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African leaders have expected that as China rises further, its wage levels will create disincentives for global manufacturers to continue sending work there. As that happens, they hope countries like Ethiopia, Rwanda, and Kenya can be seen as reliable alternatives that provide affordable labor with enough infrastructures for basic manufacturing. But with AI advancements decreasing outsourcing, the availability of cheap wage becomes irrelevant. China understands that, and is investing heavily to win the race of advanced manufacturing, tapping into the capabilities it acquired by making things for the world. If any outsourced manufacturing will remain, it is the advanced manufacturing. Based on available reports, Africa is not preparing for that level yet, as it continues to struggle with basic enablers like electricity, challenges that many countries solved many decades ago.
China designed and executed a policy that shrank the industrialization process in a mere 25 years — something that many economies took at least a century to do. That redesign has brought immense dislocation in global commerce and industry, enabling China to become one of the world’s leading economies.
China’s success has led many African capitals to pursue the country’s same industrialization trajectory. Over the last few years, African leaders have been pursuing policies designed to mimic the path China took. Some of these policies include creating special economic zones after China’s Shenzhen and positioning the manufacturing sector as a fulcrum to attract investments and create new jobs. Despite these efforts, Africa has yet to advance in its industrialization at the same speed China did.
Put simply, the things that worked for China will not work for Africa.
China had already won sizable global manufacturing, accounting for more than 32% of the world’s industrial production as of May 2019. It became the world’s manufacturing capital through a combination of factors, including optimal infrastructure and price-competitive local manufacturing talent. In doing so, China created a well-differentiated comparative advantage that made companies from the U.S. and Europe — and later, other parts of the world — outsource manufacturing activities to China.
For more than three dozen years, a virtuous circle was created: The availability of demand from the U.S. and Europe provided China the opportunity to invest to meet its needs. And over time, China moved from basic manufacturing into advanced manufacturing domains, where state-of-the-art technologies are used to improve processes and many lower-skill processes are automated. Consequently, China has improved its capabilities in robotics and broad emerging technologies like virtual reality, augmented reality, and artificial intelligence. Today China is recognized as a leading AI player.
It is in these technological advancements that China can continue to dominate while Africa may struggle. AI is expected to distort the equilibrium of the global labor market, eliminating many factory jobs. Most Western companies will use AI to do most of the manufacturing jobs that they are currently outsourcing to China. Indeed, AI will create a massive shift in how products and services of the 21st century are developed, manufactured, and distributed.
If the manufacturing jobs by global entities like Dell, HP, and Siemens do not need to be outsourced, the expected opportunity Africa is banking on may not materialize. African leaders have expected that as China rises further, its wage levels will create disincentives for global manufacturers to continue sending work there. As that happens, they hope countries like Ethiopia, Rwanda, and Kenya can be seen as reliable alternatives that provide affordable labor with enough infrastructures for basic manufacturing. But with AI advancements decreasing outsourcing, the availability of cheap wage becomes irrelevant. China understands that, and is investing heavily to win the race of advanced manufacturing, tapping into the capabilities it acquired by making things for the world. If any outsourced manufacturing will remain, it is the advanced manufacturing. Based on available reports, Africa is not preparing for that level yet, as it continues to struggle with basic enablers like electricity, challenges that many countries solved many decades ago.
Africa can find the paths to industrialization, but in ways that do not mimic China’s. Here are some of the paths for the continent; some are already in progress and need to be deepened:
Encourage internal consumption and intra-trade. Africa should build processes to improve internal consumption, rather than focusing on using cheap labor as a comparative advantage for global manufacturing. If Africa expands internal consumption by trading more among member states, decoupling from old colonial trade routes, it can industrialize, as it has sizable markets to support the growth of companies. Today, the share of intra-African exports as a percentage of total African exports is about 17%, well below the 69% recorded for Europe and 59% for Asia. Improving intra-African commerce will advance the continent.
Push forward the Free Trade Agreement. The African Continental Free Trade Agreement, which entered its operational phase on July 7, will remove some inherent barriers for intra-continental trade that have caused most African countries to favor trade with European countries and other global counterparts, rather than with African nations. The agreement has been designed to make goods produced in Africa move within the continent at negligible tariffs. The expectation is that manufacturers will be incentivized to invest in Africa in order to have access to the integrated market. If it works as planned, the trade agreement will be a catalyst to African industrialization.
Create a single African currency. The planned currency got a boost when a regional economy, the Economic Community of West African States, announced plans to launch the ECO as a regional currency in 2020. The expectation is that once regional economies have monetary union convergence, a continental-level monetary union will be formed. A single currency will reduce barriers in trade by eliminating multiple exchanges, wherein currencies have to be converted to one of the leading global currencies, like the U.S. dollar, euro, or British pound sterling, before trading in Africa. This drastic reduction on trade frictions will boost industrialization.
There are risks to these structural redesigns, however, which must be managed. A union arising out of the single currency will require a supranational bank to coordinate monetary policies, depriving member countries of individual flexibility on areas of monetary policies. The implication is that some bigger economies will have undue influence on the performance of the union. Without careful management, the smaller economies affected could experience welfare losses, making them worse off than before the integration.
Improve infrastructure. In its 2019 African Economic Outlook, the African Development Bank wrote that “trade costs due to poorly functioning logistics markets may be a greater barrier to trade than tariffs and nontariff barriers.” Africa needs more deep seaports, railway lines, airports, and other critical enablers of modern commerce in order to advance. It remains more expensive for an operating factory in Accra, Ghana, to import coffee from Rwanda than from a Paris-based company, for instance. And most exports outside Africa are unprocessed raw materials that, because of supply chains and the disparate natures of the markets, have not stimulated local processing. Investment in infrastructures will close the gaps.
Invest in education. Africa also needs to invest in education to compete and advance its citizens so that it can boost internal consumption. The continent must make primary and secondary education compulsory — and free — while boosting quality by committing more resources to education. Unless Africa can educate its citizens to compete with the best in the world, it will struggle to rise.
As robotics and AI advance, most countries will keep their production processes at home, eliminating the need for cheaper labor abroad. In this redesign, Africa’s competitor is not China; robots and AI are the real competitors. Africa can no longer depend on global manufacturing to become industrialized, nor can it simply mimic China’s policies. But if Africa educates its citizens, integrates effectively on trade and currency, and improves intra-African trade, its industries can compete at least to serve its local markets. Where that happens, Africa can attain industrialization faster by scaling indigenous innovations and utilizing AI as enablers.
‘Since domestic instead of global trends now drive growth, developing countries are likely to show significant heterogeneity in long-term performance. Therefore, they have absolutely no option but to get their industrial policies right.’
On the seventh anniversary of the 9/11 attacks, Dani Rodrik posed a controversial question: “Is Export Led Growth Passé?” Writing on September 11, 2008, this famous Harvard professor argued that advanced economies were unlikely to run large current account deficits and import as they did in the past. Export markets would shrink and long-term success for developing countries would depend “on what happens at home rather than abroad.”
In 2016, Rodrik gave a key lecture at the University of Sussex in the UK developing this argument further. He argued that the “East Asia style growth miracles are less likely in the future.” Furthermore, if growth miracles happen, they would no longer be based on exports alone. Rodrik also made the case that growth in emerging markets has been unsustainably high in the last decade and will come down by a couple of percentage points.
In this day and age, it is common sense for most economists to hold a notion of convergence. As per this idea, Third World countries can grow fast and achieve standards of living similar to advanced economies in a matter of decades or less. As latecomers, these countries, also referred to as developing economies or emerging markets, have access to the latest thinking, new technologies, First World capital and global markets. This access should allow these poorer countries to converge with richer ones in a matter of decades or less.
Rodrik distinguishes between conditional and unconditional convergence. Most development economists hold the view that convergence is not inevitable but conditional. To achieve it, poorer countries must build up their economic and political institutions, develop human and physical capital, and employ sound economic stabilization policies that rein in fiscal deficits and curb inflation. These conditions are akin to the “Washington consensus” first coined by British economist John Williamson. Since 1989, the World Bank and the International Monetary Fund have faithfully preached this sermon to poorer countries ad infinitum.
Forget Institutions, Focus on Industrialization
As per the Washington consensus, convergence with richer economies is conditional on poorer ones instituting market-based critical reforms. The faster poorer economies bring in reform, the quicker they will catch up with richer ones. While the prescription for rapid growth and thus convergence to the First-World living standards is straightforward, the trouble with it is that there is no example of a single economy that has grown and converged following the dictums of free markets, improvement of institutions and all the other recommendations.Embed from Getty Images
Rodrik examines data from 1950 to 2012 to find just two examples of convergence. The first example is the solid three-decade-long growth of countries in the European periphery after World War II. The second is the spectacular growth of countries in East Asia. The so-called East Asian miracle allowed the East Asians to catch up dramatically with the West.
In the words of Lewis Preston, the president of the World Bank from 1991 to 1995, Asian economies achieved “rapid and equitable growth, often in the context of activist public policies,” raising “complex questions about the relationship between [the] government, the private sector, and the market.” The late Preston attributed this “extraordinary growth” to “the superior accumulation of physical and human capital.” He also argued that “these economies were also better able than most to allocate physical and human resources to highly productive investments and to acquire and master technology.”
Rodrik gives a simpler explanation than Preston for the East Asian miracle. He attributes it to rapid industrialization. After World War II, Japan was a one-party democracy, South Korea was a military dictatorship and Hong Kong was ruled by the British. None of them followed the Washington consensus. The common feature for all the economies that enjoyed spectacular growth over many decades is that they industrialized with a vengeance.
It turns out that industrialization, not institutional reforms, matter most in growing the economy at higher levels and allowing it to converge faster. Rodrik labels this as unconditional convergence. The agricultural sector does not allow for a dramatic increase in productivity. Services do not do so either. Rodrik points out that high-productivity services are skill-intensive and employ few people. Low-productivity services employ more people but do not drive growth. Industrialization seems to be the only way forward for increased productivity, high growth and economic transformation.
In the case of East Asia, both supply and demand side factors came together simultaneously to cause the miracle. Governments in places like South Korea, Taiwan and Japan bet big on domestic manufacturing. They protected infant industries, subsidized exports, kept their currencies low, developed special investment zones and put in massive resources to boost manufacturing. At the same time, the US developed a taste for cheap products and American demand fueled Asian exports. It is this demand that enabled the likes of Sony, Toyota, Samsung and LG to emerge on the global stage.
The success of East Asian economies has led many developing countries to assume that the export-led growth model is the only path to rapid economic development. This view misses the forest for the trees. The export-led growth model of East Asia is more an example of rapid industrialization than of exports per se. Exports just provided markets for its industries that were the primary driver of the economy.
Lessons From the 19th Century
To understand the impact of industrialization, it is instructive to study three countries: the UK, the US and Germany. The Industrial Revolution began in the United Kingdom. Innovations like the flying shuttle, the spinning jenny, the water frame and the power loom increased cloth production dramatically. Fewer people could produce much more in less time than individual spinners, weavers and dyers. This revolution was fueled by cheap energy from coal.
The revolution in iron and steel manufacturing soon led to the development of railroads and steamships. Better roads and a canal network developed speedily to distribute the products of British industries. The first commercial telegraphy system emerged as did stock exchanges, banks and industrial financiers. Even as industrialization gathered speed in the early 19th century, the UK proceeded to conquer an increasing share of the planet. By now, present-day Bangladesh and much of India was already a colony and a captive market. After 1757, in the words of Horace Walpole, the UK was also “a sink of Indian wealth.” It might be fair to say that the First Industrial Revolution did not occur because of adherence to the Washington consensus.
The Second Industrial Revolution is purported to have begun in 1793 when an English immigrant called Samuel Slater opened a textile mill in Pawtucket, Rhode Island. He immigrated to the US in defiance of British laws prohibiting the emigration of textile workers, earning the epithet of the “Father of the American Revolution” in the process. The US then proceeded to industrialize rapidly by liberally borrowing British innovations, which really meant intellectual piracy for which the US now damns China.Embed from Getty Images
Just as the British conquered much of the world, Anglo-Saxons in the US expanded from the original 13 colonies to gobble up more Native American land. They believed in “manifest destiny,” the inevitability of the continuous expansion of US territory to the Pacific and beyond. None other than Founding Father Alexander Hamilton took the view that political independence was meaningless without economic independence.
This legendary American whose statue still stands outside the Treasury building argued that the US would never be free from Britain or any other foreign oppressor as long as it depended on foreign manufacturers. The first major act passed by Congress was the Tariff Act of July 4, 1789, and laid the grounds for protecting the infant industries that would otherwise be ruined by British competition. Unknown to most, the US pioneered industrial policy that many other countries have emulated since.
In fact, protectionism played a key part in triggering the Civil War. Most Americans do not know this fact. They look back at the Civil War with rose-tinted eyes where a virtuous patriot from the North took on the sinful slave owners of the South, paying for the liberty of the enslaved with his life. It turns out that the 1846 abolition Corn Laws in the UK and the 1857 uprising in India might have played a key role in triggering the American Civil War.
After 1846, the UK embarked on a trajectory of free trade. Now, the UK imported food for its urban working classes from around the world. The US emulated the UK, but this led to economic discontent in the industrial North. As a result, the newly formed Republican Party emphasized protective tariffs in its 1860 platform. The agrarian South was not too pleased. Protectionism meant that it had to sell cotton to Yankee buyers instead of British ones and earn less.
Not only did the South miss out on the 1846 British bonanza, but also the windfall from the rise in the price of cotton thanks to the 1857 upheaval in India that disrupted global cotton supply. The North’s triumph in the Civil War ensured that protectionism remained standard American policy well into the 20th century. Even Woodrow Wilson’s call for a removal “of all economic barriers” fell on deaf ears as the Tariff Acts of 1922 and 1930 demonstrated. Only after World War II did the US emerge as a free-trade champion with its industries intact and growing while its competitors such as Germany, Japan and the UK had been conveniently bombed to smithereens.
If the British and the Americans pushed forth industrialization through a mix of private entrepreneurship and public policy, so did the Germans. Prince Otto von Bismarck consciously promoted trade and industry in unified Germany. A mercantilist policy of tariffs aimed to make the new German Empire “a self-sufficing economic community.” Lacking the resources of the US or the British Empire, Germany focused on developing its human capital. It established a superb education system, embedded engineering in its university education instead of leaving it to tinkerers as in Britain, and instituted a system of vocational training that remains the envy of the world.
The Mittelstand, the small and medium-sized industries that drive the German economy, emerged during this Bismarckian era. They benefited from favorable policies of the Iron Chancellor who funneled money not only into the Mittelstand, but also into heavy industry such as steel, railways and chemicals. Unlike his Anglo-Saxon counterparts, Bismarck instituted accident and old-age insurance and created the world’s first and most comprehensive welfare state. Historical evidence suggests that the German economic miracle was a result of intentional industrial policy, much like the East Asian one a few decades later.
Back to the Future Again
In 2016, this author observed that world trade was slowing down as anti-trade sentiments were rising in Europe and the US. For years, American business leaders and politicians argued that trade was a win-win. That was not entirely true. Trade resulted, results and will always result in winners and losers. CEOs and shareholders benefited from moving factories overseas, but workers in the US suffered. Many of these workers voted for Donald Trump.
Trump’s election as president marks the end of the postwar American consensus on trade. It certainly marks the end of the frenzied era of trade liberalization after the fall of the Berlin Wall in 1989. The US was protectionist for more than a century and a half since its independence. It only turned to free trade after World War II when it had an unprecedented edge over the rest of the globe. Now that Americans are suffering from the ravages of free trade, protectionism is back in fashion. There is no reason to assume that it will die after Trump.Embed from Getty Images
If protectionism is back in fashion, it follows that American demand for imports is not likely to increase as rapidly as it has in the past. So far, this demand has powered the industrialization of East Asia. In particular, it has enabled Chinese factories to become the workshop of the world. There is more than an element of truth in the claim that Walmart fueled the rise of Shenzhen. Under Trump, the US is no longer willing to fuel China’s rise, and even Thomas Friedman, a lifelong Democrat, is acting as a cheerleader. He has argued in the anti-Trump The New York Times that China deserves Trump.
Friedman has a problem with Chinese President Xi Jinping’s “Made in China 2025” modernization plan that aims to make companies in the Middle Kingdom “the world leaders in supercomputing, Artificial intelligence, new materials, 3-D printing, facial-recognition software, robotics, electric cars, autonomous vehicles, 5G wireless and advanced microchips.” Sadly for China, “all these new industries compete directly with America’s best companies.” Therefore, the US cannot allow the Middle Kingdom to “continue operating by the same formula” that propelled its rise.
As a patron saint of the American establishment, Friedman uses the “trade is a win-win” trope, but the condition for it is simple. China must let Google and Amazon compete freely and fairly with Alibaba and Tencent. However, Friedman laments that China cheats. Its diabolical military stole the plans for Lockheed Martin’s F-35 stealth fighter, avoiding all the R&D costs. Huawei’s 5G equipment can serve as an espionage platform. To top it all, China is militarizing islands in the South China Sea to push the US out. The great defender of democracy cannot countenance such impudence and ipso facto cannot continue to import wantonly from China.
In this brave new world, it is “America First” yet again. Trump has declared economic war not only on China, but also on neighbors like Mexico and Canada as well as allies like Japan and South Korea. On the demand-side, this new American protectionism marks the death knell of the export-oriented growth model that many trumpet.
As if changes on the demand-side were not enough, a quiet transformation is occurring on the supply-side. In a previous article, this author chronicled how smart manufacturing using new materials, additive manufacturing, a combination of hardware with software and the Internet of Things is leading to the Fourth Industrial Revolution. This is bringing back manufacturing to the US and even to Europe. No longer does Asia have the cost advantage. The labor arbitrage is ending and industrial production is returning to the West. It goes without saying the export-led model is now as dead as a dodo.
In the light of the new zeitgeist, what economic policy should developing countries follow? It seems industrialization with a focus on domestic markets is the only sensible option. Instead, many of them have gone into what Rodrik calls “premature de-industrialization.” In advanced economies such as the UK, Sweden and Japan, manufacturing reached a peak of about 30% of GDP in the 1960s and 1970s before giving way to services. In countries like Ghana, India and Brazil, manufacturing never reached the same level as in the advanced economies and services have taken over. This means they have de-industrialized prematurely and missed out on the productivity gains through manufacturing that richer countries achieved.
To bring prosperity to their people, developing countries need to industrialize and, at times, reindustrialize. To do so, they need to foster good macroeconomic fundamentals through reasonably stable fiscal and monetary policies as well as business-friendly policy regimes. More importantly, they must invest in human capital in the form of better schools, universities and, most crucially, vocational training. Good electricians, decent plumbers and competent mechanics enable a country to meet its tryst with prosperity.
Apart from getting macroeconomic fundamentals right, developing countries need sensible industrial policies that support manufacturing through both orthodox and unorthodox measures. Such measures require judgment, which in turn depends on the quality of a country’s politics, its governance standards and the visions of its leadership. Those countries that are dysfunctional, divided and dishonest are unlikely to do well. They might well become de facto colonies of old and new industrial powers.
Since domestic instead of global trends now drive growth, developing countries are likely to show significant heterogeneity in long-term performance. Therefore, they have absolutely no option but to get their industrial policies right.
The neoliberal experiment – lower taxes on the rich, deregulation of labor and product markets, financialization, and globalization – has been a spectacular failure. Growth is lower than it was in the quarter-century after World War II, and most of it has accrued to the very top of the income scale. After decades of stagnant or even falling incomes for those below them, neoliberalism must be pronounced dead and buried. Vying to succeed it are at least three major political alternatives: far-right nationalism, center-left reformism, and the progressive left (with the center-right representing the neoliberal failure). And yet, with the exception of the progressive left, these alternatives remain beholden to some form of the ideology that has (or should have) expired.
GDP is flummoxed by the Internet. Wikipedia provides all human knowledge free of charge, but in GDP terms, it is worth zilch
Image: REUTERS/Gary Cameron
The beauty of gross domestic product is its single figure. It squishes all of human activity into a couple of digits, like a frog jammed into a matchbox. As this image of an unfortunate amphibian suggests, this condensing is also GDP’s flaw. How can the sum total of everything we do as human beings be so compacted? How can our activity be conflated with something as complex, nuanced and contested as our wellbeing?
GDP’s inventor Simon Kuznets was adamant that his measure had nothing to do with wellbeing. But too often we confuse the two. For seven decades, gross domestic product has been the global elite’s go-to number. Fast growth, as measured by GDP, has been considered a mark of success in its own right, rather than as a means to an end, no matter how the fruits of that growth are invested or shared. If something has to be sacrificed to get GDP growth moving, whether it be clean air, public services, or equality of opportunity, then so be it.
