Transcript Fiscal Policy Harmonization in the Context of African

Macroeconomic Conditions and
the Political Economy of Growth
in Ethiopia
(Lecture for Defense College)
Alemayehu Geda , Dept of
Economics,
Addis Ababa University
Addis Ababa 2007.
An Overview of the Presentation

An Overview of Globalization & Africa
Trade, Growth and Poverty in Africa
 Prospects of the Global economy and Africa

Impact of Emerging Economies: China and India (Surge
in Commodity price, Industrialization etc)
 The Ethiopian Macro Context
 The Political Economy of Growth in Ethiopia
 Conclusion: Challenges and Opportunities for Africa

References used for the Lecture
 Macroeconomic
Performance in Post-Derg
Ethiopia, Journal of Northeast African Studies
(Michigan Univ. Press, 2005)
 The Political Economy of Growth in Ethiopia
(Cambridge African Economic History Series,
2007)

The Impact of China and India on Africa: A Framework
Paper, AERC, Nairobi, 2006
The Global and African Macro Context
The Global and African Macro Context
Trade, Growth and Poverty in Africa
Africa is linked to the world economy through trade and
finance
 Its share of the world trade has declined (about 2%) and
finance is largely aid related/debt creating
 This small amount of trade and finance is central for
Africa (about 60% of GDP)
 With globalization we noted growth in Africa
 However, poverty has increased (& inequality might be
the culprit).

