Ethiopia Should Learn From The Boom And Bust in East Asia – A Critical Review

By Shimels Araya

In 1989 John Williamson, a British economist listed ten economic policies that enjoyed the backing of international and government institutions in the United States. Whatever the merits of these policies, the “Washington consensus”, as he called it, proved not good enough. Its three main prescriptions; stabilize, privatize and liberalize, have caused no end of controversy. Almost 25 years later, these standard prescriptions are refuted and hammered in Joe Studwell’s influential book titled “How Asia Works: Success and Failure in the World’s most Dynamic Region”. In general, the book loudly explained, half of the region is characterized by most extraordinary developmental success story; the other half ends up with a paper tiger.

Why is it that the northeast Asian states of Japan, South Korea, Taiwan, and China are rich, while the Southeast Asian ones, the likes of Thailand, the Philippines, Malaysia and Indonesia are relatively poor? Is the failure of the later because of their geography or climate or culture, or is it because their leaders chose the wrong headed policies?

According to the author of this influential book, poor economies can prosper by following a recipe with just three ingredients. These interventions have been employed most effectively in northeast Asia and they have produced the quickest progressions from poverty to wealth that the world has witnessed. When, by contrast, other Southeast Asian states have set off with the same ambitions and equal or better endowments, but have not followed the same policies, they have achieved fast growth for a period but the progress has proved to be unsustainable. The policy prescription adopted for the sake of rapid economic development was confused for the later. The Southeast Asians are not consistent enough for the suitable and evidence-based policies designed based on their contexts. Instead, they are also following the standard policy package prescriptions of the IMF/WB advices. 

The real tigers from the north have adopted three basic prescriptions that are in line with their contextual conditions. The first intervention is to maximise output from agriculture, which employs the vast majority of people in poor countries. The northeast Asian states have shown that the way to do this is to restructure agriculture as highly labour-intensive household farming. This makes use of all available labour in a poor economy and pushes up yields and output to the highest possible levels, even though there is a tiny gains per person employed. The overall result is an initial productive surplus that primes demand for goods and services.

The second intervention – he called it the next ‘stage’ – is to direct entrepreneurs towards manufacturing. To quicken transformation, there must be a shift of focus towards the expansion of the industrial sector following agricultural growth. This is because no more a vegetarian tiger and a shift towards metal fabrication; as well manufacturing industry makes the most effective use of the limited productive skills of the workforce of a developing economy, as workers begin to migrate out of agriculture.

Relatively unskilled labourers create value in factories by working with machines. In addition, governments should initiate new ways to promote accelerated technological upgrading in manufacturing through subsidies that were conditioned on export performance. This combination of subsidy and what he called it ‘export discipline’ took the pace of industrialisation to a level never seen before.

Finally, it is mandatory to intervene in the financial sector to direct capital serving the intensive, small-scale agriculture and manufacturing development to accelerate economic transformation. The state’s role is to keep money targeted at a development strategy based on national interests that produces the fastest possible technological learning, and hence the promise of high future profits, rather than on short-term returns and individual consumption. 

With the exceptions of Japan, the north-east Asian states radically restructured agriculture after the Second World War, focused their modernisation efforts on manufacturing, and made their financial systems slaves to these two objectives. They thereby changed the structures of their economies in a manner that made it all but impossible to return to an earlier stage of development.

Contrary to this the southeast Asians – despite their long periods of impressive growth – governments did not fundamentally reorganise agriculture, did not create globally competitive manufacturing firms, and did accept bad advice from international financial institutions and they opened up their economy to foreign firms at an early stage, as Studwell argued. As we have seen now, different policy choices across East Asian countries created – and will probably further widen – a developmental gap in the Asian region.

Studwell’s book is a gentile reminder to nations in the developing world like Ethiopia with respect to policy direction they should follow in order to sustain their growth. ‘Only those nations with good policies designed in line with their conditions will make it’, he argues. As explained in Studwell’s book about the role of farming in detail, agriculture is the key sector in Ethiopia. However, it is characterized with low productivity due to several constraining factors. Smallholders’ access to improved inputs that enhance agricultural productivity is very low. To him, the goal should be to use the cheap available labor to maximize yield per hectare, something achieved on smaller, intensively farmed plots.

Maximizing yields serves several broader development goals: farmers earn money to spend on local manufacture products; higher food and raw material production can allow to save the precious foreign exchange spent on these imports; increased supply of foods in urban areas reduces the high food inflation that are regularly reported in the Central Statistical Agency (CSA) of Ethiopia, and farmers’ savings can be recycled through the banking system for industrial expansion.

In short, the rural abundance creates room for the growth of export led manufacturing. To this end, the state must nurture and strengthen manufacturers (SMEs) through their infancy to learn how to stand on their own feet instead of quickly opening up the economy and forcing them to compete with these giants. It is predictable as the result of the fight between a world boxing champion and an amateur boxer.

Look at the situation of the traditional cloth producers in the country and the tough competitions that they are facing from those ‘similar’ products imported from China and sold at a far lower price. Anyone can check the effect of this reality around Shiromeda where these traditional clothes are marketed. I am not arguing here the bad sides of these imported Chinese cloths from culture point of view, but to protect our infant domestic industries and nurture domestic producers the government should tax such unnecessary products highly to increase the competitiveness of domestic producers. This nurture should, however, be combined with discipline: the state must oblige domestic firms to export. This is because foreign sales provide an external test of their progress.

The final secret is a controlled financial system. Many can be listed for the limited control of the precious resource (foreign exchange). In addition to the loose control to allow firms to import luxuries and unnecessary items from China as highlighted above, as an example, we have a substantial amount of foreign currency spent to import ‘human-hair’ to the Ethiopian economy.

Development finances should be controlled and directed towards projects that have huge national impact to change the economic reality instead of extravagant and unnecessary individual consumption. Finally, the three step doctrine that Studwell advocated is even shorter than the ten step standard Washington consensus he opposes. Given its practicality, it will no doubt prove similarly controversial.

On the home front the current adminstration in Ethiopia has put in place its latest economic plan as it has been called ‘Home-grown Economic Reform’ a month ago. The reform document says ‘the country’s macroeconomic, sectoral and structural problems’ are key driving factors for policy change and context based prescriptions are needed to cure the economy that suffer with chronic pain. However, some of the economists in the country have forwarded their views as the reform was purposefully designed to resolve the chronic foreign exchange problems by opening up the economy to foreign firms instead of providing a genuine solution to the real economic problems.