GDP is how we rank countries and judge their performance. It is the denominator of choice. It determines how much a country can borrow and at what rate. But GDP is well past its sell-by date, as people are starting to realise. However brilliant the concept, a measure that was invented in the manufacturing age as a means of fighting the Depression is becoming less and less capable of imparting sensible signals about complex modern economies.
Pointing out the defects of GDP and even tentatively suggesting alternatives is no longer controversial. Former French President Nicolas Sarkozy commissioned a panel led by Joseph Stiglitz, a Nobel economist, to examine the issue. It was creating a dangerous “gulf of incomprehension”, Sarkozy said, between experts sure of their knowledge and citizens “whose experience of life is completely out of sync with the story told by the data”.
What is so gross about gross domestic product?
GDP is a gross number. It is the sum total of everything we produce over a given period. It includes cars built, Beethoven symphonies played and broadband connections made. But it also counts plastic waste bobbing in the ocean, burglar alarms and petrol consumed while stuck in traffic.
Kuznets was uneasy about a measure that treated all production equally. He wanted to subtract, rather than add, things he considered detrimental to human wellbeing, such as arms, financial speculation and advertising. You may disagree with his priorities. The point is that GDP makes no distinction. From the perspective of global GDP, Kim Jong-un’s nuclear warheads do just as well as hospital beds or apple pie.
GDP is born of the manufacturing age. It measures “things you can drop on your foot”. Yet in advanced economies such as the US, up to 80% of production is in the service industry. GDP doesn’t do services – at least not very well. It is good at quantity, but lousy at quality. If the food or service improves in your local restaurant, GDP will not notice. Ditto, if an airline’s safety record improves. In fact, GDP might prefer a plane crash – so that it can build a new plane.
GDP is flummoxed by the Internet. If I buy my own cheap airline ticket, check myself in online and pick my own aisle seat, my convenience has gone up. But GDP has gone down. I am my own travel agent, a job that would once have been performed by a fully paid-up GDP-producing employee. Wikipedia provides all human knowledge free of charge. In GDP terms, it is worth zilch.
GDP deals in aggregates; GDP per capita in averages. In an age where a huge cause of social dislocation is inequality, GDP has nothing to say about distribution. Averages are misleading. Medians are better than means. A rise in average GDP could actually be retrograde, if it leaves 99% of people resentful at how the 1% is making good.
From GDP’s perspective, bigger is always better. In the real world, that is not always so. When the financial sector got bigger and bigger, it ended in financial crisis. When the US health service gets bigger and bigger, it means costs are out of control.
In general, GDP measures only cash transactions. In Europe that includes heroin and prostitution. However, volunteer work, housework or looking after an ageing relative count for nothing. GDP has skewed priorities.
In poor countries, the informal sector is practically invisible to GDP. Yet in much of the world, the informal economy counts for most. Monitoring economic activity from space, through satellite images of nightlights, might be more accurate than on-the-ground GDP, academic studies have found.
Is GDP really such a bad measure of wealth?
GDP is not a measure of “wealth” at all. It is a measure of income. It is a backward-looking “flow” measure that tells you the value of goods and services produced in a given period in the past. It tells you nothing about whether you can produce the same amount again next year. For that, you need a balance sheet – a measure of wealth. Companies have balance sheets as well as income statements. Nations don’t.
When Nigeria was busy selling high-priced oil to the world before the price crash, its GDP was soaring. But its wealth was falling. Oil deposits were used up, but cash was not reinvested in human, physical and technological capacities to ensure future income. Only wealth accounts could have drawn attention to that.
In January, the World Bank will release a groundbreaking study of comprehensive wealth for 141 countries between 1994 and 2014. It is well worth a read.
Should GDP be dethroned?
Yes. GDP is an ingenious measure. It tells us something. It should definitely not be scrapped – it is still far too valuable a policy tool for that. And GDP growth can provide the wherewithal for the other things we want in life: health, education, security, opportunity, goods.
But we need to pay more attention to other measures to complete the picture, some of which already exist and some of which we may have to invent. Measures of wealth, equality, leisure, wellbeing and net domestic product, adjusted for negatives like pollution, are places to start.
Everyone will have their favourite data point. One of mine is hours of sleep, which might be a proxy for work-life balance or stress. The number of hours of sleep in the US has been steadily declining from about eight hours in 1940 to 6.8 hours today. Now that’s a statistic I know how to act on.
The dearth of foreign currency is compelling the Ethiopian government to delay payments that should be made to international companies in US dollars.
The Reporter has learnt that the government has been unable to settle payments to oil companies that delivered petroleum products to the country in 2015-2017 according to schedule. Vitol Oil supplied diesel and gasoline to the Ethiopian Petroleum Supply Enterprise in 2015 and 2016 after winning the international tenders put up by the enterprise in two consecutive years. Vitol Oil’s second contract was terminated in December 2016.
Reliable sources told The Reporter that EPSE now owes Vitol Oil 20 million US dollars. “Though the company’s petroleum supply contract expired on December 2016 EPSE is unable to settle the remaining 20 million dollars due to foreign currency shortage. The National Bank of Ethiopia has not been able to provide dollars to settle the payment,” sources said.
Similarly the government is unable to settle a 170 million US dollars payment that was supposed to be made to Petro China, the Chinese oil company which has been supplying petroleum products to the country since January 2017. Petro China won the international bid floated by the EPSE in September 2016 and won the tender to supply diesel and gasoline for the 2017 fiscal year. Petro China’s contract will expire on December31, 2017.
Sources told The Reporter that the government now owes Petro China 170 million dollars for the petroleum products it supplied in the fiscal year. Usually payments should be settled within 90 days after the petroleum products have been delivered. According sources, the payment arears are now more than one year old.
Meanwhile international airlines flying to Addis Ababa are facing difficulty in repatriating their sales to their countries. Foreign carriers sell their tickets in the local currency Birr and repatriate their sales revenue in US dollars to their respective countries.
The International Air Transport Association (IATA) told The Reporter that Ethiopia has joined the list of African nations where international airlines face difficulties in repatriating their funds. According to IATA, Ethiopia owes foreign carriers 22 million dollars.
In an interview in his office in Geneva, Switzerland Alexander de Juniac, director general and CEO of IATA, said that nine African countries have a total of 1.1 billion dollars in airlines’ blocked funds. Angola has the largest airlines blocked fund-507 million USD, Algeria-146 million, Sudan-125 million, Nigeria-121 million, Eritrea-64 million, Zimbabwe-52 million, Mozambique-33 million, Ethiopia 22 million and Libya 20 million.
Juniac told The Reporter that most of the countries faced shortage of foreign currency due to the drop in oil price while others have their own economic challenges. “We have been working with African governments to get the airlines blocked funds released and we are successful in releasing most of the funds in Egypt and Nigeria,” Juniac said.
The Ethiopian government officials explain that the country is facing the foreign currency crunch due to the commodity price decline in the international market stunting the foreign currency earnings. The increasing fuel imports and hefty expenditures on mega infrastructure projects are among the long list of contributing factors to the foreign currency shortage. The government is taking various measures to stimulate the weakened export.
#Ethiopia defaults millions of $ in international payments due to forex crunch. https://t.co/KvJ3dhrI96 "The government has been unable to settle payments to oil companies that delivered petroleum products to the country in 2015-2017 according to schedule." pic.twitter.com/kwagist8uq
ESAT, 7 December 2017: According to a well-placed source, the foreign currency reserve in the coffers is only about 700 million dollars that could only run for three weeks.
Several mega projects have already been put on hold. Prominent among the projects is the 550 kms gas pipeline that stretches from the port of Djibouti to well inside Ethiopia.
The import of petroleum and medicines were seriously affected and businesses engaged in export trade had to wait upto a year to obtain foreign currency from banks.
The Ethiopian Shipping and Logistics Services Enterprise was unable to withdraw the 100 million dollars deposit it has with National Bank of Ethiopia.
The source also revealed that about 2000 containers were on hold at the port of Djibouti due to unpaid port fees.
The country’s annual debt payment has reached 2 million dollars of which a significant amount is due to be paid to the Chinese import export bank, China EximBank.
Meanwhile, the managing director of the International Monetary Fund Christine Lagarde is due to visit the country and is expected to talk on possible loans to help the country ease the shortage of hard currency. But the IMF, according to the source, demands the regime to halt the progress of mega projects. The IMF also requires the country privatize state-owned enterprises like Ethio-Telecom, according to the source.
A recent effort by regime officials to rekindle relationships with Qatar in hopes of getting some hard currency from the oil rich country has resulted in unintended and bad consequences. Irate over the developments, the United Arab Emirates, one of the gulf states that loves to hate Qatar, had demanded Ethiopia to pay 400 million dollars for petroleum that it had bought in loan. The UAE has for a long time been lenient on requiring Ethiopia pay the loan, the source said.
'Using fabricated economic data to seek legitimacy,… the regime then advanced narratives about its double-digit economic growth, described with such catchphrases as Ethiopia rising, the fastest growing economy in the world and African lioness.' https://t.co/gV7b30elp4
The link between currency devaluation and domestic inflation
Ethiopia has been devaluing the Birr, in part because of pressures from the International Monetary Fund (IMF). Cheaper domestic currency, Vis a Vis major international currencies, makes exports more attractive to foreigners if a decent segment of the economy is based on manufacturing or, if the manufacturing sector is expanding and looking for international markets. Devaluing domestic currency makes exports more attractive to foreigners, which in turn spurs economic growth. The flip side of that is, cheaper domestic currency makes imports more expensive. Ethiopia imports medicine, fuel, food, and almost all productive capital, vehicles, and many more consumer goods. Cheaper currency means it takes more Birr to buy one foreign currency. Ethiopian importers will naturally raise their prices (inflation) to cover additional costs incurred because of a weaker Birr. The cost of devaluing the Ethiopian Birr may outweigh its benefit as the Ethiopian economy is still largely agricultural. The demand for agricultural products and minerals on the world market is largely stable and Ethiopia does not need to cheapen its currency to sell more to foreigners. The reason Africa can’t get a foothold in manufacturing is Chinese dumping of cheaply manufactured goods, not inability to access world markets for Africa’s manufactured goods. African infant manufacturing industry simply can’t compete with predatory practices of foreign manufacturers.
Ethiopia could simply let the exchange rate float. A floating exchange rate means the price of the Birr vis a vis major international currencies is determined by the relative supply and demand of the currencies. Consider the U.S. Dollar and the Birr are just goods like any other; say salt, just as in a free market the price of salt is determined by the supply and demand of salt, the exchange rate (price of Birr in Dollar) will be determined by the relative supply and demand of the two currencies. The United States follows floating exchange rate. In Ethiopia, the exchange rate is fixed by the National Bank. Fixed exchange rate always creates arbitrage opportunities as it seldom reflects the will of the international currency markets. The latest devaluation of the Birr ( 1USD = 27.07 Birr) will undoubtedly create more domestic price inflation as Ethiopian importers will raise prices on their imported goods. With the increase in the wage rate trailing far behind increase in prices, workers are getting a wage cut in real terms. Rising general level of prices means rising input prices. When input prices rise, manufacturers cut back on output, which means even more unemployment.
Inflation, two fundamental factors
When the Ethiopian parliament opened on Monday, President Mulatu Teshome made bold claims about the state of the Ethiopian economy. I will address the merits/demerits of that claim at a later date. Today, I will talk a little bit about the fundamental causes of domestic currency devaluation (inflation). There are two fundamental causes of currency depreciation:
1. The productive capacity of an economy.
2. The size of the money supply.
When an employee creates more value through increased productivity, his/her salary should increase proportionately. If the money supply in a country is fixed while productivity is increasing, each unit of currency will store greater value. On the other hand, if the increase in the money supply is proportionate to the increase in productivity, the amount of purchasing power (value) stored in each unit of currency remains unchanged. But, if you have a runaway money supply, that is, if the money supply grows faster than the growth in productivity, the value stored in each unit of currency decreases, and we call that inflation. When there’s more money in the economy than the productive capacity of the economy, the general level of prices increases and we call that demand-pull inflation. When prices of productive inputs rise, producers increase prices on finished products in order to recoup higher payments for input and, that can also lead to inflation; inflation created through an increase in input prices is called cost-push inflation. This source of inflation is less likely in Ethiopia as the manufacturing sector contributes less than 40% of the Ethiopian GDP.
The American Federal Reserve Bank’s counterpart in Ethiopia is the National Bank of Ethiopia. The National Bank is supposed to oversee the monetary policy of the country, including managing the money supply. The National Bank is supposed to be independent of undue political influence from the executive branch of the government. In Ethiopia today, appointments to key positions in the National Bank are based more on loyalty to the regime than professional aptitude. With that in mind, it’s easy to see how monetary policy could be mismanaged.
This is just to offer basic explanation of the issue without technical jargons. Exchange rate is the price of one country’s currency in terms of another country’s currency. For instance, the price of Birr in terms of U.S. dollar or vice versa. Exchange rates affect large flows of international trade (imports and exports). Foreign exchange facilitates flows of international investment, including foreign direct investments (FDI. Countries follow various exchange rate regimes: fixed exchange rate, pegged exchange rate, floating exchange rate, and managed floating exchange rate. The exchange rate regime of Ethiopia is characterized as managed floating exchange rate regime, which partly depends on supply and demand but with some government intervention in the exchange rate market, to concurrently adjust both exchange rates and foreign exchange reserves, monitored by the World Bank and the International Monetary Fund.
What is Devaluation?
Devaluation is mainly government intervention in the exchange rate market of the country to determine the price of Birr in terms of dollar-some kind of government price setting. Simplified, devaluation makes Birr cheaper relative to the dollar, and hence you will need more Birr to get a dollar, compared to the current rate of exchange. In short, you need more Birr to buy a unit of dollar, and the people who can afford to buy dollar declines.
The recent announcement states that Ethiopia devalued its currency (Birr) by 15% per cent, which means you will need 15% more Birr to buy a dollar since Birr has become cheaper by 15%.
Why Do Countries Devalue their Currencies?
There are several reasons behind the need to devalue currencies. Some do it to promote exports and restrain imports. The simplified assumption is this. If the local currency becomes cheaper due to devaluation, foreigners can buy the local export products more cheaply and hence exports will increase. On the other hand, cheaper local currency can serve as an import restraint since foreign products become more expensive in local currency and importers need more Birr to buy foreign products, and hence increase the cost of living.
When it comes to the developing economies like Ethiopia, with limited export promotion power, the devaluation policy measure is mainly related to exchange rate stability due to imbalance between supply and demand of hard currencies. As repeatedly explained by the government officials, including the PM & the President, there is severe shortage of hard currencies in Ethiopia caused by limited hard currency earning power of Ethiopia’s exports whereas imports have grown folds more than exports. Ethiopia gets dollar from exports and needs dollar for the imports. The gap between the dollar earning and dollar spending capacity leads to part of the current account deficit called trade deficit (export values greater than import values). The gap has been expanding every year-even more so in recent years.
If you buy something (imports) you have to pay for it via exports, foreign aid in hard currency, remittances, etc. The growing gap between exports and imports is not sustainable. It’s important to note that foreign exchange rate crisis is one of the major sources of economic crises that ravaged the economies of a number of countries. Google exchange rate crisis to read more about it.
Therefore, the devaluation of Birr, which has been urged by the World Bank for years, is the policy measure undertaken by the regime to relieve a crippling dollar shortage and meager foreign exchange reserve of Ethiopia. The World Bank, EU, IMF, etc. cover the foreign exchange gap of Ethiopia so that the economy does not collapse due to the shortage of foreign exchange. Without international support and the Diasporas remittance, Ethiopia can easily become hard currency illiquid country that cannot pay for its imports or pay for its debts in hard currency.
Although the shortage of hard currency is a common phenomenon of poor countries with limited exports, the widening gap between Ethiopia’s earning and spending in hard currency is evidently not sustainable. It can kill economic growth. At worst, it can lead to economic crisis due to currency (exchange rate) crisis since there is vivid evidence of liquidity gap in hard currency in Ethiopia owing to its weak foreign exchange earning capacity. Illicit outflow of hard currency is another key problem aggravating the pain.
Simply put, devaluation is not a success story as some want us to believe. It’s a desperate policy measure undertaken to ease the pain of severe shortage of hard currency and its adverse impacts.
I will highlight the effects of devaluation on consumers, business, foreign exchange shortage, etc. in my next note.
In this photo provided by the University of Chicago, Richard Thaler poses for a photo with his books at his home in Chicago after winning the Nobel prize in economics, on Monday.
Anne Ryan/AP
Updated at 7:20 a.m. ET
The 2017 Nobel Prize in Economic Sciences has been awarded to Richard Thaler of the University of Chicago for his pioneering work in behavioral economics.
The announcement from the Royal Swedish Academy of Sciences in Stockholm said the 72-year-old Thaler “has incorporated psychologically realistic assumptions into analyses of economic decision-making. By exploring the consequences of limited rationality, social preferences, and lack of self-control, he has shown how these human traits systematically affect individual decisions as well as market outcomes,” the committee said in a statement.
The relatively new field of behavioral economics studies the effects of psychological, social, cognitive and emotional factors on economic decision-making.
“Human behavior is very complex. So, if we want to construct useful models of economic behavior, we have to make simplifications. One such simplification which has been very important in economics is the assumption that humans behave in a fully rational way and make economic decisions in a way as to maximize their own well-being,” Per Strömberg, chairman of the prize committee, said.
Over time, Strömberg said, researchers have gathered more evidence from psychology on how humans deviate from rational economic decisions. “Richard Thaler is a pioneer when it comes to incorporating such insights from psychology into economic analysis,” he said.
“Thanks to his contributions and discoveries, this new field [of behavioral economics] has gone from being sort of a fringe and somewhat controversial part of economics to being a mainstream area of contemporary economic research,” the chairman of the prize committee said.
Speaking from his home in the United States to a news conference at the Royal Academy, Thaler said he felt the most important impact of his work was “the recognition that economic agents are human.”
Among Thaler’s contributions to the field are his “theory of mental accounting, explaining how people simplify financial decision-making by creating separate accounts in their minds, focusing on the narrow impact of each individual decision rather than its overall effect,” the Academy said.
One area singled out by the committee is Thaler’s work on retirement savings. He was an early proponent of employers automatically enrolling their workers in 401(k) programs. He also developed a “Save More Tomorrow” retirement plan that encourages people to put future salary increases toward retirement.
Kenny Malone of NPR’s Planet Money says Thaler is “a bit of a rock star” in the field of economics.
“In terms of real-world implications, once you start to understand the ways that we are weird, irrational beings, you can structure policies to move people toward the ends that you would want,” Malone tells Morning Edition.
Thaler made a cameo in the movie The Big Short, where he explained the “hot-hand fallacy” about the belief that someone who has experienced success in something involving random chance has a greater chance of further success going forward.
Asked whether he thought that applied to President Trump, Thaler responded with a chuckle, “I think he would do well to watch that movie.”
When the same Swedish journalist asked what Thaler would do with the 9-million kronor ($1.1 million) monetary portion of the Nobel award, the economist: “I will say that I will try to spend it as irrationally as possible.”
Time Series is defined as a set of observations taken at a particular period of time. For example, having a set of login details at regular interval of time of each user can be categorized as a time series. On the other hand, when the data is collected at once or irregularly, it is not taken as a time series data.
Time series data can be classified into two types –
Stock Series – It is a measure of attributes at a particular point in time and taken as a stock takes.
Flow Series – It is a measure of activity at a specific interval of time. It contains effects related to the calendar.
Time series is a sequence that is taken successively at the equally pace of time. It appears naturally in many application areas such as economics, science, environment, medicine, etc. There are many practical real life problems where data might be correlated with each other and are observed sequentially at the equal period of time. This is because, if the repeatedly observe the data at a regular interval of time, it is obvious that data would be correlated with each other.
With the use of time series, it becomes possible to imagine what will happen in the future as future event depends upon the current situation. It is useful to divide the time series into historical and validation period. The model is built to make predictions on the basis of historical data and then this model is applied to the validation set of observations. With this process, the idea is developed how the model will perform in forecasting.
Time Series is also known as the stochastic process as it represents the vector of stochastic variables observed at regular interval of time.
Components of Time Series Data
In order to analyze the time series data, there is a need to understand the underlying pattern of data ordered at a particular time. This pattern is composed of different components which collectively yield the set of observations of time series.
The Components of time series data are given below –
Trend
Cyclical
Seasonal
Irregular
Trend – It is a long pattern present in the time series. It produces irregular effects and can be positive, negative, linear or nonlinear. It represents the variations of low frequency and the high and medium frequency of data is filtered out from the time series.
