Ethiopia: The challenges of building a Market Economy in its Absence: The Debate between Neoliberals and Developmental State 

Yohannes Gebeyehu

Neoliberal-ism as political economy at the risk of oversimplification implies a political economy governed and guided by demand and supply (market). It subscribes to market fundamentalism. Any political thought that aspires to build a neo-liberal political economy in Ethiopia is of no use particularly because the market led by demand and supply as defined in the neo-liberal vocabulary successfully fails to understand the Ethiopian context on the ground. Ethiopia’s political economy for much of its existence had been guided by traditional feudalism and command economy both of which discouraged market. The Feudalistic and command economy holds the backward economy to its grave. A backward agrarian economy that has for years produced for subsistence. That has for years produce no surplus for market. The smallest thing that surpluses individual consumption lacks demand (will plus ability to buy). Therefore, market was not available in real sense of the term for centuries. The existing ones were absolutely imperfect, lacks institutions to operate fully and properly. Professor Alemayehu Geda in providing us with an over view of the market and growth process in Ethiopia articulates that the Imperial regime was based upon the landed gentry, the Derg was bent on the destruction of the private sector and markets and officially, the EPRDF has reinstated the market and endorsed the private sector. That illustrates the recent resurgence and/ or emergence of the market for it to be a leading institution in the political economy as neo-liberalists would like to have.
Alemayehu Geda argues that growth in Ethiopia is largely determined by political economy factors, climatic risks, the strength and efficiency of institutions, the quality of public policies, and risks related to war and property rights. Product and input markets are found to be not only thin but inflexible. Combined with the unstable political environment, this has greatly limited both the potential for long run growth and the sustainability of individual growth episodes. At the same time, Alemayehu’s analysis suggests a potentially powerful role for Ethiopia’s long and unique history, operating through the continuity provided by a few key public sector institutions. In the absence of such continuity – and notwithstanding the manifest inefficiencies of these institutions in other respects – the growth record may well have been worse than observed, he argued. Alemayehu’s and likeminded economists’ call for robust institutions is tantamount to a call for the government to intervene until at least strong market comes into existence.
One can therefore, summarize the foundation of political economy in a third world economy like ours as the absence of market in both real and absolute terms, when they exist, they are pervasively imperfect and are not supported by proper institutions. There should therefore be an entity called a government that should take the responsibility to create market (Demand and Supply) where there is no market, and an entity called a government that establishes institutions for the proper functioning of the market that may exist.
The government intervene to curb or avoid what Adam Smith called ‘‘the businessman’s conspiracy against the public’’- which is monopoly-ism and the tendency to charge prices higher than what the production costs would dictate. Therefore, the government intervene through anti-monopoly legislation so that it can actually reduce unproductive activities and raise outputs through greater competition.
In a country like ours demand and supply needs to be created through active government intervention. The government should be involved in the construction of roads and other important infrastructures that are important to connect demand with supply. The government should work in providing farmers with market information that their supply be transported to the place where there is a demand to their product. The government has the responsibility to make accessible supplies to demands through road and information accessibility. In such a way, the government by creating the platform for the coming together of supplies and demands creates market. The government solves the problem of absence of market.
Market is imperfect even if it is created due to conventional and non-conventional reasons. Conventional reasons like the imperfection of the market to capture private and social costs/benefits. The market cannot also provide the public with public goods like road, street lightening, social service, social capital. The market is also imperfect due to information asymmetry and market distortion and unemployment. The government is vital to create competitive market.
The market is also inefficient requiring government intervention for at least reducing inefficiency. Stieglitz warns against three types of market inefficiencies. The product mix (Dynamic) inefficiency, exchange (allocate) inefficiency and production inefficiency are the three types of inefficiencies identified with Stieglitz. By product mix inefficiency, he means when the market produces too much of one good and too little of other goods creating artificial supply and demand which would results in deflation and inflation. Exchange inefficiency is when some products do not reach to individuals who want them. This can illustrate the drought in Ethiopia. Ethiopia is not short of production of consumer goods. But due to the fact that some products do not reach to individuals who want them results in inflation or sometimes absolute scarcity. Production inefficiency is when production is far inside the production possibilities curve resulting in supply constraint which in turn results in inflation. Any proper and prudent guidance from the government is utmost important in doing away with those market inefficiencies.
Markets cannot operate in a vacuum. It needs a free arbiter to regulate demand and supply. It needs a legal framework to sign a contract and state apparatus to enforce those contracts. The government should provide the market with what Stieglitz calls institutional infrastructure consisting of a legal and contract system which represents a set of rules of the game for the market to operate properly, a set of property rights, physical infrastructure including financial services and telecommunications and intellectual infrastructure through education, research and development (R&D), and technology.
The government needs to fill market failures resulted from traditional market failures happening as a result of negative externalities and the need for public goods which the market more often than not decline to provide. The government is also required to fill market failure resulted from lack of concentration on innovation and technology development, information imperfection, absence of markets and their imperfection when they exist as is reflected in unemployment, monopolistic situations and so on.
Market has limitations in maintaining equitable, sustainable and human centred development. Market does not care about egregious conditions of the poor, homeless, minorities. It does not worry about local and global environmental degradations and it generally neglects human resources developments.
Government is also essential to make markets function more effectively in developing countries and markets like ours where markets function poorly for lack of institutions, social norms and human behaviour, this means governments should introduce and enforce appropriate property rights and legal norms.
What is more is real world market is not simply the function of supply and demand but its proper functioning is conditioned by social, political and institutional factors. White analyzes the four major political factors as the politics of state involvement, market organization, market structure and social embeddedness.
The Social, political and institutional factors that are elucidated by White are particularly resonates and important to Ethiopia’s political economy. This is true because the political economy of Ethiopia is responsible for lifting up the poor from the bog of poverty, is responsible for building, operating and ultimately transferring robust market institutions to the private sector, responsible for building physical, virtual and institutional infrastructures.
The Ethiopian state is involved in different ways like taking over production in the public sector, providing key inputs such as energy to private firms, purchasing agricultural products from the primarily producers, providing public goods and services, making market function perfectly through law enforcement, institution building, shaping social norms and human behaviour; creating market where there is no market. The state should build social embeddedness in markets. Markets are embedded in the wider values of society and institutions. If the wider values of society and institutions are corrupt, the market will be corrupt. Market agents are not necessarily guided by profit maximization/self interest-instead they may be guided by culture, tradition and fairness or otherwise.
They government should also see to it that the market structure is competitive and the market organization avoids any room for certain powerful agents like rent seekers who tend to exploit the market to their advantage at the expense of the weaker agents and consumers.
The government in its effort to realize the above pivotal role should provide the market with what Stiglitze calls ‘Infrastructure’ consisting of institutional infrastructure, physical infrastructure and intellectual infrastructure.