What is GDP? GDP stands for Gross Domestic Product and is a pretty well-known economic acronym. It represents the value of all final goods and services produced in one year in a country. It is therefore comprised of non-durable consumer goods such as bread and butter, and durable consumer goods such as refrigerators, personal autos, and investment goods like industrial machinery and roads, and services like education, healthcare, and transportation. GDP can be calculated in three ways, namely, through the product, expenditure and income methods (or approaches). For example, by the expenditure method consumption expenditure plus investment expenditure plus expenditure on imports minus exports would give us the GDP. GDP can be computed at current prices or in real terms, i.e., adjusted for inflation, to measure growth in real physical quantity or volume. GDP calculation in real terms requires great statistical rigor in terms of selecting normal base years and satisfactory GDP deflators.
There is a lot of doubt about the accuracy of DGP calculation in Ethiopia, particularly as regards value estimation, base year selection and computation of GDP deflators. At any rate, Ethiopia’s GDP at current prices is officially estimated at about two trillion birr or about 67 billion USD at an exchange rate of about 30 birr to the USD. This would give us a GDP per capita at current prices of about 609 USD per year or roughly 18,273 birr per year per head. Further details are as follows: Income GDP per month 1,523 Birr or 51 in USD and income GDP per day 51 Birr whereas 1.69 in USD. It is worth noting that the average GDP per capita per day of 1.69 USD is below the international poverty line which has recently been raised to 1.90 USD from the previous 1.25 USD. How is it that after twenty –seven long years of pre-reform TPLF/EPRDF rule the majority of the Ethiopian people still languish below the poverty line? What happened to the 11% annual GDP growth that went on and on for more than eleven consecutive years as routinely and almost nauseatingly trumpeted by the pre-reform TPLF/EPRDF regime? And What is a Growth Rate? A growth rate is a relative increase of a figure over its previous number. It is usually expressed in percentage terms. If the increase is over a common base it is a simple percentage rise; if it is over a previous year figure then the increase is compounded and the growth rate is a compound one. As a TPLF/EPRDF government’s annual GDP growth rate of 11 percent is over the previous year, it certainly compounds the increase. In any case, we are entitled as honest taxpayers to raise quite a few questions about this matter of 11 percent growth rate.
Is it statistically credible to use the same 11 percent growth rate year in and year out irrespective of possible weather and production conditions? It is well-known that in Ethiopia GDP growth is significantly affected by the vagaries of the weather, if nothing else. Commodity price fluctuations on the world market are also part of the global influence that need to be factored into the estimation of the GDP growth rates. But the most confounding riddle is, how can the majority of the Ethiopian people still remain stuck below the poverty line after an eleven-year eleven percent annual GDP growth rate under a twenty-seven year plus rule of the pre-reform TPLF/ EPRDF government? If the GDP growth rate of 11 percent is accurate, then mathematically at least two things must have happened: One is that GDP per capita would grow by about 8 percent per annum after deducting something like 3 percent annual population growth from it (the estimate is actually roughly 2.7 percent), which, of course is contradicted by the poverty line story indicated above. The other possibility is the extreme scenario of 99 percent of the incremental GDP going to just one percent of the population, which, as we know, is such a familiar story line in the USA (remember the Occupy Wall Street Protest?). Assuming that the truth lies somewhere in the middle, let us explore a few other possibilities. Examining the composition of the incremental GDP may shed some light on this issue. The TPLF/ EPRDF government’s emphasis has been largely on infrastructure development in the form of roads, railways, hydro-dams, building construction, etc. Hence, if we break up the composition of the incremental GDP into consumption goods, investment of foods and services plus exports minus imports, then 80 percent of the incremental GDP may be credibly estimated to be investment and the remaining 20 percent consumption goods and services such as education and healthcare. As we know from the reality on the ground, the government’s program has not boosted the production of consumption goods, which is vital for raising living standards. Nor has it made any difference in export earnings. So, we can safely conclude that investment has not contributed significantly to increasing overall production and productivity, which brings us around to the legitimate question mark over the 11 percent GDP growth rate. If the investment –goods component of the GDP grew at the rate of 25 percent per annum and its share is the overall GDP is, say, about 30 percent, and assuming that the non-investment –good part of the GDP grew at no more than the population growth, then overall GDP could not have grown by more than 9.6 percent, and this is an unsustainable high scenario which, in stable circumstances, is unlikely to materialize because investment that does not appreciably contribute to production and productivity would soon run into resource constraints for lack of domestic savings, thus raising the risk of all sorts of macroeconomic imbalances and instability including a high foreign debt burden and excessive monetary expansion, which in fact is what we are witnessing in Ethiopia at present. So, my assumption of a 25 percent annual growth rate for the investment component of the GDP which did not contribute to overall GDP growth is unrealistic as it would assume the persistent folly of pursuing a development strategy of unproductive investment at high a level which produces neither domestic consumption goods to raise living standards nor exports to service external debt. Hence, if we reduce the growth rateof 25 percent to, say, at 15 percent, the overall growth would decrease from the estimate of 9.6 percent to 6.6 percent. As a matter of fact, it does not really matter whether the proclaimed overall GDP growth rate is 11 percent, 9.6 percent or 6.6 percent, because the basic contradiction is between the relatively high assumed overall GDP growth and the reality of the vast majority of the Ethiopian people still being stuck below the poverty line. On the other hand, we cannot deny the existence of a substantial amount of state-sector investment in the form of high rise buildings, roads, railways, hydropower dams, industrial parks, etc. which in fact are being used as a showcase for the progress the country is making and as an instrument of political legitimacy. The Essence of the Argument The gist of the argument is that the pre-reform TPLF/EPRDF government had been pursuing a misguided development policy and strategy of large-scale unproductive investment which has obviously failed to raise living standards and to increase foreign exchange earnings. The major reasons for this state of affairs are the following: Implementation of mega projects without proper and standard costbenefit studies and analysis; Resource leakages and wastages through corruption and inefficiency. Unproductive state-sector investment cannot be financed by domestic savings because it does not significantly contribute to domestic production, productivity and income and, above all, to foreign exchange earnings.