If the time series does not contain any increasing or decreasing pattern, then time series is taken as stationary in the mean.
There are two types of the trend –
Deterministic – In this case, the effects of the shocks present in the time series are eliminated i.e. revert to the trend in long run.
Stochastic – It is the process in which the effects of shocks are never eliminated as they have permanently changed the level of the time series.
The stochastic process having a stationarity around the deterministic process is known as trend stationary process.
Cyclic – The pattern exhibit up and down movements around a specified trend is known as cyclic pattern. It is a kind of oscillations present in the time series. The duration of cyclic pattern depends upon the industries and business problems to be analysed. This is because the oscillations are dependable upon the business cycle.
They are larger variations that are repeated in a systematic way over time. The period of time is not fixed and usually composed of at least 2 months in duration. The cyclic pattern is represented by a well-shaped curve and shows contraction and expansion of data.
Seasonal – It is a pattern that reflects regular fluctuations. These short-term movements occur due to the seasonal factors and custom factors of people. In this case, the data faces regular and predictable changes that occurred at regular intervals of calendar. It always consist of fixed and known period.
The main sources of seasonality are given below –
Climate
Institutions
Social habits and practices
Calendar
How is the seasonal component estimated?
If the deterministic analysis is performed, then the seasonality will remain same for similar interval of time. Therefore, it can easily be modelled by dummy variables. On the other hand, this concept is not fulfilled by stochastic analysis. So, dummy variables are not appropriate because the seasonal component changes throughout the time series.
Different models to create a seasonal component in time series are given below –
Additive Model – It is the model in which the seasonal component is added with the trend component.
MultiplicativeModel – In this model seasonal component is multiplied with the intercept if trend component is not present in the time series. But, if time series have trend component, sum of intercept and trend is multiplied with the seasonal component.
Irregular – It is an unpredictable component of time series. This component cannot be explained by any other component of time series because these variational fluctuations are known as random component. When the trend cycle and seasonal component is removed, it becomes residual time series. These are short term fluctuations that are not systematic in nature and have unclear patterns.
Difference between Time Series Data and Cross-Section Data
Time Series Data is composed of collection of data of one specific variable at particular interval of time. On the other hand, Cross-Section Data is consist of collection of data on multiple variables from different sources at a particular interval of time.
Collection of company’s stock market data at regular interval of year is an example of time series data. But when the collection of company’s sales revenue, sales volume is collected for the past 3 months then it is taken as an example of cross-section data.
Time series data is mainly used for obtaining results over an extended period of time but, cross-section data focuses on the information received from surveys at a particular time.
What is Time Series Analysis?
Performing analysis of time series data is known as Time Series Analysis. Analysis is performed in order to understand the structure and functions produced by the time series. By understanding the mechanism of time series data a mathematical model could easily be developed so that further predictions, monitoring and control can be performed.
Two approaches are used for analyzing time series data are –
In the time domain
In the frequency domain
Time series analysis is mainly used for –
Decomposing the time series
Identifying and modeling the time-based dependencies
Forecasting
Identifying and model the system variation
Need of Time Series Analysis
In order to model successfully, the time series is important in machine learning and deep learning. Time series analysis is used to understand the internal structure and functions that are used for producing the observations. Time Series analysis is used for –
Descriptive – In this case, patterns are identified in correlated data. In other words, the variations in trends and seasonality in the time series are identified.
Explanation – In this understanding and modeling of data is performed.
Forecasting – Here, the prediction from previous observations is performed for short term trends.
Invention Analysis – In this case, effect performed by any event in time series data is analyzed.
Quality Control – When the specific size deviates it provides an alert.
Applications of Time Series Analysis
Time Series Database and its types
Time series database is a software which is used for handling the time series data. Highly complex data such higher transactional data is not feasible for the relational database management system. Many relational systems does not work properly for time series data. Therefore, time series databases are optimised for the time series data. Various time series databases are given below –
CrateDB
Graphite
InfluxDB
Informix TimeSeries
Kx kdb+
Riak-TS
RRDtool
OpenTSDB
What is Anomaly?
Anomaly is defined as something that deviates from the normal behaviour or what is expected. For more clarity let’s take an example of bank transaction. Suppose you have a saving bank account and you mostly withdraw Rs 10,000 but, one day Rs 6,00,000 amount is withdrawn from your account. This is unusual activity for bank as mostly, Rs 10,000 is deducted from the account. This transaction is an anomaly for bank employees.
The anomaly is a kind of contradictory observation in the data. It gives the proof that certain model or assumption does not fit into the problem statement.
Different Types of Anomalies
Different types of anomalies are given below –
Point Anomalies – If the specific value within the dataset is anomalous with respect to the complete data then it is known as Point Anomalies. The above mentioned example of bank transaction is an example of point anomalies.
Contextual Anomalies – If the occurrence of data is anomalous for specific circumstances, then it is known as Contextual Anomalies. For example, the anomaly occurs at a specific interval of period.
Collective Anomalies – If the collection of occurrence of data is anomalous with respect to the rest of dataset then it is known as Collective Anomalies. For example, breaking the trend observed in ECG.
Models of Time Series Data
ARIMA Model – ARIMA stands for Autoregressive Integrated Moving Average. Auto Regressive (AR) refers as lags of the differenced series, Moving Average (MA) is lags of errors and I represents the number of difference used to make the time series stationary.
Assumptions followed while implementing ARIMA Model are as under –
Time series data should posses stationary property: this means that the data should be independent of time. Time series consist of cyclic behaviour and white noise is also taken as a stationary.
ARIMA model is used for a single variable. The process is meant for regression with the past values.
In order to remove non-stationarity from the time series data the steps given below are followed –
Find the difference between the consecutive observations.
For stabilizing the variance log or square root of the time series data is computed.
If the time series consists of the trend, then the residual from the fitted curve is modulated.
ARIMA model is used for predicting the future values by taking the linear combination of past values and past errors. The ARIMA models are used for modeling time series having random walk processes and characteristics such as trend, seasonal and nonseasonal time series.
Holt-Winters – It is a model which is used for forecasting the short term period. It is usually applied to achieve exponential smoothing using additive and multiplicative models along with increasing or decreasing trends and seasonality. Smoothing is measured by beta and gamma parameters in the holt’s method.
When the beta parameter is set to FALSE, the function performs exponential smoothing.
The gamma parameter is used for the seasonal component. If the gamma parameter is set to FALSE, a non-seasonal model is fitted.
How to find Anomaly in Time Series Data
AnomalyDetection R package –
It is a robust open source package used to find anomalies in the presence of seasonality and trend. This package is build on Generalised E-Test and uses Seasonal Hybrid ESD (S-H-ESD) algorithm. S-H-ESD is used to find both local and global anomalies. This package is also used to detect anomalies present in a vector of numerical variables. Is also provides better visualization such that the user can specify the direction of anomalies.
Principal Component Analysis –
It is a statistical technique used to reduce higher dimensional data into lower dimensional data without any loss of information. Therefore, this technique can be used for developing the model of anomaly detection. This technique is useful at that time of situation when sufficient samples are difficult to obtain. So, PCA is used in which model is trained using available features to obtain a normal class and then distance metrics is used to determine the anomalies.
Chisq Square distribution –
It is a kind of statistical distribution that constitutes 0 as minimum value and no bound for the maximum value. Chisq square test is implemented for detecting outliers from univariate variables. It detects both lowest and highest values due to the presence of outliers on both side of the data.
What are Breakouts in Time Series Data?
Breakout are significant changes observed in the time series data. It consist of two characteristics that are given below –
Mean shift – It is defined as a sudden change in time series. For example the usage of CPU is increased from 35% to 70%. This is taken as a mean shift. It is added when the time series move from one steady state to another state.
Ramp Up – It is defined as a sudden increase in the value of the metric from one steady state to another. It is a slow process as compared with the mean shift. It is a slow transition process from one stable state to another.
In Time series often more than one breakouts are observed.
How to detect Breakouts in Time Series Data?
In order to detect breakouts in time series Twitter has introduced a package known as BreakoutDetection package. It is an open source package for detecting breakouts at a fast speed. This package uses E-Divisive with Medians (EDM) algorithm to detect the divergence within the mean. It can also be used to detect the change in distribution within the time series.
Need of Machine Learning and Deep Learning in Time Series Data
Machine learning techniques are more effective as compared with the statistical techniques. This is because machine learning have two important features such as feature engineering and prediction. The feature engineering aspect is used to address the trend and seasonality issues of time series data. The issues of fitting the model to time series data can also be resolved by it.
Deep Learning is used to combine the feature extraction of time series with the non-linear autoregressive model for higher level prediction. It is used to extract the useful information from the features automatically without using any human effort or complex statistical techniques.
Anomaly Detection using Machine Learning
There are two most effective techniques of machine learning such as supervised and unsupervised learning.
Firstly, supervised learning is performed for training data points so that they can be classified into anomalous and non-anomalous data points. But, for supervised learning, there should be labeled anomalous data points.
Another approach for detecting anomaly is unsupervised learning. One can apply unsupervised learning to train CART so that prediction of next data points in the series could be made. To implement this, confidence interval or prediction error is made. Therefore, to detect anomalous data points Generalised ESD-Test is implemented to check which data points are present within or outside the confidence interval
The most common supervised learning algorithms are supervised neural networks, support vector machine learning, k-nearest neighbors, Bayesian networks and Decision trees.
In the case of k-nearest neighbors, the approximate distance between the data points is calculated and then the assignment of unlabeled data points is made according to the class of k-nearest neighbor.
On the other hand, Bayesian networks can encode the probabilistic relationships between the variables. This algorithm is mostly used with the combination of statistical techniques.
The most common unsupervised algorithms are self-organizing maps (SOM), K-means, C-means, expectation-maximization meta-algorithm (EM), adaptive resonance theory (ART), and one-class support vector machine.
Anomaly Detection using Deep Learning
Recurrent neural network is one of the deep learning algorithm for detecting anomalous data points within the time series. It consist of input layer, hidden layer and output layer. The nodes within hidden layer are responsible for handling internal state and memory. They both will be updated as the new input is fed into the network. The internal state of RNN is used to process the sequence of inputs. The important feature of memory is that it can automatically learns the time-dependent features.
The process followed by RNN is described below –
First the series of data is fed into the RNN model. After that, model will train the series of data to compute the normal behaviour. After computing, whenever the new input is fed into the trained network, it will be able to classify the input as normal and expected, or anomalous.
Training of normal data is performed because the quantity of abnormal data is less as compared with the normal data and provides an alert whenever any abnormal activity is observed in the future.
Time Series Data Visualization
Data Visualization is an important and quickest way for picturizing the time series data and forecasting. The different types of graphs are given below:
Line Plots.
Histograms and Density Plots.
Box and Whisker Plots.
Heat Maps.
Lag Plots or Scatter Plots.
Autocorrelation Plots.
The above techniques are used for plotting univariate time series data but they can also be used for multivariate time series when more than one observation is dependent upon time.
They are used for the representation of time series data to identify trends, cycles, and seasonality from time series and observe how they can influence the choice of model.
Summary
Time Series is defined as sequence of data points. The components of time series are responsible for the understanding of patterns of data. In time series, anomalous data points can also be there.
Therefore, there is a need to detect them. Various statistical techniques are mentioned in blog that are used but machine learning and deep learning are essential.
In machine learning, supervised learning and unsupervised learning is used for detecting anomalous data. On the other hand, in deep learning recurrent neural network is used.
The transition from Ethiopian culture to that of the U.S. may have been drastic, but for Metropolitan Transportation Network (MTN) Inc. President and CEO Tashitaa Tufaa, an Ethiopian of the Oromo ethnic group who immigrated here in 1992, adjusting to baseball-consumed television and the occasional unrelenting Minnesota snowstorm was a small price to pay for a life of security.
“Let me put it this way: Whatever I did not have back in Ethiopia, I have it now through my freedom,” Tufaa says. “If you are free, then your mind is free, and you can use your talent wherever you want to go.”
While Tufaa’s talent eventually brought him to own and operate MTN — a school bus company based in Fridley, Minnesota, that provides student transportation for dozens of local public, private, and charter schools and owns more than 300 vehicles — the road to success was windy and unpaved. Although he majored in political science and diplomacy, he couldn’t legally work for the U.S. State Department because he wasn’t yet a U.S. citizen, so he started working a civil service job with the Minnesota government.
Tufaa’s drive to drive
Tufaa wasn’t earning enough to pay his mortgage, so he started working nights and weekends as a driver for Metro Mobility, a Minneapolis-area transportation provider for people with physical and mental disabilities. There, he discovered an unexpected passion.
“I fell in love with driving, really,” he says. “It’s very flexible and there’s fresh air, and instead of being in the office, you go to the parks and drive around with open windows. There are so many different things to love about it.”
Desiring more flexibility and hoping for higher pay, Tufaa left Metro Mobility and started driving a cab, where, he says, “I would drive drunk people from the bar, people coming from work, and everyone else.”
Despite his formal education and his urge to succeed, Tufaa struggled to hold these jobs. Unsatisfied with unsteady employment and energized with his newfound craving to get behind the wheel, Tufaa was determined to dive into the city of Osseo’s school transportation scene.
“In the summer of 2003, I started actually writing letters and delivering them to the school districts, offering them services that weren’t around,” Tufaa says. “Many of them made fun of me, but there was one transportation director who was willing to give me a chance because I had been bothering him so much.”
“We put ourselves in our customers’ shoes, and we listen to the feedback we receive. As a result, people want to do business with us, and we don’t turn our backs.”
Tashitaa Tufaa, president and CEO, Metropolitan Transportation Network
Expanding the business
Because of his persistent effort, Tufaa was awarded a single opportunity to transport three homeless children to school with the van he owned, a task that he says he succeeded at, receiving no complaints. From there, the director started offering him more consistent work, and this one-time errand steadily matured into a full-blown company that he now conservatively estimates to be worth $35 million. Today, Tufaa employs over 400 people who transport more than 15,000 K-12 students to school every day across the Twin Cities metropolitan area.
Fleet Facts Headquarters: Fridley, Minnesota Vehicles in fleet: Over 300 Fleet mix: IC Bus, Thomas Built Buses Fueling mix: Diesel, CNG Service area:Metropolitan Twin Cities area Routes serviced daily:Over 400 Drivers: 275 and 125 contracted Staff members: 30 Students transported daily: Over 15,000
“I did see a need here in the school bus industry for a contractor that was dedicated, that was doing business wholeheartedly,” he says.
Tufaa capitalized on this recognized need and founded MTN in 2004. More recently, MTN’s expanding customer base inevitably resulted in the need for a space about 30% larger than the existing one. The new facility is expected to be ready in July. The redevelopment will cost about $2.7 million and is being handled by Thor Companies, a real estate development and construction company that is also based in Fridley.
“It will have corporate offices, a break room where drivers can enjoy themselves, a fleet maintenance shop, and parking storage inside for the buses,” Tufaa says. “It’s a much better and newer space — a good image for both our customers and those who work here.”
The majority of updates will focus on the exterior site improvements, such as landscaping, a complete resurfacing of the asphalt parking lot, and enhancements to the security systems.
Top-notch equipment
Because the agency is responsible for the well-being of thousands of students, Tufaa says he ensures that each bus is equipped with top-notch technology, from two-way radios to GPS to surveillance camera systems.
“We want the maximum safety possible in all of our buses in order to protect the families and children that we service,” he says. “Safety is number one.”
He recounts an instance where a driver’s bus had broken down and hisradio had stopped working. Fortunately, the team realized it had broken down because of its lack of movement on the GPS system. Sure enough, upon physically locating the bus through the ground tracking system, Tufaa and his team found it immobile and were able to service it.
Because Metropolitan Transportation Network transports more than 15,000 students daily, Tufaa says he ensures each bus has quality safety equipment, such as two-way radios, GPS, and surveillance cameras.
Leadership style
Tufaa calls himself a “field guy,” meaning he does not like to remain in the office. In fact, despite MTN’s recent expansion, Tufaa decided not to build himself a personal office. Instead, he works in available desk spaces when necessary and still drives buses every day.
“I don’t want to be a guy who just stays inside. I want to be out there in the field,” he says. “I sit with the drivers and I listen to them. I listen to their stories in the morning and the afternoon, and then I drive the bus to see what the issue is. This way, instead of someone reporting to me, I see it firsthand.”
Tufaa attributes his leadership style to his perilous upbringing in Ethiopia. Because he spent many years of his life in danger, he’s able to more easily adapt to everyday business challenges.
“We put ourselves in our customers’ shoes, and we listen to the feedback we receive. As a result, people want to do business with us, and we don’t turn our backs,” he says. “In Ethiopia, I was raised in harm, and so it’s easier for me to understand where people come from, whether it’s with our customers or our employees.”
MTN is undergoing a $2.7 million expansion, which includes renovated corporate offices, a fleet maintenance shop, a break room, and parking inside for the buses.
Employee appreciation
Appreciation for MTN employees stands tall on Tufaa’s priorities as a business owner. Every year, the company holds an employee appreciation banquet where everyone, from the human resources team to the workshop mechanics, is invited to mingle with their peers, along with their plus-one.
“We want to show our employees that we value them,” Tufaa says. “We are a family, and the MTN family gets together once a year, every year, to enjoy this classy corporate-style dinner.”
Other MTN-planned gatherings that aim to boost company morale include a monthly bulletin that informs the team about company happenings and employee birthdays, as well as weekly prepared breakfast for drivers, blood drives, summer barbecues, and day trips to support the local pro baseball team at the Minnesota Twins stadium.
Sometimes the recognition goes beyond simple social events, like when Tufaa expressed his gratitude by naming a newly built site the Iverson Terminal, after the last name of a driver who had suddenly passed away.
“We named it after her because our drivers have an ownership in our company,” he says. “We don’t want to be just another corporation.”
Challenges, rewards
Tufaa’s triumph does not come without its challenges. As with school bus contractors and districts across the U.S., he has been affected by the widespread driver shortage, and he worries about Minnesota’s slippery roads in the winter. He’s also had to forgo significant family events in order to keep his business afloat, especially while it was just getting started.
“There are some things I’ve had to compromise to get where we are as a business, but as long as my wife and family understood me, that was all that mattered,” Tufaa recalls. “I had to work extremely long hours in the beginning, and sometimes it came down to paying the people who were working for me before being able to pay myself.”
Eventually, the achievements overcame the hardships, and now Tufaa and the whole MTN team work fervently to transport the community’s youth to their daily education.
“As a contractor, it’s important to love what you do,” he says. “I still drive, and I love taking those children to school.”
In an admittedly non-conventional manner, we view the global economy via two interconnected lenses. The first lens is a combination of two practical foundations of economics: (a) based on observations made by economists Colin Clark and Jean Fourastié in the 1940s that technology has persistently replaced the need for human labor throughout increasingly widening sectors of the economy (see chart below). We can now observe that the services sector, now comprising over 72% of the economy has reached a tipping point where technology is increasingly replacing the need for human labor to the extent that increasingly wider sections of the population no longer seem to possess assets to contribute to the production of economic activity.
Colin Clark and Jean Fourastié
And (b) In 1979, the world’s economic systems discontinued using gold as a method of creating and valuing currency, and thus, ended the process of what is called ‘fractional reserve banking’ (where banks are able to lend more than they have on deposit). Fractional reserve banking was replaced by fiat currency, where local commercial banks create new currency when real estate loans are created.
From the convergence of these two practical foundations of economics—technology replacing mass labor and fiat currency created from real estate lending—we can now observe that the conventional metrics used by political institutions and banking systems the world over in determining the relationship between commercial real estate and residential real estate are no longer viable. Banking systems have self-evolved to move away from market lending to creating financial instruments that are traded exclusively between the banks themselves (this is referred to as the ‘shadow banking system’).
Government institutions, however, have not evolved… and thus have essentially become irrelevant in terms of managing affairs of economics.
The second lens with which Wealth Beyond Nations views the global economy is a moral and philosophical view of how and why individuals and groups interact with each other. Prior to Adam Smith’s Wealth of Nations in 1776, the benefits of economic activity were in the main enjoyed by elites (the aristocracies, monarchs, and churches, which were all prone to violent upheavals). Smith’s blueprint provided a process by which the masses could both contribute and benefit from participating in what he referred to as ‘a commercial society’, and it was this commercial society which self-maintained social order.
But in modern circumstances where economic production no longer needs the masses to contribute to production, how can the masses expect to participate in such a commercial society?
But even deeper, we observe that societies across the world are constructed upon a foundation of consuming materialthings that merely contribute to their sense of self-aggrandizement (and most often, not to their overall well-being). John Kenneth Galbraith’s seminal work in 1958, The Affluent Society, already observed that this foundation was simply unsustainable.