Table 1.2: Regional Percapita Income as Share of High Income OECD Countries
OECD Countries Per Capita Income (1995 constant US$, percentage)
Region
1980
1981- 1986- 19911985
1990
1995
sub-Saharan Africa
3.3
3.1
2.5
2.1
South Asia
1.2
1.3
1.3
1.4
Middle East & North Africa
9.7
9.0
7.3
7.1
Latin America & Caribbean
18.0
16.0
14.2
13.5
East Asia & Pacific
1.5
1.7
1.9
2.5
High income non-OECD
45.3
45.3
48.2
56.1
High income
97.7
97.6
97.6
97.9
High income OECD
100.0
100.0 100.0
100.0
Source: Alemayehu (2006b)
19962000
2.0
1.5
6.8
13.3
3.1
60.2
97.9
100.0
2001
1.9
1.6
6.7
12.8
3.3
59.2
97.8
100.0
Prospects of the Global Economy
 Slow
down in the US Economy, Japan (but EU ok)
 Global commodity prices expected to increase
 Global finance for Africa is also expected to grow
 US deficit, oil price (for importers) will continue
as a problem
Emerging Economies: China and India’s
Impact on Africa
Emerging Economies: The Asian Drivers
and Africa
 The
impact of the Asian Drivers (China and India)
is a challenge and an opportunity
 Trade b/n African and China surged from $3
billion in 1995 to $32 billion last year, estimated to
over 50% this year ( though Africa make up only
2.3 % of China’s world trade).
 Currently close to $400 billion/2014
Emerging Economies ….Cont’d
 This
constitutes about 10% of Africa’s world trade.
This trade is expected to more than double by
2010. [it does already1]
 For some it is important: in 2005: for Sudan 70%
which was 10% in 1995, Burkina Faso about 33%
which was none before; Ethiopia about 13% which
was none before.
Emerging Economies ….Cont’d
 China
is also contributing about $1 billion out of
15 billion foreign investment Africa received in
2004.
 For some China’s investment is huge. China
promised to invest about $4 billion in Nigeria (in
return for oil rights)
 offer Angola $4 billion concessional credit – debt
being to be paid in oil
Emerging Economies ….Cont’d
 pattern
of trade is shifting from traditional partner
the EU away to Asia/US
 EU declining from 44 to 32% & US increase from
11 to 19% - 1995-2005).
 We look at it through the vector of trade and FDI.
Impact Analysis: Trade and FDI
Impact
 There
is a need for Impact Analysis (see
AERC, Nairobi)
 Trade
Impact: The Asian Drivers and African
Manufacturing
 FDI Impact: The Asian Drivers and African
Manufacturing
The Political Economy of Growth in
Ethiopia
The Ethiopian Macroeconomic
Environment
 Gebre-hiwot:
Conflict & unequal Trade
Major Patterns of Growth and
Periodization
 Political
economy factors matter a lot (see below)
 Growth (in particular its sustainability) depends on
external shocks too ( Agrl, Weather, trade shocks)
 Poor policy accentuated poor growth Performance
Three distinctive regimes
 Imperial
(lose control) --1974
 Derg (hard control) – 1974-1991
 EPRDF (Fairly liberal) 1991-now
The Macro-Growth Performance
 GDP
and Sector Growth and Forecast
Figure 1 : GDP and Agr Growth Rates
Figure 2: Rainfall and GDP Growth
2.1 The C-B Growth Accounting
2.1 The C-B Growth Accounting
 Capital
explains / Goes with periodization
 Capital’s role decelerated in the latest 2 regimes
 Contribution of Education/worker weak across
regimes
 TFP virtually weak – correlates with weather
Table 2.3: A Growth Accounting Exercise for Ethiopia in the Last Decade (2000-2010)
Note: The growth accounting is based on the result of econometric estimation reported in Alemayehu and
Befekadu (2005) and Alemayehu et al (2008). Using various models (both macro and micro) these
studies have come up with the capital share coefficient (β) that ranges from 0.28 to 0.36. We have used
0.30. The capital stock is generated using the perpetual method (Geda, 2013/14).
GDP Growth
The Contribution of
Capital
The Contribution of
Labour
The Contribution of Total
Factor Productivity (TFP)
2000/2001
7.4
0.6
2.6
4.2
2001/2002
1.6
0.8
2.7
-1.9
2002/2003
-2.1
1.0
2.6
-5.7
2003/2004
11.7
0.7
2.7
8.3
2004/2005
12.6
1.2
2.6
8.8
2005/2006
11.5
1.1
2.7
7.7
2006/2007
11.8
1.5
2.2
8.1
2007/2008
11.2
2.1
2.2
6.9
2008/2009
9.9
1.8
2.3
5.9
2009/2010
10.4
2.7
2.2
5.5
Average(2003/04-2009/10)
11.3
1.6
2.4
7.3
Year
2.2 Chenery-Syrquin/Structural
change:
 No
structural change
 Performance half below expectation
2.2 Chenery-Syrquin/Structural
change:
Figure 3: Structural Change
Macro Stability and Macro Policy
 Macro
Stability in Ethiopian is related to:
 Rainfall
 External
Shock (World Coffee and Oil Price + Aid)
 Regional Security
 Macro Policy (eg. Money SS/Printing)
 Policy
Implications of this contracts with US and
EU (Fiscal and Monetary policy is no central)
2.3 Augmented Solow & the Conditional
(O-N) Models:
 Growth
below prediction
 Significant Negative (2nd) and Positive (3rd) time
dummy
 O-N show same but dramatically
 The Base variables are the most important
 Public spending within the policy variables is
important
 Policy improved but not unsustainable
2.3 Augmented Solow & the Conditional
(O-N) Models:
Political Economy (of Growth in
Ethiopia)
Politics matter: History: war with different ideology
 Land is the dynamics behind politics/regime shift
 External shock can trigger / oil crisis
 Detrimental effect: abrupt change, running by new
owners, disruption


Shaped the natures of state (militaristic) and institutions which are
not developmental (but aimed at controlling power & resoruces)

Reform and politics:
Int’l context/cold war,
 external endorsement/ shattered economy, decentralization

Political Risk & Percapita Income
Per Capita Income Index (PCYI)
120
110
PCY I = 94.0+0.40(PRI)
t-value (21.7) (3.1)
R^2=0.39
100
90
10
20
30
40
50
Political Risk Index (PRI)
60
Politics shaped: Markets, Institutions
and agents behavior
Product Market: Mover from controlled to liberalized over
time
 The Labour Market: Urban Phenomena/Informal sector is
crucial
 The Land Market:

Land is as much political as economic
 Shadow land market


Financial Market: Build=> Nationalize=> Privatize
Politics & Policy shaped Micro Level
Agents behavioru
 General:
Risk increased over time: policy,
shock/regime shift
 Rural: (see next slide)
Natural risk
 Frequent Distn of land
 Inputs are important (credit/fertilizer)

 Urban:
very small, shock by Nationalization
Evidence on Micro Aspect/Agrl/
Conclusion on Ethiopia & Note on
Botswan
 Growth
modest, but structural change absent
 Political & Institutional factors fundamental
(regional distribution)
 Pattern of growth, nature of control and TFP
correlated but: TFP is worst in the 2nd (Controlled
)regime
 Growth is associated with external shock too (in
the context of weak markets). Thus Unsustainable
growth (owing to shocks!)
Botswan: Lesson from African
 Botswana
exhibited most of the problems
identified for Africa’s growth problem
 yet grew at 6% for last 35 years, & with export
success,
 why?
 Maintained
good institutions (historic factor)
 Botswana chose prudent fiscal and macroeconomic
direction
Botswana …Cont’d
 avoided
'Dutch-Disease'-by not engaging in excessive
spending of the export windfalls
 It managed a stable exchange rate
 Its participation in the SACU limited lobbying for
favours in the trade arena (agency of restraint)
 The public sector allocated resources based on
economic and social returns
 was successful with foreign investors; and state
investment in education,
Botswana …Cont’d
 Why
Botswana had good policies while other African
do not?
 good policies were complemented by good institutionswhat they refer to as institutions of private property
 Four factors have contributed significantly to the
formation and preservation of these institutions
 (1)
possessed relatively inclusive pre-colonial institutions that
put bounds on how the political elite functioned.
 (2) The second is the minimal impact of British colonialism
on the traditional institutions that scrutinized how the elite
behaved. T
Botswana …Cont’d
 (3)
after independence, the elite in Botswana found it in their
best interest to preserve the institutions of private property.
 (4) Botswana was rich in diamonds, the export profit of
which created enough rents for so that no group found it in its
best interest to challenge the status quo..
Success
of Botswana depended on good institutions is
only a proximate answer .
why
has Botswana such good institutions when the rest of
Africa is devoid of them?
Botswana …Cont’d
 well-enforced
property rights were in the interest of the
Botswana’s political elite in the aftermath of
independence
 By the mid 70’s the income from diamonds outstripped
that of ranching income, but the elite did not rush to
expropriate , particularly, two reasons.
 One was that the elite did not feel threatened by the
prospects of growth (slim chance that the elite became
political losers deterred them from working towards the
destruction of the good institutions –
 The little risk that the Botswana elite faced in pursuing
developmental policies was not shared by other African
countries, where developmental policies only worked to
dispossess traditional political institutions
Botswana …Cont’d
 second
constraints placed by institutions such as the
Kgotla may have ensured the accountability of
institutions; forced the elite to opt for the enforcement
of their property rights.
 These institutions assured that there were no political
instabilities. ( leaders forging an unlikely coalition
between tribal chiefs, cattle owners and the BDP-the
ruling party against colonialism)
 good policies promoted rapid accumulation,
investment and a socially efficient exploitation of
resource rents.

Botswana …Cont’d
 Botswana’s
growth has been a juxtaposition of good
institutions-good policies-resource rents [primarily the
export of diamonds, and export incomes from cattle
ranching prior to the 70’s].
 Harvey (1992): rural origin of political leadership that
contributed to export agriculture escaping the ‘wrath of
tax policy’, unlike other SSA where the social origins
of the elites are urban and export taxes are exorbitant.

END (See Next Slide for Conclusion)
Botswana …Cont’d
Rodric' s Proximate Causes
Rodrics Fundamental Causes
(we may add Clture here too)