Hence, the need for external financing in the form of foreign loans, grants and investment. Domestically, it leads to inflationary financing in the shape of excessive monetary expansion including currency printing, and the macroeconomic imbalances which result from this are quite well-known: inflation, currency depreciation, trade and overall balance of payments deficits , fiscal deficits, savings/investment gaps, high unemployment, grinding poverty, wide income and wealth disparities, etc. This is exactly the situation Ethiopia has been in under the twenty-seven years of the prereform TPLF/EPRDF government. What to Do? We can quite safely begin by saying that nothing much can be done to rectify this appalling macroeconomic mess with the kind of cabinet ministers Prime Minister Abiy has been able to put together. The economic challenges facing Ethiopia are almost insurmountable, but we cannot even begin to try and tackle them without putting our political house in order. The ultimate purpose of political power should be to achieve economic and social development, but designing a sound economic policy and strategy requires a great deal of technical knowledge and experience. We cannot expect much from a governor of a central bank who says his objective is to make a state-owned commercial bank a successful policy bank or who looks bewildered when asked what the effect of an increase in foreign exchange reserves is on the money supply. Likewise, we cannot invest much hope in a plan commission commissioner who has never heard the terms internal rate of return, shadow pricing, net present value, etc. These officials could very well learn on the job, but the trouble is, we do not have all that much time now. So, with the kind of people surrounding Prime Minister Abiy Ahmed, I personally do not believe that his government will deliver on the economic front. What I do hope he may succeed in doing is perhaps preside over a credibly free and fair election in about one year and five months’ time, which may bring to power high caliber people such as Prof. Berhanu Nega, Ato Andargachew Tsige, Dr. Aregawi CBerhe, Prof. MereraGudina, etc. Some analysts believe that even thisis in doubt and that the final say would come from the indomitable Birtukan Mideksa, the Chairperson of the Ethiopian Electoral Commission, who is almost certainly likely to resign unless the preconditions for a free and fair election are fully met. In the mean time, Prime Minister Abiy Ahmed could use his new-found global stature and prestige to try and obtain debt relief and re-structuring, additional foreign grants and soft loans and balance of payments support funds to alleviate some of the most serious macroeconomic imbalances of the country. But if the rest of the economy continues to be mismanaged in the same old way, the problems will quickly re-appear, perhaps with a vengeance, and this is unfortunately what is likely to happen if the PM continues to be surrounded by sycophants who blink at the mention of technical terms like the canons of taxation, the backward and forward linkages of industrial development, the multiplier effect and the accelerator principle, the quantity theory of money and what have you. Worse still, they may not yet have detected the colossal contradiction between an 11 percent annual GDP growth rate and a population stuck below the poverty line! Concluding Remarks The pro-reform TPLF/EPRDF government bamboozled us into believing that it indeed was a developmental state by hyping the showcase bit of its grossly unproductive investment that was blown up into an elevenyear, eleven percent annual GDP growth rate which was trumpeted ad nauseam by the relentless government development propaganda machine! As we now know under Abiy’s premiership, the so-called developmental state has been nothing more than an egregious kleptocracy the likes of which have never been seen before on the African continent, except perhaps in Nigeria and Central African Republic. In actual fact, the TPLF/EPRDF government’s developmental state is equal to grossly unproductive state investment which in turn is equal to over-expenditure, corruption and inefficiency which gives rise to inflation, foreign exchange shortage, currency depreciation, devaluation and impoverishment of the population. As is well-known, every state in the world worth its name is developmental. States differ only in the degree to which they play the role of a developmental state. This is assessed on the basis of the extent to which the state intervenes in the economy. For example, the Chinese state has been the smartest, most interventionist developmental state in the world, perhaps on a par with that of Singapore. On the other hand, the American government has been the smartest, least interventionist developmental state on the planet. From this perspective, where does the TPLF/EPRDF government stand? The answer, dear reader, is floating in the air!
The Ethiopian Herald February 17/2019
BY TEKLEBIRHAN GEBREMICHAEL