Consequently, if it is true and accurate to restate the central problem underpinning the global economies as being: contributions to economic production by the human masses is no longer the glue that holds societies together, as well as the observation that almost everyone on the planet is operating from outdated knowledge of how economic markets operate… then, and only then, can we begin to grasp the severity of the real problem. Then, and only then, can we begin to grapple with exploring real solutions to the real problem. Click here to read more..
Ethiopia: “There’s been a brilliant PR campaign on its part to sell a story that does not really exist.”
‘Yet the data show that manufacturing now accounts for a smaller slice of Ethiopia’s economy than at almost any point since the early 1980s.In 2015, the sector accounted for just 4.1 per cent of Ethiopia’s gross value added, well below the peak of 7.8 per cent in 1997, according to data from the World Bank, as the second chart shows. Moreover, manufacturing accounts for a smaller share of Ethiopia’s economy than that of virtually any other country in sub-Saharan Africa.
South Africa, Kenya, Ivory Coast, Cameroon, Benin, Malawi, Mozambique and even Zimbabwe all generate at least 10 per cent of their gross value-added from manufacturing, with the likes of Nigeria and Uganda not far behind, as the third chart shows. Across sub-Saharan Africa as a whole, 10.6 per cent of continental GVA emanates from the sector, according to the World Bank, raising the question as to why Ethiopia is seen as one of the few African nations to have made a go of manufacturing.
“Ethiopia has the smallest manufacturing share of any of the African countries we look at,” says Charles Robertson, chief economist at Renaissance Capital, a Moscow-based investment bank with a focus on emerging markets. “There’s been a brilliant PR campaign on its part to sell a story that does not really exist.”
John Ashbourne, Africa economist at Capital Economics, a consultancy, adds: “Media coverage of Ethiopia’s manufacturing sector sometimes exaggerates its economic importance. A close look at the country’s economy shows that it is much more similar to its African peers than leaders in Addis Ababa would like to admit.”
Despite the hype, Ethiopia exported just $44m worth of shoes in 2015, for example, 0.25 per cent of those exported by Vietnam and less than the footwear exports of the cordwaining powerhouse that is El Salvador. The east African state’s entire exports of clothing and textiles are worth just a tenth of its coffee exports.’ FT
Ethiopia’s success in attracting foreign manufacturers is often held up as a beacon of hope that sub-Saharan Africa, by far the poorest region on the planet, can follow the well-trodden development model that has allowed the rest of the world to become richer.
Industrialisation has largely been the key to development elsewhere, allowing relatively unproductive subsistence agricultural workers to be absorbed by a rapidly growing manufacturing sector boasting far higher productivity.
With China now slewing off lower valued-added manufacturing jobs in sectors such as textiles and basic electronics as wages rise rapidly in the Middle Kingdom, low-wage Africa has long been seen as a potential rival to the likes of Bangladesh and Vietnam for such jobs, as suggested by the first chart.
While this has yet to happen on any meaningful scale — the continent accounts for just 1 per cent of global manufacturing output — Ethiopia has won plaudits for attracting Chinese, Turkish and US investment into garment and shoe factories, notably from Chinese shoemaker Huajian Group, which employs 4,000 people in an industrial park outside Addis Ababa, the capital.
This had led to the country being described as a regional manufacturing powerhouse. Yet the data show that manufacturing now accounts for a smaller slice of Ethiopia’s economy than at almost any point since the early 1980s.
In 2015, the sector accounted for just 4.1 per cent of Ethiopia’s gross value added, well below the peak of 7.8 per cent in 1997, according to data from the World Bank, as the second chart shows.
Moreover, manufacturing accounts for a smaller share of Ethiopia’s economy than that of virtually any other country in sub-Saharan Africa.
South Africa, Kenya, Ivory Coast, Cameroon, Benin, Malawi, Mozambique and even Zimbabwe all generate at least 10 per cent of their gross value-added from manufacturing, with the likes of Nigeria and Uganda not far behind, as the third chart shows.
Across sub-Saharan Africa as a whole, 10.6 per cent of continental GVA emanates from the sector, according to the World Bank, raising the question as to why Ethiopia is seen as one of the few African nations to have made a go of manufacturing.
“Ethiopia has the smallest manufacturing share of any of the African countries we look at,” says Charles Robertson, chief economist at Renaissance Capital, a Moscow-based investment bank with a focus on emerging markets. “There’s been a brilliant PR campaign on its part to sell a story that does not really exist.”
John Ashbourne, Africa economist at Capital Economics, a consultancy, adds: “Media coverage of Ethiopia’s manufacturing sector sometimes exaggerates its economic importance. A close look at the country’s economy shows that it is much more similar to its African peers than leaders in Addis Ababa would like to admit.”
Despite the hype, Ethiopia exported just $44m worth of shoes in 2015, for example, 0.25 per cent of those exported by Vietnam and less than the footwear exports of the cordwaining powerhouse that is El Salvador. The east African state’s entire exports of clothing and textiles are worth just a tenth of its coffee exports.
Slightly more charitably, Mr Ashbourne does suggest that part of the “Ethiopia story” is that it has been more successful than many of its regional peers in attracting investment from “big brand names” from overseas.
Moreover, while in some African states a fair chunk of manufacturing activity may be a byproduct of those countries’ primary sectors (eg oil refining in Nigeria, processing and packaging of agricultural products in Kenya), Ethiopia is instead producing “relatively high quality goods that are exported”.
“It’s being pulled into these global supply chains, which is not common across Africa and is impressive. Exports have risen sharply, [Ethiopian manufacturing] does employ more people than it used to,” Mr Ashbourne adds, even if job growth since the turn of the century has been faster in areas such as construction, mining, transport and the public sector.
Mr Robertson believes it is Ethiopia’s close links to China that has captured the world’s interest. This extends beyond investments such as that of Huajian and China’s funding of a $4.2bn, 470-mile rail line from Addis Ababa to the port of Djibouti, which opened this year.
More fundamentally, Ethiopia is following the state-led, investment-heavy development model so successfully blazed by China
“What has captured the interest is this comparison with China,” says Mr Robertson. Whereas most African countries are pursuing a private sector-led development model, “Ethiopia has adopted the five-year plan, top-down approach that we have seen in China,” which focuses on rolling out infrastructure such as electricity provision first, then developing light manufacturing, followed by heavy industry.
“People are saying China has grown for 30 years at a very fast pace with a top-down programme. Ethiopia has grown very fast for 10 years [around 11 per cent a year] with a top-down programme. [People] are jumping to the conclusion that Ethiopia is following [in terms of manufacturing growth] when it’s really not,” he adds.
Ethiopia’s rapid economic growth since 2004 does, though, raise the question as to whether other sub-Saharan states, with their private sector-led, bottom-up development models, could or should follow its lead.
Mr Robertson, for one, does not believe the likes of Nigeria would be well suited to the Ethiopian approach. Firstly, Ethiopia can manage a state-led process because it has a strong bureaucracy, something that is lacking in much of Africa but has developed in Ethiopia because the country “has a long history of relatively stable government dating back to 1270,” Mr Robertson says.
Secondly, Nigerians are wealthier than Ethiopians and are used to far more freedom than a government-led, top-down economic model would permit, he argues.
“It is being used as an example in Nigeria but I don’t think it will fit. [Nigerians] are too democratic, too free, too opinionated. Ethiopia has had this regime in place for 30 years and it’s working and they have shown a commitment to relatively low corruption.
“In Ethiopia nobody has anything. Nigerians are three times richer and I just can’t see them being put into the communist box. Ghana, Senegal and Kenya have all moved beyond that stage.”
Incompetence in leadership in most African countries is not only the problem of people who occupy positions in government; it is a reflection of the leadership culture. We’ve had different leaders with the same results for decades. The power distance that exists between leaders in government and citizens is also reflected in organizations and families. In such a structure, leaders don’t serve; they are served, because occupying leadership positions make leaders superior and unaccountable to the people they lead. Africa needs leadership development systems, and it is incumbent on development partners and global leaders to understand how cultural differences affect these.
It has become obvious that it is politics that drives the economies of nations. Acemoglu and Robinson assert in their seminal book Why Nations Fai’ that the major difference between developed countries and developing countries is in their political evolution. Developed countries have political and economic systems that are inclusive and offer opportunities for most people to create wealth.
However, most developing economies have political and economic systems that are extractive. Those in the ruling class have a strong hold on political power, and use it to channel economic resources to benefit themselves and those close to them. Foreign aid, when channelled through such extractive systems, almost never reaches the most vulnerable in society. We need to rethink the form of aid Africa needs and the platforms for distributing or offering it.
There is an ongoing discussion on the effectiveness of foreign aid in helping the economic development of Africa. One thing is obvious: the results are not exactly what Africa’s development partners have expected, and the reasons are not far-fetched. Dambisa Moyo, global economist and author, contends in her book Dead Aid that while foreign aid that addresses humanitarian needs caused by drought and conflict is helpful, most of the aid given to African countries is rather harmful. The OECD provides comprehensive statistics on the kinds and volume of aid received by the continent up until 2015. Moyo lists the problems enhanced by aid to include corruption, civil conflict, shrinking of the middle class, and the instilling of a culture of dependency. All of these combine to make Africa unattractive to global investors.
It has become obvious that it is politics that drives the economies of nations. Acemoglu and Robinson assert in their seminal book Why Nations Fai’ that the major difference between developed countries and developing countries is in their political evolution. Developed countries have political and economic systems that are inclusive and offer opportunities for most people to create wealth.
However, most developing economies have political and economic systems that are extractive. Those in the ruling class have a strong hold on political power, and use it to channel economic resources to benefit themselves and those close to them. Foreign aid, when channelled through such extractive systems, almost never reaches the most vulnerable in society. We need to rethink the form of aid Africa needs and the platforms for distributing or offering it.
Also, globalization is the reality of our day and age. There is increasing economic, social, technical, cultural and political interdependence between nations. People are more inter-connected now than ever before. The availability of worldwide communication systems through rapid improvements in communication technology and the internet has led to more international trade and cultural exchange. But globalization does not appear to be hastening Africa’s development. The problem is also rooted in the political structure and the leadership culture prevalent in Africa.
The problem is leadership
Some years ago, I had a discussion with Donald Duke, former governor of Cross River State in Nigeria. I commended his vision for a plan to attract large numbers of tourists from around the world, impacting positively on the economy of the state and the nation. I observed that a large number of leaders in Nigeria can’t envision Nigeria as a developed nation, and talk more of mobilizing citizens to actualize the vision. He replied with an illustration: Nigeria, he said, is like an aircraft that is being flown by pilots that did not go to flying school. He added that when the plane crashes, everyone blames the pilot. The question therefore is: where are Africa’s leadership “flying schools?” How and where do Africans acquire sophistication in the leadership skills required to guide the continent into development?
Image: REUTERS/Akintunde Akinleye
The cultivation of leaders with exceptional character and skills is critical to Africa’s development. Africa’s development partners should recognize that it is too late to teach someone who occupies a high position in government how to lead during side talks at global events. They should also bear in mind that there has to be alignment between the sense of identity of the leader and that of the followers for leadership to work.
Incompetence in leadership in most African countries is not only the problem of people who occupy positions in government; it is a reflection of the leadership culture. We’ve had different leaders with the same results for decades. The power distance that exists between leaders in government and citizens is also reflected in organizations and families. In such a structure, leaders don’t serve; they are served, because occupying leadership positions make leaders superior and unaccountable to the people they lead. Africa needs leadership development systems, and it is incumbent on development partners and global leaders to understand how cultural differences affect these.
Wanted: effective leadership development systems
Opportunities for developing leaders have never been greater in our increasingly complex world. Diagnosing leadership development needs, especially in Africa, requires an assessment of the entire leadership culture. For example, the GLOBE project, conceived of by Robert J. House of the Wharton Business School and conducted on organizations and middle-level managers around the world, describe countries in sub-Saharan Africa as scoring high in power distance and in-group collectivism, but low in performance orientation. Leaders do whatever it takes to produce results in such a leadership culture, and they usually position themselves and their cronies above the law. Most of the citizens have leadership potential, but several factors inhibit their leadership development, such as bad governance, poverty, corruption and religious bias. Most young people in Africa are hungry to learn and to realize their potential. They seek respected mentors and resources to help them navigate the complex life challenges they face. However, there is a dearth of institutions and curricula to help them realize such desires.
A broader view of leadership development provides insights into why some initiatives are more successful than others at generating change in individual behaviour. To have an impact, the capabilities being developed in the individual need to mesh with the leadership culture in which the leader is embedded. Most of the leadership development curriculum developed in Western countries may not particularly address individual situations, especially youth in developing parts of the world, who have little education as a foundation, and who are distracted by the struggle for survival occasioned by rampant poverty.
According to the GLOBE studies, emerging leaders in some developing countries approach foreigners cautiously; that’s because they’re not used to participative styles of leadership, and prefer bold, assertive styles of leadership. The notion of fear is high due to the conservativeness in the culture, and most people have not been trained to be independent thinkers that are willing to step outside their ‘boxes’ unless directed to do so by leaders. They have developed a learned state of helplessness, with the overwhelming feeling that they cannot change their circumstances. The culture is permission seeking. Unfortunately, the ruling class is not interested in granting permission for the mass of the people to be admitted into its cadre. In such a culture, the community dominates the individual, and women are hardly empowered.
Change is possible
Africa’s large youth population presents a great opportunity to influence the emergence of a new generation of leaders. The reality, though, is that the elite class on the continent tends to appropriate the existing curriculum for leadership development in expensive executive education programmes in business schools, whose fees are beyond the capabilities of the major part of the population. There is a need to democratize the leadership development process in the developing world. The high rate of infusion of mobile technology could be an advantage. This will make formal and informal leadership development an inclusive process that will reach people at all levels of society.
Africa needs cultural change agents that will leverage both business and non-profit platforms to offer leadership development training to a large proportion of the population. Such agents must have experienced a change in their own mind-sets. Development partners around the globe who genuinely seek Africa’s transformation should appreciate that the extractive leadership structures in that part of the world will not allow the intellectual, material and financial resources they distribute to create any meaningful and lasting change on the continent. They should cut down on the volume of financial aid, while partnering with cultural change agents who are democratizing the development of leaders at all levels, enhancing the evolution of inclusive political and economic structures.
Putting people before GDP: Policymakers and leaders across the continent can tackle the issues of poverty and inequality if they take a “human economy” approach. This means focusing on “what works for the majority of African people” rather than measuring growth solely by GDP.
Build a ‘human economy’, says Oxfam. It could help Africa to fight extreme inequality
Seven of the world’s 20 most unequal countries are in Africa.
Image: REUTERS/Edward Echwalu
Strong GDP growth in Africa is a good thing, right? Not if the benefits aren’t shared equally, argues a new Oxfam report.
Africa has experienced a decade of significant growth – at one point, six of the 10 fastest growing global economies were on the continent – but the proceeds haven’t been evenly distributed.
Millions have been left behind, and to make matters worse, slowing growth could increase poverty further, says Oxfam. The most pessimistic forecasts suggest 250 to 350 million more people could be living in extreme poverty in the next 15 years.
There is a solution though: the human economy.
Extreme economic inequality
Seven of the world’s 20 most unequal countries are in Africa, with Swaziland the most unequal, followed by Nigeria, Namibia and South Africa.
In South Africa, the richest 1% owns 42% of the country’s total wealth and three billionaires have the same wealth as the bottom 50% of the population, according to Oxfam.
Image: Oxfam
Why is inequality so high? The impact of colonialism lingers, and the structure of many African economies means the benefits of growth have not been shared, according to the report.
Inadequate investment in agriculture, large informal sectors and over-reliance on extractive industries have exacerbated inequality.
The hardest hit are young people and women, particularly in rural areas. Ignoring their potential is having a major impact on African economies. Gender inequality costs sub-Saharan Africa more than $90 billion every year. Meanwhile, better policies and investment in young people could be worth up to $500 billion every year for 30 years.
With Africa’s large – and growing – youth population, there is an urgent need for action.
Image: United Nations
Putting people before GDP
The legacy of colonialism and current policies can be overcome, argues the paper.
Policymakers and leaders across the continent can tackle the issues of poverty and inequality if they take a “human economy” approach. This means focusing on “what works for the majority of African people” rather than measuring growth solely by GDP.
African countries received $162bn in 2015, mainly in loans, aid and personal remittances. But in the same year, $203bn was taken from the continent, either directly through multinationals repatriating profits and illegally moving money into tax havens, or by costs imposed by the rest of the world through climate change adaptation and mitigation. This led to an annual financial deficit of $41.3bn from the 47 African countries where many people remain trapped in poverty. – Honest Accounts 2017.
The headquarters of the African Union in Addis Ababa, Ethiopia. Campaigners said illicit financial flows account for $68bn a year. Photograph: Sean Gallup/Getty Images
More wealth leaves Africa every year than enters it – by more than $40bn (£31bn) – according to research that challenges “misleading” perceptions of foreign aid.
Analysis by a coalition of UK and African equality and development campaigners including Global Justice Now, published on Wednesday, claims the rest of the world is profiting more than most African citizens from the continent’s wealth.
It said African countries received $162bn in 2015, mainly in loans, aid and personal remittances. But in the same year, $203bn was taken from the continent, either directly through multinationals repatriating profits and illegally moving money into tax havens, or by costs imposed by the rest of the world through climate change adaptation and mitigation.
This led to an annual financial deficit of $41.3bn from the 47 African countries where many people remain trapped in poverty, according to the report, Honest Accounts 2017.
The campaigners said illicit financial flows, defined as the illegal movement of cash between countries, account for $68bn a year, three times as much as the $19bn Africa receives in aid.
Tim Jones, an economist from the Jubilee Debt Campaign, said: “The key message we want to get across is that more money flows out of Africa than goes in, and if we are to address poverty and income inequality we have to help to get it back.”
The key factors contributing to this inequality include unjust debt payments and multinational companies hiding proceeds through tax avoidance and corruption, he said.
African governments received $32bn in loans in 2015, but paid more than half of that – $18bn – in debt interest, with the level of debt rising rapidly.
The prevailing narrative, where rich country governments say their foreign aid is helping Africa, is “a distraction and misleading”, the campaigners said.
Aisha Dodwell, a campaigner for Global Justice Now, said: “There’s such a powerful narrative in western societies that Africa is poor and that it needs our help. This research shows that what African countries really need is for the rest of the world to stop systematically looting them. While the form of colonial plunder may have changed over time, its basic nature remains unchanged.”
The report points out that Africa has considerable riches. South Africa’s potential mineral wealth is estimated to be around $2.5tn, while the mineral reserves of the Democratic Republic of the Congo are thought to be worth $24tn.
However, the continent’s natural resources are owned and exploited by foreign, private corporations, the report said.
Bernard Adaba, policy analyst with Isodec (Integrated Social Development Centre) in Ghana said: “Development is a lost cause in Africa while we are haemorrhaging billions every year to extractive industries, western tax havens and illegal logging and fishing. Some serious structural changes need to be made to promote economic policies that enable African countries to best serve the needs of their people, rather than simply being cash cows for western corporations and governments. The bleeding of Africa must stop!”
However, Maya Forstater, a visiting fellow for the Centre for Global Development, a development thinktank, said the report did not provide a meaningful look at the issues.
Forstater said: “There are 1.2 billion people in Africa. This report seems to view these people and their institutions as an inert bucket into which money is poured or stolen away, rather than as part of dynamic and growing economies. The $41bn headline they come up with needs to be put into context that the overall GDP of Africa is some $7.7tn. Economies do not grow by stockpiling inflows and preventing outflows but by enabling people to invest and learn, adapt technologies and access markets.
“Some of the issues that the report raises – such as illegal logging, fishing and the cost of adapting to climate change – are important, but adding together all apparent inflows and outflows is meaningless.”
Forstater also questioned some of the report’s methodology.
The coalition of campaigners, including Jubilee Debt Campaign, Health Poverty Action, and Uganda Debt Network, said those claiming to help Africa “need to rethink their role”, and singled out the British government as bearing special responsibility because of its position as the head of a network of overseas tax havens.
Dr Jason Hickel, an economic anthropologist at the London School of Economics, commenting on the report, agreed that the prevailing view of foreign aid was skewed. Hickel said: “One of the many problems with the aid narrative is it leads the public to believe that rich countries are helping developing countries, but that narrative skews the often extractive relationship that exists between rich and poor countries.”
A key issue, he said, was illicit financial flows, via multinational corporations, to overseas tax havens. “Britain has a direct responsibility to fix the problem if they want to claim to care about international poverty at all,” he said.
