IMF’s pills for Ethiopia: It Ain’t the Economy, it Is the Lab!

(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]l.com

Merkeb Negash

Merkeb Negash, is a Lecturer of Political Science and International Relations at Jimma University. He is a blogger on HornAffairs and can be reached at elroenegash(at)gmail.com

more recommended stories