequently conservatives invoke the confidence argument, there’s remarkably little empirical research on the matter (including little research by the IMF which seems to rely on the confidence argument heavily). The evidence does show overwhelmingly, however, that cutting government expenditures leads to lower GDP in both developed and developing18 countries. The direct impact of a cut in government expenditure on GDP is much stronger than the confidence effect.
Expenditure reductions forced on Argentina and East Asia in the 1990s did not have the positive effects promised by the IMF, but instead produced the negative effects predicted by the more standard Keynesian models.”
So, unless you will tell me the Nobel Prize Winner in economics doesn’t know anything about what he is talking about, I knew what I was quoting. Next time, do more of reading and less of insulting!
There is currently no access to credit for normal Ethiopians, and that is what is holding back the private sector. The state should stop trying to control to whom and at what rates the banks can lend.
nonsense…
the growth of gdp proves the ethiopian government right
You said, “This recommendation emanates from the assumption that a cut on government expenditure leads to higher private investment and higher growth rate.” No sensible economist or IMF would say such a thing.
It shows you don’t know what you are talking about except prescribing Woyane control of the economy, which has been a total disaster in terms of creating jobs or raising income for the average person except enriching a few Woyanes and their cronies. Think if Woyanes were creating jobs, we would not be at the mercy of in Saudi Arabia
Controlled economies like Ethiopia, Eritrea, North Korea, Cuba are a drag. Although China is the exception becasue it has liberalized investments and technology, unlike stupid Woyanes, who cling to the notion of denying or limiting access to technology for the Ethiopian people for unknown reason.
Critically analyzed and produced article.
Thank you Mr.
well articulated!
Reblogged this on Allana Potash Blog.