The report makes a series of recommendations, including preventing companies with subsidiaries based in tax havens from operations in African countries, transforming aid into a process that genuinely benefits the continent, and reconfiguring aid from a system of voluntary donations to one of repatriation for damage caused.
Growth in the first industrial revolution was driven by engineering, the second through electricity and production lines, and the third by technology and information. The modern economies that will undergo a fourth industrial revolution will not be those that worship machines, but those that support human creativity. When we understand how people think and work best, we will be compelled to put our workers’ well-being first in the name of both health and economic productivity.
For centuries, human health has been systematically traded for economic growth. The word labor originated in medieval Europe during a decline in slavery and widespread adoption of money, and symbolizes the monetization of human skill: “productive work, especially physical toil done for wages.” Its modern definition, and how we perceive productivity, came about through the process of industrialization.
The first, second, and third industrial revolutions
In the mid-17th century, the nature of work changed when rural, agrarian societies shifted to become urban and industrial. Economic growth meant going underground for energy and into factories for manufacturing. The detrimental effects to workers’ health in these industries are well documented: In the name of financial gain, miners and factory workers were subject to hazardous conditions that often resulted in illnesses, physical pain, and early death.
The first industrial revolution presented economic opportunities fraught with dangerous labor. The tradeoff of well-being for economic benefit was clear: Employers knowingly ran businesses that paid workers not just for their time, but also for their health.
Employers knowingly ran businesses that paid workers not just for their time, but also for their health.Over time, machines took over from humans in dictating the pace of production, and working hours soared. Rising demand outpaced supply, meaning that businesses could maximize profits by manufacturing around the clock. An extensive study by the International Labour Organization (ILO) into working hours explains how the concept of “working time” in early industrialization was based on the perception that hours spent outside work were regarded as “lost time.”
Through these developments, the perceived dichotomy of work and life emerged: Work is the time dedicated to economic gain, while life is the time spent on our mental and physical needs. Four hundred years later, our contemporary culture of “living for the weekend” is a reflection of how this form of exchange became an accepted aspect of our existence.
The fourth industrial revolution
Western countries now firmly in throes of the third industrial revolution successfully shifted from manual to skilled labor. Yet the mentality that time spent outside work is “lost” hasn’t changed. The ILO study points out that even a recorded decrease in working hours is shaky because of the institutionalization of overtime and out-of-office work, such as mindlessly replying to emails on your phone.
One example of how businesses and organizations are trying to create a more effective workforce is not actually based in work, but in the office spaces in which it is conducted. The new wave of “fun” workplaces that are now standard in high-tech companies is a continuation of finding solutions to the wrong problem; the aim of such designs is often to encourage longer work hours and company loyalty. Facebook went as far as offering workers $10,000 to live closer to the office.
However, the link between an employee spending more time in the office and being more productive with their time is rather tenuous. Workers might clock more hours and stay longer at a company if the surroundings are comfortable, but the assumption that this makes them better at what they do is unfounded.
Another design-based example is open-plan offices. In the push to lower overheads—and under the false assumption that it would encourage better working practices—private rooms were traded for non-divided workspaces. This resulted in environments that increase stress, particularly due to noise. Stress has become the dominant cost to human health at work. A 2016 report found that stress accounted for 37% of all work-related ill-health cases in the UK and 45% of all working days lost due to ill health.
Studies carried out as early as the 1970s have shown that stress can be beneficial for performing simple or familiar tasks, but detrimental to ones requiring complex, flexible thinking. The prefrontal cortex is an area of the brain associated with executive function, which contributes to decision making, predictions, and many of our highest cognitive processes related to learning and imagination. Increased levels of catecholamine released during stress harms the performance of the prefrontal cortex, including persistent loss of these functions from chronic stress. Naming just one aspect of how working conditions affect us cognitively, there are many more that stem from our environmental and social context.
As robots increasingly take on manual labor, we will need to foster what differentiates human from machine (at least for now): creativity. Evidence that psychological and physical well-being is paramount to creative thinking will turn the historic exchange of human health for economic growth on its head. As Klaus Schwab, founder of the World Economic Forum writes, “I am convinced of one thing—that in the future, talent, more than capital, will represent the critical factor of production.”
Neoliberalism, Harvey writes, is “a theory of political economic practices that proposes that human well-being can best be advanced by liberating individual entrepreneurial freedoms…within an institutional framework [of] strong private property rights, free markets, and free trade” [8]. He goes on to write that neoliberalism “seeks to bring all human action into the domain of the market” [9]. In short, neoliberalism offers a set of market-based solutions to social ills. It supposes that problems experienced collectively can be conquered by individuals. An important aspect of this an antipathy to state intervention. The state, in the neoliberal understanding, only gets in the way of individual entrepreneurs who want to alleviate problems. Hence, deregulation is a prime aspect of neoliberal practice. To quote Steger and Roy in Neoliberalism: A Very Short Introduction, “the state is to refrain from interfering with the economic activities of self-interested citizens” [10]. Neoliberalism presents a profound hatred of collective action in favor of individual motivation. This does not mean, however, that the state under neoliberalism is impotent, ineffectual, or meaningless. On the contrary. Although the regulatory and public service components of the state will be stripped bare under neoliberalism (we will examine this in more detail later), the military and police-the repressive state apparatus-will be inflated to new heights. Harvey writes that the state must “secure private property rights and…guarantee, by force if need by, the proper functioning of markets. Furthermore, if markets do not exist [in water, healthcare, and education, for example] then they must be created, by state action if necessary” [11]. Neoliberalism, then, is not against the state. It is against the state when it interferes with market mechanisms, but is perfectly happy to lean on the state when the neoliberal order is resisted or challenged. Under neoliberalism, the state must protect the interests of the aforementioned entrepreneurial individuals (the capitalists). It will not hesitate to use violence to do this.
It should be noted that this process of violent state intervention has been common, literally, since the very beginning of capitalism. An important part of the development of capitalism in England, for instance, was the land enclosure. rich landowners used their control of state processes to appropriate public land for their private benefit. This created a landless working class that provided the labor required in the new industries developing in the north of England. EP Thompson writes, “in agriculture the years between 1760 and 1820 are the years of wholesale enclosure in which, in village after village, common rights are lost” [12]. He goes on to say, “Enclosure (when all the sophistications are allowed for) was a plain enough case of class robbery” [13].
As human beings, we are in our very nature compassionate and collaborative, but our current monetary and economic systems are based on the narrative of separation that creates and encourages competition. For too long, we have told a story about nature ‘red in tooth and claw’ and excused the worst of human behaviour as natural. Scarcity is primarily a mindset and lack of collaboration not a biophysical reality! Competition creates scarcity, which in turn is used to justify competitive behaviour (a vicious circle).
The natural limits of bioproductivity and healthy ecosystems functions don’t create scarcity as such. Collaboration can turn these natural planetary limits into enabling constraints to create abundance for all within healthy ecosystems and a healthy biosphere. Collaboration creates shared abundance, which in turn invites more collaboration (a virtuous circle). We choose which world we want to bring forth together! – Dr. Daniel Christian Wahl
Good jobs. Wellbeing. Environment. Fairness. Health.
It is, of course, entirely possible for an economy to go faster and faster without getting closer to meeting these goals – indeed, while heading in the opposite direction.
GDP is like a speedometer: it tells you whether your economy is going faster or slower. As in cars, a speedometer is useful but doesn’t tell you everything you want to know. For example, it won’t tell you whether you are overheating, or about to run out of fuel.
Above all, the speedometer doesn’t tell you whether or not you’re going in the right direction. If you suggest to a car driver that you might be on the wrong road, and the response is “then we must go faster”, you might think that’s pretty stupid. Yet this is what happens whenever complaints about the state of the economy elicit a commitment to boost growth.
So what is the right direction for a modern economy? That’s a relatively easy question to answer: when you ask people, they say much the same things. A good economy meets everyone’s basic needs. It means people are healthy and happy with life. It avoids storing up potential sources of long-term trouble, such as extreme inequality and environmental collapse.
It is, of course, entirely possible for an economy to go faster and faster without getting closer to meeting these goals – indeed, while heading in the opposite direction.
Now the trickier part. What would be the economic equivalent of a compass? We need to measure the direction of economic travel in a way that’s comparable to how GDP measures its speed – easy to communicate, and amenable to being influenced by policy decisions.
The New Economics Foundation (NEF), where I was the Executive Director until December 2015, proposed five indicators in an October 2015 report. Imagine them arrayed like dials on a dashboard that you can glance at for an overall picture, as well as study in more detail if you want. Why five? It’s hard to capture everything that matters in one metric, and psychological research demonstrates that people struggle to hold more than five things in their heads at once.
1. Good jobs. Employment statistics tell us what proportion of people have jobs. They don’t tell us what proportion of those with jobs are paid too little to afford a decent standard of living, or worry about whether they’ll still have work next month.
According to UK government figures, 94% of people were in work in 2014 – up nearly two percentage points in four years. However, the NEF calculated that only 61% were in secure jobs paying a living wage – down a similar amount in the same period.
2. Wellbeing. A growing economy is not an end in itself – it’s a means to improving people’s lives. Few would disagree that the ultimate aim of public policy is wellbeing; we care about GDP because we assume it means more wellbeing. So why not also measure wellbeing directly?
The validity of research into measuring wellbeing, by asking people about their life satisfaction, is now widely accepted. Such measures capture a range of things that people care about and that policies can influence – from income and health to housing and social connections.
Some governments do measure life satisfaction, including the UK (it increased from 7.4 to 7.6, on a scale of 0-10, in the four years to 2014). However, it remains at the margins of policymaking.
3. Environment. The NEF propose a national indicator of lifestyle-related carbon emissions, relative to an allocation calculated from global targets for avoiding dangerous levels of climate change.
In four years, the UK’s position deteriorated from using 91% of its allocation to 98%.As climate is a global problem, this indicator is effectively a measure of responsible global citizenship.
4) Fairness. Research increasingly shows that high income inequality has negative social consequences, while casting doubt on the idea that it incentivises hard work.
Comparing the average incomes of the top and bottom 10%, inequality in the UK has been worsening by an average of 0.8% a year for the last four years.
5) Health. The NEF proposes “avoidable deaths” as a simple, easily-understandable measure that captures the quality of health interventions – not only treatment, but also prevention.
Here, the UK shows a positive trend, but with plenty of room for further improvement – the latest figures suggest 23% of deaths need not have happened.
Image: New Economics Foundation (NEF)
The NEF designed these measures with the United Kingdom in mind, working with the UK’s Office of National Statistics. But they are, in principle, just as meaningful for other countries.
The shortcomings of GDP, as a measure of what we want from an economy, are not a new discovery. The NEF and others have been making the case for years. But while various proposals for alternatives have engaged the interest of policymakers and technocrats, they have not yet taken hold among politicians.
That’s understandable: any politician who suggests new ways to judge their performance is also creating new ways to fail, and many policies that will pay long-term dividends on these indicators will also impose short-term costs.
More broadly, there remains a reluctance to move away from viewing economics as a hard, mathematical science, and accept the need to incorporate more of a social science mindset. In effect, we need another value shift in economics, comparable to those that shaped the last century – Kenyesianism and neoliberalism.
However, while the problems with the current economic system are increasingly widely appreciated, we still lack a compelling, coherent, simple alternative narrative. I hope these indicators can help that narrative to develop.
Woman with child in Burundi, the country with the second smallest GNI per capita in the world. Low GNI is an indicator of severe economic inequality and hardships related to poverty.The Gross National Income, or GNI, represents the sum of a nation’s Gross Domestic Product (GDP) plus any other net income received from overseas. Therefore, the gross national income measures both the domestic income of a country and the income it receives from abroad.The GNI per capita measures the average income earned by a person in a given country and is calculated by simply dividing the total GNI of the country by the total size of the population. Generally, GNI per capita is used to compare the state of wealth of a population and the standard of living in a country with those of other nations. GNI per capita is expressed in international dollars, and is based on Purchasing Power Parity (PPP), how far the money will go in buying commonly purchased goods in relation to that money’s ability to do the same elsewhere on the planet. When determining a country’s development status, GNI becomes an important economic factor. Taking into account all the considerations listed above, it becomes quite easy to understand why the countries with the smallest GNIs per capita tend to be developing countries which struggle with poor Infrastructure in terms of social welfare and economic development alike.
Malawi’s Economic Issues
According to World Bank data, the country with the smallest GNI per capita is Malawi, with 250 international dollars of income per person. Although the country enjoys a democratic and stable government, the economy continues to operate within a poor fiscal environment, characterized by the country’s high debt levels. The social environment is characterized by a proliferation of inequality and poverty, with over a half of the population being considered as poor, and one-quarter of it living in extreme poverty. The low agricultural productivity is one of the main obstacles in reducing the poverty, further worsened by increasing erratic weather patterns.
Post-Conflict Poverty in Burundi
Burundi, with a GNI of 270 international dollars, is the country with the second smallest GNI per capita. Even if the country is in the process of transitioning from a post-conflict economy to a stable, peacetime economy, poverty remains at troublingly high levels. The country is focusing on developing its basic social services, modernizing the public finance sector, and upgrading institutions and infrastructure across the board. Though it possesses a modernized industrial establishment, it above all relies on the agricultural sector, energy production, and mining for the majority of its revenues. The growing economy will increasingly offer more employment opportunities, and hopefully improvements in the standard of living will be quick to follow.
Underdeveloped Resources in the Central African Republic
The Central African Republic has the third-smallest GNI per capita value (330 international dollars). While it’s true that the country has recently been devastated by a political crisis, the Central African Republic was among the countries with the highest poverty rates well before the recent tumultuous events. The country possesses abundant natural resources but, unfortunately, they are generally very underdeveloped. Subsistence agriculture represents almost one-third of the gross domestic product. Exports of diamonds and wood, while relatively significant domestically, have clearly not been enough to raise the economy to the level of a major global power.
Liberia’s Epidemic
Liberia’s economy was gravely affected by the Ebola crisis that swept Africa for much of the new millennium. Indeed, the outbreak essentially reversed many of the important gains the country has made in the fights against political and economic insecurity and poverty. The quarantines implemented due to the Ebola epidemic affected the production and exports of rubber as workers were restricted in their daily travels, and contamination from African goods became a global concern. The weak business environment constrains the growth of manufacturing industries, and most of the important sectors suffered production disruptions due to the epidemic. The economy of Liberia definitely needs effective implementation of an economic recovery plan
Other Countries With Low per Capita GNIs
Besides these countries, the Democratic Republic of Congo, Niger, Gambia, Madagascar, Guinea, Guinea-Bissau, and Ethiopia are all struggling with extreme poverty as well. Within them, GNI per capita rates vary from 380 to 550 international dollars. This often becomes even more concerning when considering that income disparities often leave the general population in an even poorer state the already bad numbers would suggest. Collectively, these countries need strong economic reforms to begin to fight poverty and increase the welfare of their citizens and secure stronger standings on the global economic scene.
It’s astonishing when you think about it. Why should an old and poorly-performing industry carry on, burdened with even more tasks, and provided with yet more money? I’m talking about foreign aid, whose mixed results have been reconfirmed countless times in the last 70 years.
For aid’s backers, such skepticism is unfair or at best premature. Successes, from combating diseases to promoting the ‘green revolution,’ are held as self-evident. With new, smarter policy formulas and management focused on results, failure is soon going to be minimized. Across most of the Left-Right spectrum, aid still enjoys political backing. Western spending continues largely upward. New aid donors from Turkey to Thailand are joining in. And tasks are expanding.To achieve the 169 targets of the world’s 17 Sustainable Development Goals by the year 2030, global leaders concur that foreign aid is vital.
For aid’s critics, however, ‘mixed results’ is a euphemism for badly designed, poorly-managed efforts guided by donor hobbies and flip-flopping policies that ignores the graveyards of failed programmes, the histories of waste, and the sometimes toxic outcomes of aid born of coercion and incoherence. China and Vietnam reduced poverty significantly with almost no Western aid, while aid-dependent countries like Malawi and Timor-Leste have fared badly—in which case why does the aid industry keep on prospering?
To answer that question we have to look at the drivers and navigation systems at work upstream in the system where the captains of the aid industry confer. These drivers get little serious probing, but the knowledge we do have points to an inconvenient truth: the main systems of development aid chiefly serve the donors. The aid system colludes in redistributing wealth from poorer to richer. Under an aura of beneficence, aid is harnessed to self-interest.
Here’s how.
To buy goodwill from others or coerce them, aid provides a classic tool of statecraft. For the biggest donors it can buy votes at the United Nations, keep client regimes ‘onside’, punish troublemakers and open doors to powerful people. As a former senior US aid official put it, “Foreign aid … is like political campaign contributions: it can facilitate the access of those providing it to those receiving it.” Giving aid helps governments to look good in diplomatic forums while encouraging taxpayers to feel good about their generosity.
In addition, ‘our security’ is at stake. Since 9/11 development and humanitarian aid has increasingly been subordinated to hard power aims—that is ‘securitized.’ European aid, for example, is now supposed to help curb irregular migration from Africa. Meanwhile, military doctrine and operations have become ‘developmentalized,’ complementing older practices in which aid lubricates access to strategic assets as in Kyrgyzstan, where western aid was exchanged for use of an airbase serving NATO operations in Central Asia.
Boosting exports and investments are major objectives of aid providers. A scholarly consensus, backed by many studies, holds that the mercantile interests of aid givers usually enjoy priority over the interests of aid recipients. For donors the pay-offs are many. For example, for every €10 the Dutch provide in bilateral aid to an average recipient country, Dutch exports to that country increase in the short run by €7 to €9. In the longer run, as goodwill and force of habit take hold, aid-induced sales then become even more lucrative. In the period 1988-2004, each dollar in Western bilateral aid yielded 2.15 dollars in additional exports of goods and services by Western businesses.
Donors use aid to gain footholds for their industries, like Japanese fishing fleets in the South Pacific, French uranium mining in Niger and oil and gas companies in emerging producers of hydrocarbons. Aid providers work assiduously to lower costs and risks for their business investors using subsidies like low-cost loans, insurance and market advice. In recipient countries they add to physical infrastructure and occasionally skilled-up workforces. But the aid system’s most powerful contributions involve the transmission and enforcement of ‘sound policy’, meaning policy that is suitable for investors.The formulas are well-rehearsed: sell-offs of public property; weaker protection of labour rights and environmental safeguards; and taxes shifted from foreign flows to domestic sources.
Under the World Bank’s ‘competitive cities’ approach, municipalities are pushed to compete for outside investment by offering tax ‘sweeteners’, land and other subsidies. With the rise of financial sector power, donors have facilitated the growth of stock markets and hot money flows. Key to these investor-friendly climates has been austerity—driving down public spending in recipient countries.
Acting almost as bailiffs, donors also help to extract payments to big pharmaceutical and software firms who own patents, copyrights and other kinds of ‘intellectual property.’ In the years 2012-2015, sub-Saharan African countries together paid about $10 billion to these private interests, up from about $8.7 billion in the years 2007-2010. But because rich country tax laws allow firms to hide profits, these World Bank data may actually understate the true scale of extraction.
Under vigorous donor pressure, poorer countries have poured trillions of dollarsinto Western banks under a rationale of self-insurance. As the economist C. P. Chandrasekhar has pointed out “This reverse flow of capital essentially means that excess savings in emerging markets are being ‘recycled’ in ways that put the responsibility of allocating that capital in the hands of a few financial decision makers … sitting at the apex of a concentrated global financial system.”
Consistent with their promotion of rent-seeking from ‘intellectual property’, donors show almost no interest in curbing cartels and other anti-competitive practices by transnational firms. Research is scarce, but it points to massive losses for poorer countries. One study estimates that annual losses are equivalent to at least 50 percent, and could equal as much as 300 percent of aid disbursed.
Donors have also invested in knowledge, but gains can flow back disproportionately to themselves. Aid for the ‘Green Revolution’, for example, helped boost crop yields in poor countries, but major beneficiaries have been western agribusinesses. Up to the early 1990s, estimated returns to such firms were forty times the amount of aid paid out originally by the US for research and development of the ‘Revolution’s’ higher-yield technologies.
Contrary to the belief that aid-financed programmes target diseases that mainly affect people in the tropics, research shows that “development aid is intended to alleviate the threats to populations within the donor state.” And since the 1960s, foreign aid has brought hundreds of thousands of students from poorer countries to study at universities in Europe and North America. Today, student fees and expenses annually absorb more than $3 billion in aid—virtually all of it spent in donor countries. Where the longer-term benefits from aid-funded scholarship programmes go isn’t known with much precision, but there is some evidence that former scholarship holders from Africa tend to stay in richer countries, or to work abroad in Western firms and other organisations.
