Companies, organizations, government bodies and development partners are increasingly adopting the goal of long-term value creation, which integrates financial, social and environmental values in the transition towards a sustainable economy.
Besides, institutional investors struggle to invest for long-term value creation and perform the social function of finance. The long-term investment approach includes short investment chains, active management that assesses companies’ transition preparedness, concentrated portfolios, and deep engagement.
Taking all this into account, The Ethiopian Herald conducted an interview with Abdisa Lemma, an agro economist graduated from Haramaya University. He said that investments are regulated by multiple regulatory bodies. This depends on the type of investment the nation does have.
He said, “Investment is an important factor that influences the growth of the gross national product. It is highly volatile, and its variability is much more flexible than the variability of the gross national product. Technical and technological developments in one sector can cause rapid and intense investment in some other related sectors of the economy.”
He further elucidated that capital accumulation is the result of net investment which in turn is made possible by the economy’s flow of aggregate net saving out of current income. This establishes a savings-investment-growth nexus which gives economic growth its essentially dynamic character.
As to him, every sector or segment has its growth regulator. The regulators oversee investments and offer unbiased and interactive resources to help operators get started with investing. Since last year, Ethiopia has been developing and investing in mission-driven customized portfolio solutions for investors, investing across the growing market opportunity and leveraging resources, and importantly, it has well identified and report on impact metrics of underlying investments.
The country has been striving for generating measurable social and environmental impact in addition to financial returns as well as investing with a focus on the core impact sectors for investment, he said.
The public–private partnership model is not an easy solution to the capital funding gap. Because capital investment is so challenging, many organizations compensate by finding strategic investors; that is, investors who can provide not only capital but also experience and expertise on how to invest that capital wisely. There are several potential strategic investors in the country with deep experience in capital management and infrastructure investing, the ‘dine for the nation bounties like Gorgora, Wonchi and Koyisha, and the recent corridor project commenced in Addis Ababa.
As to Abdisaa, to ensure that capital investment projects align with the needs of those they are intended to benefit, it’s important to engage community stakeholders, to be transparent with respect to the business case and to choose project outcomes that are relevant to communities and can be measured over the long term.
According to Abdissa, since attracting foreign investment is a policy and country situation issue, the influence of marketing on investment promotion and how investors should be viewed as consumers who have needs to be satisfied has to be well capitalized.
With globalization, many nations have liberalized their trade policies and removed trade barriers. The transaction costs decreased and the integration of economies has contributed to increases in foreign direct investment (FDI), he added.
“Investment in Ethiopia is giving rise to matters of national security may entitle the withholding of classified information only, and an investor must have an opportunity to tailor its capital to the development engagements across the nation. In equilibrium, all investors hold the market portfolio, which is replicated in the market index. It suffices to adopt a passive investment approach by investing in the market index. That is a very strong idea indeed. And in practice most investors indeed seem to be positioned close to the market. But the problem is the narrow view on financial risk and return, ignoring the social and environmental dimensions.”
Investments in new technologies, equipment, and infrastructure he added help increase production efficiency. This, in turn, leads to an increase in gross output, reduce unemployment rates and increase the level of employment.
The goal of any country is to achieve a high level of economic growth, as this would lead to better living standards, better prosperity, and a more comfortable life for its people. Therefore, achieving economic growth requires governments to adopt different types of policies such as promoting savings, stimulating investment, and increasing internal production, he opined.
Undoubtedly, investment contributes to aggregate growth; however, investment cannot be raised without increasing the amount of savings. In order for Ethiopia to achieve sustainable economic development, it needs to increase its aggregate savings, which will in turn contribute to greater investments and higher GDP growth. This also means that more savings, specifically in developing countries like ours would lead to less consumption, which could also result in a larger amount of capital investment and finally a higher rate of economic growth.
True, businesses in Ethiopia have varying financial resources available at low cost; they also have a major investment in infrastructure, technology, and development and do not necessarily need to attract foreign investors. However, this trend has to be well altered to help the nation make a difference in all aspects.
On the effects of domestic investment on economic growth, the country has meaningfully embarked on a significantly positive—that is, increasing domestic investments has confidently contributed to the country’s economic growth.
According to Abdissa, there is co-integration between gross domestic savings, gross domestic investment, and Gross Domestic Product. Both the short-and long-term investments showed a significant positive impact on economic growth. The current savings of the nation have served as the main potential of financial resources for capital investment in Ethiopia and have made an indisputable and irreplaceable contribution to the development and growth its economy. Increasing the accumulation of domestic savings would offer multiple benefits to national economy, too.
Yes, Ethiopia needs to mobilize internal savings to achieve the desired economic development. For this strategy to be implemented, it would require well-organized, competitive, and flexible financial institutions. Lending is the main mechanism through which savings are transformed into investment in the country. The biggest improvements in due course of booming modern production lines, machineries, and technology utilization for reducing production costs, increasing productivity, and improving competitiveness, have now been given due attention on behalf of the government.
Developing countries like Ethiopia need to quench an ever-growing volume of financial resources, and investment resources in Ethiopia come largely from abroad, especially foreign direct investment and loan. However, this high dependence on external sources limits the country’s independency and it might face coercive policies for misusing its resources. Even a small change in external capital flows can cause internal economic downturn, and the accumulation of domestic savings will help reduce the vulnerability arising from dependence on foreign financing and provide a sustainable long-term financing base for investments in the country.
Responding to the question revolves around the relationship between savings and economic growth, Abdisa said it cannot be denied that an increase in aggregate savings would boost investment and promote economic growth.
Therefore, increasing the level of accumulation of domestic savings in the Ethiopian banking system will help reduce unemployment, enable greater technological development, and increase the country’s GDP and citizens’ well-being. This strategy will reduce the risks to the country’s economy, as a major problem faced by the nation is typically the burden of external debts and dependence on aid providers. Hence, the state of the nation should initiate strategies to promote the accumulation of domestic savings to accelerate sustainable economic growth in the country.
Abdissa said, “Investment is an important factor of economic growth. Accumulation of social capital is possible due to investment, too. Investment contributes to additional revenue, which is determined by the state of general economic activity. It also represents one of the most important economic categories, one of the components of GNP, the most variable and at the same time determining the development of the economy. The amount of investment is very difficult to predict at the macro level if consumption is functionally related to the income, government spending and net export are fairly predictable.”
It should be emphasized that investment as an economic category during the evolution of economic science is closely connected with the categories of sustainable growth, the economic system in general and macroeconomic equilibrium in particular, he stated.
BY MENGESHA AMARE
THE ETHIOPIAN HERALD FRIDAY 6 SEPTEMBER 2024