In sum, poorer countries routinely put more resources at the disposal of donor country interests than they receive in foreign aid, yet it isn’t easy to demonstrate this inconvenient truth conclusively. Estimating the extent of the aid system’s collusion in ‘perverse’ aid is often guesswork because the system’s upper reaches lack transparency. Laws, rules, political agreements and sheer inattention shield many counter-flows from public view. Every year, thousands of evaluations of aid’s ‘downstream’ activities take place but I know of no formal evaluation of aid mechanisms ‘upstream’ that would indicate with precision who benefits and by how much.
Does it have to be this way?
In 1943, at a time of enormous human suffering, one of the 20th century’s greatest activist-philosophers, Simone Weil, wrote about the characteristics of practical compassion for others. She insisted that help must be concrete and authentic: “All human beings are bound by identical obligations, although these are performed in different ways according to the circumstances…. The obligation is only performed if… expressed in a real, not a fictitious, way.” Today, in framing debates about obligations across borders, that plea has lost none of its relevance. It calls for lucidity, and hence the rejection of pseudo-solutions promoted through the foreign aid system.
Activists, academics, journalists and NGOs in a number of fields are already focusing on counter-flows and the legal gimmicks and non-transparency that promote them. Although based outside the mainstream aid system, these initiatives are getting respectful attention from some donors, notably in Norwaybut also in a few knowledge centres of the United Nations. A prime example is the movement for tax justice.These combined efforts have begun to pay off as better tax enforcement and new rules yield more revenues for public purposes. Meanwhile a bloc of non-Western governments at the United Nations led by Ecuador is pressing to create a global tax body.
A system of global taxation won’t be with us soon, but as this idea gains traction it may open up a pathway towards an authentic system of redistribution across national borders. In so doing it could help to replace today’s machinery of upward redistribution, re-build decent social contracts, and ultimately sideline foreign aid as we know it.
For farmers, farmland is a basis of their livelihood and the basic agricultural resource and is now becoming a constraint in agricultural production. This study was carried out in Kombolcha district of Oromia National Regional State. The specific objectives of the study were to identify the factors affecting size of landholding and to analyze the effects of land size variation on farm income. To address these objectives a two-stage random sampling procedure was used to select 5 peasant associations and 110 sample respondents from a total of 19 peasant associations found in the district. Multiple linear regression and Cobb-Douglass production functions were used for analyzing the cause of land size variation and effects of land size variation on farm income respectively. Accordingly, age of the household head, agro ecology, family size and land availability in PA were found to be the significant factors in causing variation in size of land holding in the study area. The regression coefficients of the Cobb-Douglass production function indicate that the size of cultivated land, average land productivity, livestock owned and non-farm income were statistically significant factors in explaining variation in farm income among farmers. Therefore, there should be urgency of devising means and ways to improve the farm income through strengthening the production of cash crops. Besides this, productivity of land should be increased through the introduction of high yielding varieties of crops. And there should be strategy to create non-farm income sources for the smallholder farmers.
Cite this paperDoti, A. G. (2017). Causes and Effects of Land Size Variation on Smallholder’s Farm-Income: The Case of Kombolcha District of East Hararghe, Oromia, Ethiopia. Open Access Library Journal, 4, e3312. doi: http://dx.doi.org/10.4236/oalib.1103312.
MOFED (Ministry of Finance and Economic Development) (2003) Challenges and Prospects of Food Security in Ethiopia. Proceedings of Food Security Conference2003, Professional Associations Joint Secretariat, Addis Ababa.
Kebede, B. (1998) Agricultural Credit and Factors Impeding Loan Repayment Performance of Small-Holders in Central Highlands of Ethiopia: The Case of Alemgena District. Unpublished M.Sc. Thesis, AUA, Ethiopia.
Joshi, M.R. (1990) Status and Agro Forestry Opportunities. In: Agro Forestry in the Taria. Seminar Proceedings. U.N, Food and Agricultural Organization and the Department of Forestry and Government of Nepal, Nepal, 5-11.
Tesso, G. (2003) Variation in Land Size and Its Effects on Farmers’ Income. The Case of Qarsa Qondaltiti District. Unpublished M.Sc. Thesis, AUA, Alemaya Ethiopia.
Adnew, B. (1992) Analysis of Land Size Variation and Its effects: The Case of Smallholder Farmers in the Hararghe High Land. Unpublished M.Sc. Thesis, Alemaya University.
How we track our economy influences everything from government spending and taxes to home lending and business investment. In our series The Way We Measure, we’re taking a close look at economic indicators to better understand what’s going on.
Ever since 1944, Gross Domestic Product (GDP) has been a primary measure of economic growth. It’s in the news regularly and, even though few can define what it means, there is general acceptance that when GDP is growing, things are good.
There are problems with this simplistic formulation.
This narrow focus distorts our perception of progress. It guides our representatives to focus only on certain things – what is measured – and allows them to ignore what isn’t quantified and regularly reported.
But a new set of measures is slowly being established, which aims to capture a wider range of human experiences and reset our idea of “success”. Called the UN Sustainable Development Goals (SDGs), these aim to include all the main pillars of a progressive society, from physical safety through to economic opportunity and good health.
SDGs will force action by highlighting what is currently covered up by the narrow measures of how our economy and society are faring.
Most of us use products made in China every day and are aware of its growing economic power as a factory to the world. But China intends to become a developed nation by mid-century, and integral to this ambition is its intense focus on innovation. In a few decades, Chinese companies have evolved from imitators…
Saga Holidays is among a number of major UK tour operators to cancel trips to Ethiopia as a wave of unrest spreads across the African country.
The Foreign Office (FCO) is advising against all travel to some regions in the east and all but essential travel to central parts that include places such as Lalibela, popular with tourists for its rock-cut churches.
Saga, Kuoni and Cox and Kings are among those to have cancelled tours for this year, offering refunds or alternatives to customers.
The Ethiopian government this month declared a six-month state of emergency and arrested more than 1,600 people as the FCO warned of clashes between protesters and security forces. Protests have been most fervent in the Amhara and Oromia regions.
In August, some 90 people were believed to have been killed after police used live bullets on protesters chanting anti-government slogans and waving dissident flags.
The Foreign Office has different advice for different parts of the countryCREDIT: FOREIGN OFFICE
“Demonstrations have been taking place in the Oromia and Amhara regions in 2016 and further protests are likely,” the Foreign Office said.
“Tensions in Oromia have significantly risen since October 2 when up to 100 people died during a stampede at the Irreechaa religious festival.
“There has been widespread disruption to road travel across Ethiopia. Unauthorised and official roadblocks can appear with little or no warning.”
The country had recently been experiencing a boom in its tourism industry, thanks to its unique mix of history, wildlife and culture. Last year, the country was praised by the European Council on Tourism and Trade for its “excellent preservation of humanity landmarks”.
Beside the rock-hewn churches of Lalibela, other draws include the Simien Mountains National Park, Lake Langano, and the Danakil Depression, one of the hottest places on earth.
A spokesperson for Kuoni, which offers a tour of the highlights of Northern Ethiopia, said it had stopped selling the trip and would be monitoring the situation.
A spokesperson for Saga, too, said all 2016 departures had been cancelled, adding: “The initial change to FCO advice was that some areas should be avoided. As a result tours were amended to ensure that our holidaymakers were nowhere near those areas. However… the advice changed again and advised against all but essential travel to certain regions of Ethiopia. As a result we took the decision to cancel all 2016 departures.”
Cox and Kings said it would only be able to resume its trips should the FCO advice change.
Responsible Travel, which hosts a number of tour operators on its website running trips in Ethiopia, said some of its clients are continuing to offer tours.
“Several of the holidays we market in Ethiopia are run by local tour operators, who will continue to offer and run the same trips as they always have done,” said marketing manager Sarah Faith.
“It is then up to each individual traveller to consider the FCO advice and to purchase insurance that will cover them given the FCO warnings.
“Our local operators in Ethiopia are extremely well-placed to understand the day-to-day situation on the ground in the country.”
Ethiopia:“Things are effectively on hold,” said Jim Louth, owner of Undiscovered Destinations, a UK travel company. “If anyone inquires, our policy is to say people are being advised not to go.” Financial Times
#OromoProtests: “Strikes, ‘ghost town days’ and non-violent protests are more common now because they’re so much harder to police, even under the state of emergency.” Financial Times
Protests and state of emergency see bookings to historic sites grind to a halt
A wave of anti-government protests has caused a collapse in tourist bookings to Ethiopia
A wave of anti-government protests and the imposition of a state of emergency has triggered a collapse in tourism bookings in Ethiopia, underlining the effect the unrest is having on one of Africa’s best-performing economies.
As the demonstrations spread across the country, governments, including the US, UK, Australia, Canada and Ireland, have advised their citizens against all non-essential travel to the country or Amhara and Oromia regions at the centre of the instability.
Hailemariam Desalegn, Ethiopia’s prime minister, has said the death toll from the demonstrations, which began last November and have been exacerbated by the authoritarian regime’s brutal crackdown on protesters, could be as high as 500. Thousands of people have been arrested and the government imposed a state of emergency as it grapples with the biggest threat to the Horn of Africa nation’s stability in years. The protests originally began over land disputes, but the state’s harsh response caused them to spiral into broader protests against the government.
An American woman was killed after being caught up in a protest on the outskirts of Addis Ababa, the capital, this month.
Travel companies said bookings to the country — home to ancient Christian sites and spectacular highlands — have virtually ground to halt as the unrest and travel warnings keep visitors away.
“Things are effectively on hold,” said Jim Louth, owner of Undiscovered Destinations, a UK travel company. “If anyone inquires, our policy is to say people are being advised not to go.”
Tourism has become an important part of the economy, which has been growing at an annual average of about 10 per cent over the past decade as Ethiopia has attracted increasing levels of foreign investment.
The government estimates the sector contributes about 4.5 per cent of gross domestic product, or $2.9bn. The indirect contribution, through investment, is the same, while about 1.5m people are thought to earn their living from the industry.
More than 750,000 foreign tourists visited Ethiopia last year, with the US by far the largest country of origin, followed by China, Britain and Germany, according to government data.
The blow to tourism comes amid rising investor uncertainty as foreign companies, particularly flower farms and textile factories, have been targeted in a string of attacks that have caused tens of millions of dollars of damage.
The International Monetary Fund warned just before the state of emergency was imposed this month that attracting foreign investment will be crucial to sustaining the high growth rates.
Some travel companies said one problem is that while some of Ethiopia’s most popular sites — such as the city of Aksum — are not located in Amhara or Oromia, people have to travel through those regions to reach them.
“People on their first visit will want to go to the main sites and not be stressed,” said the UK-based Ultimate Travel Company. “More adventurous travellers might still go to places like the Omo valley that haven’t been affected, but most people will simply wait.”
The Ethiopian Tourism Organisation, a government body, insisted that “all tourist areas of the country are safe”.
“It is as safe now for tourists and business visitors to travel in Ethiopia as it has been for the last 22 years since the new constitution has been introduced,” it said in a statement.
Kiros Mahari, the general manager of the Ethiopian Tour Operators Association, said that “while there has been some unrest for a while, the situation has been restored back to normal”.
Emma Gordon, an analyst at Verisk Maplecroft, a risk consultancy, said such statements “come across as unbelievable”.
“The situation is quieter now than a few weeks ago, but the protests have not stopped,” she said. “Strikes, ‘ghost town days’ and non-violent protests are more common now because they’re so much harder to police, even under the state of emergency.”
Ms Gordon predicted that once the protesters had worked out how to cope with the state of emergency, which bans all protests, political communication on social media, and political gatherings, “there will be an upsurge in unrest”.
The transaction “utility” (economists’ term for satisfaction) compares the price one thinks is justified (the “reference price”) to the actual price they have to pay. If reference price is less than or equal to the actual price, humans get satisfied.
For free-trade skeptics, buying a relatively varied and less expensive basket of commodities is an alluring development. However, the transaction utility (satisfaction) is severely negative. This is because they are not willing to pay the price of substantial layoffs and unemployment at home (incidents that they perceive chiefly stem from globalisation) in order to get the goods for cheap.
Whether they are right or wrong is another matter, but the heavy moral cost they face because of perceived guilty conscience is too high. This results in a dissatisfaction with the current state of free trade and borderless transactions. In short, they suffer from a negative overall utility.
When you think of the industries that allow a person to acquire a massive fortune—the kind that makes them the wealthiest person in a country, or continent—your mind probably goes to fields such as technology, or oil. But clothes, and especially cheap clothes have turned out to be a surprisingly good route for many of…
The confined view of rationality regarding humans has strong relevance while carrying out activities like trade and exchange. Although rationality must not be ignored, understanding other key drivers behind transactions could widen our approach to comprehending and applying economics.
For instance, why do some universities conduct exams without an invigilator? Or why do most people value products they use beyond their monetary value (such as a coffee mug or passes for a cricket match)? Or even with no waste bins, why do some roads stay significantly cleaner than the others?
To answer the above questions, one would have to move away from the usual notion of maximising self-interest. Much literature has come to light during last few decades by behavioural economists and psychologists such as D. Kahneman, A. Tversky and others, in the field of psychological sensitivity. They suggest that various characteristics determine the choices that one makes. Most importantly, they point out that these reasons are beyond the maximisation of self-interest of the individual. Some of these characteristics include attitudes of people, such as higher aversion to losses of wealth and possessions than to identical amounts of gains, or a bias towards an unlikely or a rare event, or any limitation of memory due to biological factors…….Read more at:-
At its root the economy is a living, complex organism. Rather than envisioning economic transformation as akin to overturning an unresponsive juggernaut, it may be more productive to see it in terms of tending to a fragile body. Avoiding drawing “us” versus “them” battle lines, and acting on the transformational potential that exists within the economy as it is right now, opens up new arenas for constructive action. Now that would be radical.
Transformation doesn’t require an alternative “social economy,” because the economy we have is already social. We just need to recognize and act on that fact.
Traditional economics views humans as robotic machines who make calculated decisions based on logic. In contrast, behavioural economics views humans as irrational and emotional beings who are influenced by biases and experience when making decisions. This infographic takes a closer look at just what behavioural economics is and how it can be used.
Read more at:- https://www.b2binternational.com/publications/what-is-behavioural-economics/
Ethiopia: Double Digit Growth or Collapsing Economy?
Analysis by Andualem Sisay, All Africa, 8 April 2016
Ethiopian government’s increasing reliance on foreign loans is posing a serious risk of economic collapse, a renowned economist has revealed.
“Take for instance China, which has loaned over $17 billion to the Ethiopian government for infrastructure projects. Our total investment is 40 per cent of the GDP. Our saving is between 10-20 per cent of the GDP.
“We import $13 billion and export $3 billion. They are the ones who are filling all these deficit gaps,” said Dr Alemayehu Geda.
The Addis Ababa and London universities don was presenting his paper on Foreign Direct Investment (FDI) in Ethiopia and Credit Financing.
“What will happen if they stopped such financing tomorrow? What if, for instance, the Chinese government tomorrow says sell for me Ethio Telecom or sell to me Ethiopian Airlines or give me some share or buy my aeroplanes, or I will stop such credit financing?
Strategic items
“The country will collapse, I guarantee you,” he said.
Dr Alemayehu went on: “About 77 per cent of our imports are strategic items. Fuel only has 25 per cent share of the total import. As a result, even if we want to reduce these imports, we can’t. Ethiopia needs to minimise strategic vulnerability.”
The don elaborated giving the example of how the Koreans mitigated against such dependency risks when they used to source 75 per cent of their imports from the US some decades ago.
Dr Alemayehu presented his paper in Addis Ababa at the launch of a two-year 12 series of public dialogue by the Forum for Social Studies – a local civil society, partially financed by the UK’s Department for International Development (DfID).
“The Koreans came out of such vulnerability risk after analysing their situation properly, discussing the issue with their intellectuals and setting long term plans,” he said, advising the Ethiopian government to invest in quality education, skilled labour and improve the negotiations capacity as well as have in place a well-designed policy.
Last decade
Official estimates have shown the Ethiopian economy growing by double digits annually for about a decade now, a figure that has highly been doubted by independent scholars.
The Addis government has been applauded for growing the country’s GDP by around 10 per cent per year for the last decade.
In his paper, Dr Alemayehu indicated that Ethiopia’s external loan included $17.6 billion from China for various infrastructure developments, around $3 billion from Turkish and close to $1 billion from Indian governments.
The World Bank’s data shows that from 2012 – 2016, Ethiopia has taken a total loan of close to $6 billion from the global lender. Last year, Ethiopia for the first time, joined Euro Bond and accessed $1.5 billion.
In addition to loans, reports show that some $3 billion annually came to the country in the form of aid from donors.
Have declined
Ethiopia’s exports have declined from around $3 billion last year to around $2.5 billion this year, as revealed in the recent six-month report of the prime minister to the parliament.
Even though tax collection has been growing by an average of 20 per cent annually over the past five years, Ethiopia’s tax to GDP ratio still stands at 13 per cent, which is less than the around 16 per cent of the sub-Saharan average.
Last year, Ethiopia collected around $6 billion from tax, including $25 million recovered from contraband traders. The figure could have been raised by at least $3 billion had it not been for the generous tax incentives the country has provided to investors, according to latest report of the Ethiopian Revenue and Customs Authority (ERCA).
In only nine months of Ethiopia’s last budget (July 8, 2014 – July 7, 2015), the country provided tax incentives of around $2.4 billion to investors, by exempting them from customs and excise duties and withholding, VAT and surtaxes, according to ERCA’s report.
Financial integrity
A financial integrity report last December indicated that around $2 billion was leaving Ethiopia every year through mis-invoicing and other tax frauds.
When it comes to the FDI coming from China, India and Turkey, close to 71 per cent of their investments in Ethiopia were in the manufacturing sector.
However, job creation, technology transfer and export contribution were insignificant for Ethiopia, which has over an 90 million population dominated by the youth. The country has about 16 per cent unemployment rate, according to Dr Alemayehu.
Between 2003-2012, there were 93 Chinese companies that had reportedly invested $600 million, creating around 69,000 permanent and 79,000 temporary jobs for Ethiopians. There was little contribution to technology transfer and foreign currency generation through the exportation of their products.
According to Dr Alemayehu’s paper, during the same period, Indian investments in Ethiopia created 24,000 and 26,000 permanent and temporary jobs respectively, while 341 Turkish companies operating in Ethiopia created a total of 50,000 jobs.
Though much was being talked about Chinese investments growing in Africa, the Asian giant had less than 4 per cent of total share of FDI on the continent, out of the total stock of $554 billion worth in 2010. Most of the investments in Africa were still dominated by the Western companies, according to Dr Alemayehu.
Prime Minister Hailemariam Desalegn recently told the local media that Ethiopia’s GDP growth was not expected to record a double digit this year and would likely drop to around 7 per cent.
However, his special economic adviser with a ministerial docket, Dr Arkebe Equbay, reportedly told Bloomberg media that the economy was expected to grow by 11 per cent this year.
Foreign debts
The government was now expected to deal with puzzles such as why the economic performance was not as good as in the previous years, with all the generous incentives to investors and huge infrastructure investments mainly dependent on local and external loans?
How to repay its local and foreign debts before the lenders force the government to cede shares in its highly protected businesses, such as, Ethio Telecom, Ethiopian Airlines, the Commercial Bank of Ethiopia, the Ethiopian Insurance Corporation and Ethiopian Shipping Lines is, for sure, the elephant in the room.
But the big question is: How soon will these issues get the attention of a government pre-occupied with trying to feed about a dozen million people affected by drought and dealing with political unrest and conflicts mainly in Oromia and Gondar area of Amhara Region?
The resources are scarce in comparison to our never ending wants andEconomics is concerned with the ‘rational’ management of these resources that have alternate uses to maximise the gains at both micro-macro level.
There are several economic models that have been developed that have distinct characteristics and unique features. Adam Smith’s Capitalist model, the one where the market forces of demand and supply move freely to determine the Equilibrium level represents an ideal system of want origin and its satisfaction in the perfect sense. Any extension of demand will shift the Equilibrium price upwards and this in turn, will motivate the ‘rational’ producers to supply more to the market at the increased price to maximise their profits. This will eventually stabilise the price and eventually Equilibrium will be restored in the market. How simple is that! This model seems stable and logical in every sense, doesn’t it?
Econometrics – the most practical part of any Economics course. Combining regression analysis with economic theory using real world data sets! This is what applied econometrics is all about!Feel free to download and share my course notes from EC2020 Elements of Econometrics.
“In a society in which the money-maker has had no serious rival for repute and honor, the word ‘practical’ comes to mean useful for private gain, and ‘common sense,’ the sense to get ahead financially. The pursuit of the moneyed life is the commanding value, in relation to which the influence of other values has declined, so men easily become morally ruthless in the pursuit of easy money and fast estate-building… A society that is in its higher circles and on its middle levels widely believed to be a network of smart rackets does not produce men with an inner moral sense; a society that is merely expedient does not produce men of conscience. A society that narrows the meaning of ‘success’ to the big money and in its terms condemns failure as the chief vice, raising money to the plane of absolute value, will produce the sharp operator and the shady deal. Blessed are the cynical, for only they have what it takes to succeed.” – (C.Wright Mills 1956). Source: Markets, policy and sociology of economic immorality by Oleg Komlik
TPLF/EPRDF Regime a Contra to a Developmental State
By Dr Barii Ayano, Economic Thinker
Introduction
One of the catchy phrases the TPLF/EPRDF regime leaders and their cadres often use to describe the regime is “limatawi mengist” or “developmental state”. However, the TPLF/EPRDF regime is not pursuing a development state economic model since the regime’s economic system does not meet standard features of a development state. Actually, the regime’s economy and its rhetoric are in contradiction with the conventional features of a developmental state enshrined in nation building and economic nationalism that unify a nation. There is difference between state-led developmental state and state-controlled and state-owned economy of TPLF-led regime. The regime’s rulers and bureaucrats have predatory and kleptocratic motives, which are fed by structural and institutional corruptions and rentseeking. Unlike a developmental state, which builds foundations for private entrepreneurship and innovative enterprises, Ethiopia’s monetized economy is dominated by interest groups affiliated or aligned with the regime such as REST. The regime marginalized and displaced most of the traditional entrepreneurial and business class. The foundation of Ethiopia’s economy under the current regime is not entrepreneurial or business skill but alliance with TPLF leaders. The leaders of the TPLF/EPRDF regime and interest groups aligned with them designed get-rich-quick schemes based on land grabs and cronyism, which have nothing to do with economic efficiency, entrepreneurship, innovative value adding, business acumens, etc. of a developmental state. Therefore, the regime’s leaders and their cadres use of the phrase ‘developmental state’ to the describe economy is similar to the regime’s leaders and their cadres use of the word ‘democracy’ to describe the current political system. It is also important to note that a developmental state is not always synonymous with authoritarianism and dictatorship, but many Asian states have been authoritarian to a degree, particularly at the earlier stages of development.
What is a Developmental State?
A developmental state is a term coined by Chalmers Johnson that is used to describe states which follow a particular model of economic planning and management. It was initially used to describe post World War II Japan and its rapid modernization and economic growth. It is the developmental state of Japan that led to innovative creation of world renowned Japanese brands such as Toyota, Honda, Mazda, Mitsubishi, Nisan, Sony, Toshiba, etc. Other examples often cited as developmental states include Singapore, Thailand, Taiwan, Malaysia, South Korea, and Indonesia. In terms of an economic jargon, a developmental state is a state where the government is intimately involved in the macro and micro economic planning in order to grow the economy whilst attempting to deploy its resources in developing better lives for the people. Developmental states invest and mobilize the majority of capital into the most promising sector of an economy that will have maximum spillover effect for the society and reduce the dislocations caused by shifts in investment and profits from old to new sectors. Such state plays the social engineering role to restructure the national economic system for promoting long-term (industrial) development. Thus it is based on combinations of nurturing innovative private enterprises as the key owners and the positive role of government via an ambition use of the interventionist power of the state and its fiscal and monetary policy to guide investment in a way that promotes economic solidarity of different interest groups based vision for national economy and its growth.
Key Features of a Developmental State
In order to understand the concept of a developmental state, it is important to highlight some of the characteristics of a developmental state. Although dictators pursuing developmental states generally believe that they will attain state legitimacy through delivery of services to citizens rather than through the ballot, they use economic nationalism to unify the nation based on a collective goal of economic development. Developmental states hugely invest in quality education, especially in technical fields in both domestic universities and overseas scholarship. This leads to the emergence of bureaucratic layers populated by extremely educated people, who have sufficient tools of analysis to be able to take economic leadership initiatives, based on sound scientific basis, at diverse levels of decision making within the government structure. Moreover, developmental states have been observed to be able to efficiently distribute and allocate resources and, therefore, invest optimally in critical areas that are the basis of growth such as education, research and development, infrastructure, etc. It is this ideology-structure nexus that distinguishes developmental states from other forms of states. Let me elaborate the ideology-structure nexus of a developmental state in two areas.
1. Economic Nationalism as an Ideology
The successful developmental states are based promoting economic nationalism as a unifying ideology. The state promotes economic nationalism as an essential keystone, which unifies different interest groups. A developmental state conceives economic development as its national mission and the mission of the country at large. Although a development state establishes its principle of legitimacy as its ability to promote sustained development, it does not alienate experts of diverse interest groups and political views in participating in economic nationalism since real development requires expertise for steady high rates of economic growth and structural change in the productive system, both domestically and in its comparative competition in the international economy. In spite of dictatorial development states control of political sphere, there is economic freedom where experts of diverse professions are able to establish an “ideological hegemony” based on economic nationalism to which key actors in the nation adhere voluntarily in order to contribute towards economic development for the benefits of their country. The main force behind the developmentalist ideology has usually been economic nationalism, inducing nations to seek to “catch up” with countries considered as more developed. It is essential to stress the ideological underpinnings of state policies knit together the ruling class and the ruled class of a country with economic nationalism as a unifying factor. In other words, the centrality of economic nationalism as an alternative ideology points to de-politicized national quest for economic development, which is driven by professional expertise with the help and support of a developmental state. The economy falls under some kind of technocratic governance of the best and the brightest a country can offer for economic development to carry out state policies that are good for the nation without focusing on cronyism and self-serving profiteering of politicians and their relatives. The TPLF-led regime does not function in this mindset. Economic development is not only a central preoccupation for political leaders but also by professional technocrats of a developmental state. Nationalist-cum-developmentalist ideology is used for both unifying nation building and economic development. Economic nationalism ideology is used to rally the masses for national unity and economic development. The centrality of economic development was such that it acquired the status of an ideology (“developmentalism”) national ideology, which seeks to subordinate the energy of the people behind a single national goal. Among others, the role of the government is maintaining public investment in infrastructure, research and development, and education to stimulate private investment, create skilled labor force and entrepreneurial class, etc. In the politics of nation building, the developmental state leadership focuses on the economics of nation building. In dictators-led developmental state leaders swear by economic growth and seem to view good growth indicators as the main source of their legitimacy. The developmental state is also committed to resolving conflicts in the on-going process of social restructuring as it tends to induce winners and losers in economic development. Conflict management in this regard involves ensuring that the benefits, expected benefits, of the growth process are widely shared and discussed among politicians, experts and the public. The developmental state is understood to be identified with its actual achievement of economic growth, since its legitimacy stems from the significant improvement in standards of living for a broad cross section of society. Thus economic nationalism can include political interest groups molded into a developmental coalition for a common goal.
2. Developmental State-Structure: Professional Capacity Building
The state-structure of a developmental state emphasizes building structural capacity to implement economic policies sensibly and effectively. The capacity is determined by structural, institutional, technical, administrative, and political engagements and professional bureaucrats. Undergirding all these layers is the autonomy of the state from social forces so that it can use these capacities to devise long-term economic policies unfettered by private interests of corrupt politicians and unprofessional bureaucrats. The quest for a “strong state” in the development process is aligned with building administrative capacity more than the political ability to push through its developmental project using political power. The developmental state has some social anchoring that prevents it from using its autonomy in a predatory manner and enables it to gain devotion of key social actors. It does not rely on asymmetric nature of centre-periphery power relations, which tend to produce various class structures. Rather, it focuses on building capacity for appropriate state structures and functions that effectively promote development as a national goal. (See “a” and “b” below) The foundation to building a developmental state is to develop an educated population and a knowledgeable society with high levels of scientific literacy in building a knowledge economy based on professional business people and entrepreneurship. Economic nationalism leads to a harmonious society with a strategic partnership amongst labor, government, industry and society, which leads to a society that efficiently allocates and distributes resources.
a. Competent and Efficient Bureaucracy
It goes without saying that cooperation between state and major industries is crucial for maintaining stable macroeconomy since policies decided at the top levels of government are administered by middle-level bureaucrats. One of the main characteristics of a successful developmental state capacity building is creating an extensive bureaucratic layer consisting of mainly professional technocrats with highly developed economic and innovative visions, who are able to plan in large cycles that extend over long time periods. The bureaucrats also pay special attention to reconfiguring the social sphere so that the culture of appreciating the value of education is entrenched since technical education is the driver of increasing developmental capacity. For instance, in East Asia, the developmental state’s bureaucracy has several important characteristics. There was an extensive discourse on ‘developmentalism,’ the necessity of industrialization and of state intervention to promote it. The professional bureaucracy in Asia has a powerful social group of highly educated bureaucrats with predictable and coherent national interests. Thus, the public-private cooperation between the bureaucracy and business sector has been developed and refined through institutional adaptation over time, and responds flexibly to changing new realities in the respective country and international economic conditions. By and large, the behavior of Asian bureaucrats has been bound to the pursuit of collective goals rather than individual opportunities presented by the market, allowing the state to act with autonomy from certain societal pressures. The fact that formal competence, as opposed to clientelistic ties or loyalties, is the chief requirement for entry into the bureaucratic network makes it all the more valued among people. A competent and efficient bureaucracy dedicated to devising and implementing a planned process of economic development is central role of a developmental state. Developmental states staff the bureaucracy by the respective countries best human resources, who are charged with the task of directing the course of their countries’ development. Thus the chance to join the state bureaucracy has a high degree of prestige and professional legitimacy. This allows a developmental state not only to continue recruiting outstanding personnel, but also to utilize policy tools that tend to give them additional authority. As a result, the developmental state economies have developed the greatest state capacity not only to formulate development policies but also to implement them effectively to promote economic development. The TPLF-led regime has never nurtured bureaucratic professionalism but bureaucratic clientelism of loyal servants.
b. Embedded Autonomy of Professional Bureaucrats and Entrepreneurs
A competent and efficient bureaucracy under a developmental state is able to maintain effective relationship, especially regarding the direction and funding of investment projects, with the domestic business sector without direct intervention of the central government. Thus, the professional bureaucrats, entrepreneurs and the business sector have “embedded autonomy” when it comes to the relationship between the developmental state and the business sector. A successful developmental state needs to be sufficiently embedded in society so that it can achieve its development objectives by acting through “social infrastructure”, but not so close to business sector that it risks ‘capture’ by particular interest groups, which tend to lead to entrenched corruptions and rent-seeking. This no demarcation between the TPLF-led regime’s politics and the economy since politics and economy, including dominating economic ownership, are meshed together in Ethiopia-politics is economy; economy is politics.
TPLF-led Regime: A Kleptocratic State
The TPLF/EPRDF regime vividly lacks an ideology of development anchored in some form of economic nationalism that unifies Ethiopia as a collective goal. The government has not attempted to build national consensus on economic development of different interest groups with the exception of the Grand Ethiopian Renaissance Dam (GERD). Some argue that the GERD campaign by the regime is more for finance and political expedience than unifying the people under a national project. Economic growth rhetoric is sold as the domain and monopoly of the regime whereas the general public is ridiculously divided into “pro-development” and “anti-development”. And the opposition groups, by and large, fall under the category of “anti-development”. Surely, this is anti-thesis to a developmental state’s theme of building economic nationalism, which binds different interest groups of a country so that they all accept and take part in it as a collective national goal. Abay Tsehaye, in one of his interviews, clearly stated the economic goal of the regime in the long run. He stated that the regime has the agenda of creating an economically empowered class, which will control the economy and lead politics. This agenda has nothing to do with a developmental state agenda founded on building national consensus and economic nationalism as an ideology. The regime’s economic agenda is aligned with “divide-and-rule” and long term goal to lord over Ethiopia. Like the political goal of the regime, the economic agenda is also inherently discriminatory in its nature. In the lack of nurturing national development ideology and intrinsic one-party rule, loyalty to the regime easily overrides societal development goals. Individuals aligned with the regime often hold highly idiosyncratic mindset that they flout with impunity and with no moral qualms in politics, the economy and their general interaction with the business sector and the society at large. Consequently, TPLF/EPRDF regime’s leaders have no moral basis on which they could demand enthusiastic and internalized compliance to whatever “national project” they launch due to the lack of ideology of development, which addresses the public demand and national economic interests shared by all interest groups. Unlike the developmental state, the central political stage and layers of bureaucracies of the regime are not occupied by well educated professionals, who are guided by the aspirations of nation building and economic development. Loyalty is the major factor in bureaucratic appointments from top to the bottom, and hence most of the regime’s bureaucrats are less merited to occupy their offices. Rather than being competent and efficient bureaucracy, the processes of appointing less qualified individuals based on loyalty has led to an inescapable “development of underdevelopment” in Ethiopia’s bureaucracy, which in turn produced a series of political and economic contradictions and bureaucratic cronyism. Moreover, unlike a development state, the TPLF/EPRDF regime portrays foreign dependence syndrome, with a significant part of the regime’s budget covered by international budgetary aid. Externally dependent growth is not conducive for dynamic capital accumulation, which builds basis for a development state economy. Thus, even accepted at face value, equating the regime’s claimed booming economy of Ethiopia with a developmental state becomes problematic since the economy heavily depends on external factors, such as export of primary products and aid inflows.
TPLF-led State Controlled and Owned Economy
The institutional and economic structures of the regime are reinforced and constructed by political power to control the economy rather than developing national economic ideology or creating discourses with interest groups. Structural aspects of the regime’s economy include mass dislocation of society without offering alternative settings or means of survival. This kind of economic structure resembles settler colonial economy much more than a development state. This is most apparent in land-grab and the privileging of elements of the regime, their families and supporters. Access to politicians paves way for getting rich much more than individuals’ entrepreneurial and business skills. Large chunk of renowned entrepreneurs and business people have been forced to leave Ethiopia and migrate to other countries. The economic system and its bureaucracy are structured as a predatory state, where top rulers and layers of bureaucracy have predatory motives, and hence less willing to part with corruptions and rent-seeking. The aim of regime is to exploit the physical, human, and economic resources for the benefit the leaders of the regime and few others aligned with them. The economic goals of regime are simple. It is to provide maximum economic benefit to the individuals in power at the expense of the majority. Like colonial settlers, the individual needs of their subjects are neither important nor part of their economic goals. The imposition of economic policy is often arbitrary and unrelated to any real need of the majority of the people. This led to inadequacy of the food entitlements and chronic malnutrition and famine. Unlike a development state’s national development driven by all-encompassing economic nationalism, the TPLF/EPRDF regime’s economic agenda is more about economic subjugation and about the regime’s ability to control of the economy. Improving the production methods and strengthening national economy for all people are not the priorities. It’s all about empowering the likes of REST to be unchallengeable economic giants of Ethiopia. There is a crystal clear lack of autonomy of the business sector due to the unholy relationship of state-society and state-business under the TPLF-EPRDF regime. There is bureaucratic malaise into both market and state structures and it has eaten into the very core of the edifice of modern administration rendering it both weak and incoherent, at best. Mired in clientelism, the state has not been able to provide the bureaucratic order and predictability that business sector and entrepreneurs need to engage in long-term investment and contribute to long-term national development. TPLF-led regime is literally driven interest groups and mired in state-clientelist relationships. And hence it is even lacking in “stateness” in a strict sense of the word. Self-interest groups which control the state adopt policies that generated rents for them. The TPLF/EPRDF state is essentially a rent generating institution that inhibited efficient allocation of resources. Rent seeking usually involves redistribution of income from one group to another, and in Ethiopia, it is redistribution from poor to the rich through corruptions and rent-seeking. Let alone being a development state, the regime cannot pursue the collective task of development in the long run. It has crushed most of the strategies and institutions that build a solid foundation for development. State-society relationships are inherent to national development, and mistrust runs both ways-the regime does not trust the people and the people don’t trust the regime.
Conclusion
The developmental state refers to the collective economic and human development via state’s essential role in harnessing national human, financial, etc. resources and directing incentives through a distinctive policy-making process. The foundation for building a developmental state is the ability to establish nationalist educated population by creating a harmonious society with strategic partnerships amongst labor, government, industry and society as well as efficiently allocating and distributing resources. The success of the developmental state also stems from the ‘embedded autonomy,’ in which the developmental state is linked intimately with the private sector but preserves sufficient distance for the renegotiation of goals and policies when capital interests are inconsistent with national development. The key government actors under the TPLF-led are irredeemably greedy, corrupt and captured by rent seekers and economies of personal wealth accumulation, and hence focus on promoting vested interests over national development. They don’t think creatively of modes of social organization at both macro and micro level that can extricate Ethiopia from poverty and lead it to the long term path of development. Appropriate institutional structures do not exist in Ethiopia to socially engineer a developmental state since a development state is a social construct consciously brought about by a state, its bureaucracy and societies. Economic nationalism of a developmental state cannot take root. We cannot draw parallels between TPLF-led regime and developmental states implemented in Asia. Unlike TPLF, Asian dictators were/are very nationalist with the goal to change the living standard of their people and promote their countries in the world. TPLF leaders have beef with most of the people in Ethiopia such as Oromos and Amaras. TPLF’s governance resembles settler colonialism of the apartheid system in South Africa and British land-grab system in Rhodesia (now Zimbabwe) much more than the developmental state systems in Asia. The regime does not pursue collective economic empowerment agenda. In dictatorial developmental states, even where was no political freedom but people had economic freedom. Under the TPLF/EPRDF regime, there is neither political nor economic freedom. Discriminatory economic policies, with enclave economy nature, are more aligned to colonial policies. TPLF governance is unequivocally becoming ethnic apartheid in political, economic, etc. fronts. Its policies are designed to marginalize dissenting people from economic benefits and then to impoverish them for long term political and economic control whereas the leaders and their relatives profiteering through deeply entrenched cronyism. Developmental state dictators in Asia were not consumed by self-enriching schemes via corruptions and rent-seeking. Actually, the Asian dictators were very tough on corrupted individuals, politicians, etc. Although they did not stop it, corruption leads to very long imprisonments. But people join the TPLF/EPRDF regime to get license to be corrupt and rent-seeker without any repercussion. The TPLF –led regime is structurally and institutionally corrupt, which was not the case under Asian developmental state system. Finally, the TPLF-led regime is weak, over-extended, and interfere with the smooth functioning of the markets with its repressive characters and draconian policies. It heavily depends on foreign powers for its existence. Therefore, it is not an example of a developmental state by any account. I think phrases like the “rentier state”, the “overextended state”, the “parasitical state”, the “predatory state”, the “crony state”, and the “kleptocratic state” better fit the TPLF/EPRDF regime. I think it is a kleptocratic state/autocracy (rule by thieves) made up of very greedy individuals addicted to personal wealth accumulation through structured and institutionalized corruptions and rent-seeking.
(Addis Fortune) — Ethiopia’s foreign currency supply available for importers and travellers alike is increasingly facing chronic shortages, claims an importer engaged in trading of household appliances from Asian countries, while opting to speak to Fortune on conditions of anonymity. As the country’s foreign exchange provision plummets into a whirlpool, the parallel or black market for hard foreign currency (which has become a rare commodity), is thriving in the country.
The forex shortage is so critical that opening a Letter of Credit (LC) takes as long as one year or even more, and even then, there is no guarantee that the requested amount of foreign currency will be availed, the importer complained.
His is not the sole voice of concern with the increasing scarcity of foreign currency in Ethiopia, as his view is also shared by a senior executive of a private bank and an economics lecturer, who also chose to speak anonymously to Fortune. They argue that basic economic principles of supply and demand suffice to explain the ongoing critical shortfall of forex in Ethiopia.
Both the banker and economist posited three basic factors: global economic slowdown, Ethiopia’s mega projects consuming huge loads of hard currency and the country’s widening trade balance, as the genesis of the shortage.
As the world still reels from the financial meltdown of 2008 and the subsequent global economic slowdown, it has negatively affected and upset long term foreign investment in the country, the banker and economist argued. However, a recent study by the United Nations Conference on Trade & Development (UNCTAD) discovered that Ethiopia is actually the third largest recipient of Foreign Direct Investment (FDI) in Africa, with inflows of 953 million dollars in 2014 and 279 million dollars in 2013, highlighting a rapidly rising trend.
Ethiopia’s mega projects in hydroelectric generation, sugar production, and rail transport, continue to drain the country’s hard currency reserves, with high demand for public investment, the experts argued. Import of capital goods and construction-related services increased sharply in Ethiopia according to a June 2015 IMF report, utilising large sums of hard currency.
In line with the country’s development endeavours, the National Bank of Ethiopia (NBE) has a policy of prioritising provision of foreign exchange for selected goods and services based on a designated priority, which shuns other imports, the banker explained. The mega projects top the priority list and drain the country’s forex reserves.
In addition to the impact of the country’s mega projects taking a rather large chunk of the highly limited forex reserve, Ethiopia’s trade balance is also one of the major factors affecting the availability of hard currency.
Though Ethiopia’s exports have registered growth over the past years, the growth rate of its imports has been at a much faster pace, resulting in an ever widening gap in the overall trade balance of the country.
Reports by NBE indicate that though the country’s export trade has been registering steady growth in the recent past, with exports worth roughly two billion dollars in 2009/10, increased to 3.25 billion dollars in 2013/14 and more than 1.6 billion dollars in the first two quarters of the current fiscal year, the country’s imports have skyrocketed at an alarming rate.
NBE’s data show that Ethiopia’s imports have maintained a robust course of growth over the years as the country imported goods worth roughly 8.27 billion dollars in 2009/10, increased to 13.72 billion dollars in 2013/14 and well over eight billion dollars in the first two quarters of the current fiscal year.
The national bank’s data also highlight the distressingly widening trade imbalance which continues to haunt Ethiopia’s balance of trade. As such, the trade deficit was put at an estimated -6.27 billion dollars in 2009/10, -10.47 billion dollars in 2013/14 and roughly -6.6 billion dollars for only the first two quarters of 2015.
This imbalance has partly been caused as a result of slow-evolving export growth rates with falling commodity prices and lack of diversification in exports, loopholes underscored by the International Monetary Fund’s (IMF) report.
But beyond the basic economic principles of demand and supply used as tools to explain the shortage of forex, other variables are worth exploring to get the picture of the problem in its entirety.
One important aspect is the proliferation of the black market and shady business deals between businesspeople and bankers. As anxious importers are willing to pay whatever cost they are made to pay to avoid penalties during delivery of imported goods, and as some corrupt bank staff and managers take advantage of the situation, the forex shortage has worsened.
Fortune spoke to a dealer, who, on conditions of anonymity, explained some of the processes in which brokers, importers, exporters and bankers engage, to facilitate the provision of forex at a faster time interval than normal. He stated that the deals take place underground but strictly follow legal procedural steps. This makes the whole process virtually undetectable by regulations of the national bank.
At the current going rate, a person who wants to get forex ahead of the pack, has to pay as much as three Birr for every dollar they request in their LC, the dealer told Fortune. His job is to bring together the bankers and the importers and the deal will be done. He also explained a different, still illegal, mode of acquiring forex employed in the context of secret partnerships between corrupt importers, exporters and bankers.
In this case, the dealer negotiates a proposal between an exporter and an importer where the latter will make use of the export earnings of the former, by paying the current going rate for every dollar used. The dealer once again negotiates the proposed scheme with the bankers and once on board, they jointly facilitate the importers’ access to hard currency.
The lack of transparency in opening LCs has cast an ominous shadow on the industry, according to several importers and the banker who spoke with Fortune. NBE recently took a highly publicised measure against the Cooperative Bank of Oromia for alleged mishandling of forex involving LCs.
One importer noted that a growing number of suppliers in Asia are now rejecting LCs opened in certain banks from Ethiopia, due to unpaid credits, emboldening his opinion that unless the regulatory state apparatus takes a serious overhaul at the forex provision, darker days are yet to come.
Travellers are also feeling the brunt of the forex crunch. As one traveller put it, she considers herself lucky if she can get 500 dollars from banks for a travel visa. The chronic shortage, she adds, has fed the parallel market for forex and its proportions and ramifications on the country’s economy are growing daily.
The CIA’s Factbook showed Ethiopia’s reserve of foreign exchange and gold was 3.785 billion dollars at the end of 2014. International financial institutions such as IMF have stated that they support the national bank’s objective of having foreign exchange reserves to cover three months of imports – but the central bank has so far, failed to respond to any of the questions Fortune had regarding the overall forex shortage in the country, including the state of forex reserves.
In addition to racking up the reserves, NBE should proactively counter all the shady business deals now widespread in the banking sector to cut the business community and the overall economy of the country, some slack.
Related:-
Ethiopia: The chronic shortage economy: What is the price and utility of a kilo of Sugar in Finfinnee (Addis Ababa) in terms of never ending queue?
Ethiopia’s fake economic growth borrows from ENRON’s accounting
J Bonsa analyses Ethiopia’s economic growth over the last ten years. Africa At LSE
More than 70 people have been killed and dozens wounded in an ongoing crackdown on peaceful protesters in Oromia. One of the underlying causes of the prevailing tense political situation is Ethiopia’s bogus claim about “miraculous” economic growth in the last decade.
The youth is not benefitting from the country’s supposed growth and doesn’t anticipate the fulfillment of those promises given the pervasive nepotism and crony capitalism that underpins Ethiopia’s developmentalism.
Courtesy: OPride
The ruling Ethiopian People’s Revolutionary Democratic Front (EPRDF) came to power in 1991 and briefly experimented with democratic transition. However, a little over a decade into its rule, the party’s former strongman, the late Meles Zenawi, realized that their pretentious experiment with liberal democracy was not working. Zenawi then crafted a dubious concept called, “developmental state.”
Stripped of the accompanying jargon and undue sophistication, Zenawi was simply saying that he had abandoned the democratic route but would seek legitimacy through economic development guided by a strong hand of the state. This was a ploy, the last ditch attempt to extend EPRDF’s rule indefinitely.
Using fabricated economic data to seek legitimacy and attract foreign direct investments, the regime then advanced narratives about its double-digit economic growth, described with such catchphrases as Ethiopia rising, the fastest growing economy in the world and African lioness. The claims that EPRDF has delivered economic growth at miraculous scales has always been reported with a reminder that it takes several decades to build democratic governance. The underlining assumption was that, as long as they deliver economic growth, Ethiopia’s leaders could be excused on the lack of democracy and human rights abuses associated with the need for government intervention in the economy.
EPRDF spent millions to retain the services of expensive and well-connected Western lobbying firms to promote this narrative and create a positive image of the country. These investments were also accompanied with a tight grip on the local media, including depriving foreign reporters’ access if they cross the government line. Ethiopia’s communication apparatus was so successful that even serious reporters and analysts started to accept and promote EPRDF’s narrative on rapid economic growth.
However, a few recent events have tested the truthfulness of Ethiopia’s economic rise. Drought and the resulting famine remain the Achilles heels of the EPRDF government. The government can manipulate data on any other sector, including the aggregate Gross Domestic Product, and get away with it, but agriculture is a tricky sector whose output is not so easy to lie about. The proof lies in the availability of food in the market, providing the absolute minimum subsistence for the rural and urban population.
The sudden translation of drought into famine raises serious questions. For example, it is proving difficult to reconcile the country’s double-digit economic growth with the fact that about 15 million Ethiopians are currently in need of emergency food aid.
Rampant famine
Except for some gullible foreign reporters or parachute consultants, who visit Addis Ababa and depart within days, serious analysts and students of Ethiopian economy know that authorities have often fabricated economic statistics in order to generate fake GDP growth. To the trained eye, it does not take a lot to find inconsistencies in the data series. In fact, Ethiopia’s economic growth calculus is so reminiscent of Enron accounting. (See my recent pieces questioning EPRDF’s economic policies, including anomalies in the alleged achievements of millennium development goals, crony businesses, devaluation, external tradeand finance.)
The tacit understanding in using GDP as a measure of economic growth is that responsible governments generate such data by applying viable international standards and subjecting the data to scrutiny and consistency checks.
Unfortunately, these standards are not foolproof; irresponsible governments with mischievous motives can abuse them. There is credible evidence that shows Ethiopian authorities deliberately inflated economic statistics to promote feel-good, success stories.
Let’s take the agricultural data, which is timely and topical given the ongoing famine. This came to light recently as the European Union tried to understand anomalies in Ethiopia’s grain market, particularly persistent food inflation which the EU found incompatible with the agricultural output reported by the Central Statistical Authority (CSA) of Ethiopia.
The EU’s Joint Research Centre (JRC) then developed the technical specification for studying the scope of the Cereal Availability Study in order to account for the developments in the Ethiopian cereal markets. The International Food Policy Research Institute (IFPRI) was selected to carry out the study.
Figure 1 (above) compares the EU-sponsored survey and the Ethiopian government’s survey produced by the CSA. I am using the data for 2007/08 for comparison. The negative numbers indicate that the IFPRI estimates were consistently lower than the CSA data. For instance, CSA overstated cereal production by 34 percent on average. This ranged from 29 percent for maize to 44 percent for sorghum. The actual amount of Teff produced is lower by a third of what’s reported by the CSA.
The research team sought to explain this “puzzle” by examining the sources of the confusion, the methodological flaws that might have led CSA to generate such exaggerated economic data. Toward that end, they compared CSA’s crop yield estimates with comparable data from three neighboring countries: Kenya, Tanzania, and Uganda (see Figure 2).
From 2000 to 2007, the average increase in cereal yield for these countries, including Ethiopia, was 19 percent. Yet the CSA reported a whopping 66 percent for Ethiopia’s yield growth. The country was not experiencing an agricultural revolution to justify such phenomenal growth. It is unrealistic that Ethiopia’s yield growth would be greater than the neighboring East African countries, particularly Kenya, where the agricultural sector is at a much more advanced stage. If anything, the reality in Ethiopia is closer to Uganda, which did not report any yield increase during that period.
This reveals the extents of data manipulation by Ethiopian authorities to create an inexistent economic success story and seeks political legitimacy using a bogus record. We now know the widespread distortions in official statistics on cereal production thanks, in no small part, to EU’s intervention in sponsoring a study and explaining the disparities. Cereals represent only a sub-sector in the agricultural realm. It is likely that worse distortions would be revealed if similar studies were done on Ethiopia’s growth statistics in other sectors, including manufacturing and service divisions.
‘Poverty reduction’
The IMF has praised Ethiopia for achieving accelerated growth with a focus on equity and poverty reduction, a challenging dilemma for most countries. However, a closer look at three interconnected facts turns this claim on its head.
First, as noted above, Ethiopia’s agricultural output has been inflated by 34 percent on average. Second, a33 percent poverty reduction since 2000 is widely reported. Third, there is a consensus that poverty reduction has happened mostly in rural Ethiopia. Now we put these three facts together and apply a simple logic to establish that the 33 percent poverty reduction is explained by the 34 percent exaggerated agricultural outputs. Notice that it is not by accident that the two percentage points are almost identical. Therefore, the ups and downs cancel each other out. In the best-case scenario, poverty rate must remain at the same level as in 2000.
The World Bank, IMF and other donors have often anchored their conclusions on poverty reduction on alleged changes in the agricultural sector, where the bulk of the poor live and work. Little do they know that the data they used to compute the poverty index comes from agricultural statistics with hugely inflated yield assumptions as shown above.
This raises the question: where has the billions of dollars in bilateral and multilateral aid pumped into Ethiopia in the name of poverty reduction and the millennium development goals gone?
‘The enclave economy’
The ‘Ethiopia rising’ storyline is a standard set by foreign correspondents who often repurpose official government press releases, or reports based on the construction projects in the capital, Addis Ababa.
For example, Bloomberg Africa’s William Davison, often uses the proliferating high-rise buildings in Addis Ababa as tangible evidence of Ethiopia’s double-digit economic growth. In his latest whitewash, Davison writes, “such growth is already visible in parts of the capital, where shopping malls and luxury hotels are sprouting up.” That a veteran reporter for a business website unashamedly passes judgment on economic success by referring to heights and width of buildings underscores his shallow understanding of the country’s social and political fabric.
Here are some of the questions that reporters aren’t asking and seeking answers for: Who owns those building? Where did the investment money come from? Are there any firm linkages between these physical infrastructures and the rest of the Ethiopian economy? I have partially answered some of these questions in a previous piece and will soon provide additional insights.
For now, I would like to draw attention to the existence of an “enclave economy” within the mainstream Ethiopian economy. This enclave is made up of highly interconnected crony businesses, which are owned and operated by Tigrean elites, who also have a tight grip on the political and military command structures. Take, for example, the Endowment Fund for Rehabilitation of Tigray (EFFORT), a business conglomerate affiliated with the Tigrean People’s Liberation Front (TPLF). EFFORT has its humble origin in the relief and rehabilitation arm of the TPLF. However, it has undergone amorphous growth and now controls the commanding heights of the Ethiopian economy. By some estimates, EFFORT now controls more than 66 business entities.
The EFFORT controlled enclave and related military engineering complexes have created a semi-autonomous economy in Ethiopia. They made smart choices and specialized in engineering and construction businesses. This means they do not have to rely on the Ethiopian public for their products; instead, each specialize in separate industrial branches and buy from each other and also sell to the government, which is also in their hand. The huge government infrastructural projects necessitated by the “developmental state” model create business opportunities for these engineering companies.
The enclave economy is only loosely linked to the mainstream economy and it does not benefit the bulk of the Ethiopian people in any meaningful way. The luxury hotels and supermarkets that Davison refers to cater for the needs of the affluent business classes, their families, and the expatriate community.
In other words, Ethiopia’s miraculous economic growth, if it in fact exists, must have happened only in the enclave economy. Statistically, it is possible to generate a double-digit economic growth at the national level through a combination of some real astronomical growth in the enclave component and stagnation or declines hidden, through some accounting tricks, in the rest of the economy.
Lock-in style of reporting
Unfortunately, the unquestioned reporting on Ethiopia’s economic success has continued. Even the EU study appears to have been shelved, or deliberately ignored despite the significant findings. Even as a fifth of the population is in need of emergency aid, the World Bank is sticking with the outdated data and has recently released a sensationalized report entitled “Ethiopia’s Great Run: the growth acceleration and how to pace it.”
The ensuing famine has shaken the foundation of Ethiopia’s growth narrative, yet western NGOs and media outlets appear to suffer from the lock-in effect in adopting consistent storylines. They continue to link and refer to the World Bank, IMF and others reports and indexes by multilateral organizations.
That’s why we continue to see comical headlines such as “Ethiopian Drought Threatens Growth as Cattle Die, Crops Fail,” which assumes that Ethiopia’s growth is actually occurring. This acquiescence does not only display ignorance, but it also underscores an effort to evade accountability for previous mistakes and failure to report accurate information.
In a recent interview with The Ethiopian Reporter, Prime Minister Hailemariam Desalegn made a rare and fateful admission: “if we crave for too much praise for our achievements, we might run the risk of undermining the challenges we are facing. These challenges could grow bigger and become irreversible and that would be detrimental.”
Over the past 25 years, the EPRDF worked tirelessly to create a distorted image of the country and began craving and lobbying foreigners for praises.
Enron’s success involved an elaborate scam, but the firm was named “America’s Most Innovative Company” for six consecutive years. This fame did not stop Enron from crumbling. EPRDF’s fate will not be any different. The Oromo uprising has already started the unraveling of its elaborate scams devised to attain legitimacy on the back of non-existent economic and democratic advancement.
Did you know that investments in early childhood are crucial for achieving the brain’s full developmental potential and resilience?
Jim Heckman, Nobel Laureate in economics, and his collaborators have shown that strong foundational skills built in early childhood are crucial for socio-economic success. These foundational skills lead to a self-reinforcing motivation to learn so that “skills beget skills”. This leads to better-paying jobs, healthier lifestyle choices, greater social participation, and more productive societies. Growing research also reveals that these benefits are linked to the important role that early foundations of cognitive and socio-emotional abilities play on healthy brain development across the human lifespan.
Brain complexity –the diversity and complexity of neural pathways and networks— is moulded during childhood and has a lasting impact on the development of cognitive and socio-emotional human abilities.
Early life experiences affect childhood development through changes in brain structure and function
The first one thousand days of a person’s life is a window of opportunity for investments that will lead to health and productivity. The quality of nurturing environments, in particular, preschool experiences and the interactions with adults and peers during childhood, shapes cognitive and socio-emotional skills.
Childhood cognitive abilities provide a foundation for adult cognitive functions. This means that successful brain development ensures that children develop basic cognitive abilities. The so-called “fluid abilities” (such as memory, reasoning, speed of thought and problem solving ability), which underlie high-level cognitive processes, are used to acquire new knowledge, tackle novel problems, and reasoning.
Fluid abilities tend to correlate with each other (i.e. individuals who perform well in one domain have a tendency to perform well in other domains) and intertwine to form a person’s general cognitive ability or intelligence. While there are substantial individual differences in cognitive functioning across the life-span, on average, knowledge-based abilities remain relatively stable into late-life. In addition, fluid abilities start to decline in mid-life and more so during advanced aging.
We are more likely to develop pathologies (diseases) with aging
Aging erodes structural and functional brain integrity. One such cognitive disorder of the aging brain is dementia, the incidence of which increases exponentially with age. It is the leading cause of loss of independent functioning and requirement for institutional care in old age.
Alzheimer’s disease is the most common cause of dementia. The number of people living with dementia worldwide is currently estimated at 47 million –nearly 60% of cases occur in low- and middle-income countries — and is expected to triple by 2050 with increasing life expectancies around the globe. Some of the mainchallenges associated with dementia are the economic impact on families, caregivers, and communities, associated stigma, and social exclusion.
An adequate early childhood environment and strong foundational cognitive abilities protect against the risks of the aging brain. A healthy and active brain, shaped byadequate nutrition and safe and enriching environments in early-life, enables the retention of brain functions across a lifespan.
The peak level of fluid cognitive abilities is shaped, in part, by early childhood cognition and is one of the major factors in determining cognitive aging trajectories. Multiple complex pathways underlie this association, which also explains why childhood cognitive abilities provide, partly via higher educational achievement, entry into better jobs and healthier environments.
The resilient brain
Optimal brain development provides an individual with a greater number of neurons, more synapses (neural connections), and multiple pathways to perform any given task. Such “neuronal redundancy” comes in handy when a person is faced with deleterious brain aging.
More importantly, an increasing number of studies suggest that early childhood interventions targeting mental domains might increase maximum life-time cognition, potentially reduce the trajectory of cognitive decline in late-life, and even postpone the point at which cognitive deficits first appear.
Evidence from this research is inspiring innovations to make brain development a central element in early childhood programs in developing countries. In Colombia, a World Bank pilot program showed caregivers how to stimulate young children using play and talk. A rigorous evaluation shows that it improved their ability to understand and process what they hear or read. A follow up study is being planned to see if the gains have been sustained over the medium term.
In Kenya, researchers are studying whether giving storybooks to poor households helps improve children’s readiness to succeed by stimulating visual and cognitive brain development. In Bangladesh, another study examines whether getting parents to play and sing to their young children helps their brain development by building positive bonds with them.
Studies and increasingly interventions across several disciplines – neuroscience, health, education, economics, and psychology- provide evidence that early and sustained investments in human development are key for our neurons, our brains, for us as individuals, and for our societies. They lay the foundations for our capacity to achieve and to function well despite social or even biological obstacles throughout one’s life course.
Is there a link between the early foundations of brain development and the capacity to recover from adversity? What is the role of socio-emotional development? Advances in the brain sciences show that, indeed, individuals with a good head start in brain development are more resilient to potential mid-life adversities and the aging process.
In our next blog, we will look into new evidence from the fields of neuroscience and psychology. We will write about ‘resilient brain aging’ and the catalytic role of an adequate early-life environment for developing full brain potential. Please check back next week to find out more about the link between socio-emotional abilities and the resilient brain.
Author: Dorota Chapko is a PhD candidate in Public Health at the University of Aberdeen. Omar Arias is acting sector manager and lead economist in the Human Development Economics Unit for the World Bank Europe and Central Asia region
Aggregate demand is the total amount that consumers, businesses, government, and foreigners are willing to spend on all goods and services in the economy. Changes in aggregate demand occur when any or all of these groups expand or cut back their spending plans. These changes range from:
An increase in consumption that may be caused by
a rise in income levels,
a decrease in interest rates,
a house price inflation.
a rise in the level of government spending.
a balance of payments surplus.
What Happens If An Increase In Aggregate Demand Occurs?
Suppose that the economy is in “normal times,” neither in a recession nor in a boom, so that real GDP equals potential GDP. In theory, firms could respond to the greater demand for their goods either by expanding output or by raising prices. In practice, firms do not raise prices in the short run. Instead, they expand output, and the economy enters a boom.
But prices are not fixed forever. Over time, if demand stays high, firms raise their prices and the boom ends. If aggregate demand falls, the reverse occurs. In the short run, firms lower output instead of cutting prices, and the economy enters a recession. Over time, if demand stays low, prices fall and the economy recovers. Read more at:-
OromianEconomist 
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