For long, the incumbent’s position has been for the state to have a vital role in promoting economic growth. Though the private sector is given a lot of room, the state opted into playing a key role in the economy than leaving everything to be decided by the market. The state-interventionist policies, particularly in infrastructural development, have then resulted in successive economic growth and reduction in poverty for more than a decade now.
Practically, it is the traditional responsibility of the state to invest in infrastructural development (because of huge cost of investment and long term returns), but what makes the Ethiopian case different is that it has been the priority of the government and its public sector-led development strategy. This strategy, with its focus on heavy investment in infrastructure, has underpinned the country’s rapid economic growth, according to the African Development Bank Group, country strategic paper 2016-2020.
On the other hand, recognizing the enormous development achievements the state-led model brought about, some prominent international financial institutions have been advocating for ‘a bigger push’ to increase the private sector’s role in the economy, if the growth is to sustain.
The World Bank and the International Monetary Fund have repeatedly recommended the government to go for a policy change to expand the private sector thereby meeting the goal of becoming a middle income economy by 2020. They urged the government to shift its public sector-led growth strategy to a private investment led model for the growth to sustain.
Certainly, it was only since the fall of the Marxist affiliated military regime in the early 1990s that the private sector has been growing in several aspects. And if we take this point of time as base case to make comparison, it is crystal clear that the private sector’s participation in the economy has shown radical shift to the better, as there is also a radical ideological shift. But what really matters in the last 25 years is the rate of growth and contemporary comparisons both with other countries that are in a similar stage of development and in terms of the government’s policies.
Now, the domestic private sector seems to be in the nick of time to play a decisive role in realizing the industrialization and middle income ambition within a decade. In fact, with the exception of resource rich countries, no country has achieved middle income status without diversifying its economic basis from agriculture to industry and service sectors.
Yet, critical questions can be raised on the current state of the private sector in Ethiopia, about its readiness, ability, potential and capacity to engage in industry and to adding value. Though capital accumulation is a major problem, paradoxically enough, it is how the private sector accumulates capital and reinvests it that poses a major constraint to engage in industry. While developmental and productive private sector that play fairly and envisions long term returns than greedy short term profit is essential, Ethiopia’s private sector in most cases tend to go for the latter, both as a means to accumulate capital and as a rationale to make investment.
According to an assessment on the role of the private sector during the Second Growth and Transformation Plan (GTP II), a study conducted by TAK-Innovate Research and Development Institution and commissioned by the Addis Ababa Chamber of Commerce and Sectorial Associations (AACCSA), during GTP I, private sector development has been neglected as the government was throwing its full weight towards promoting infrastructure development that include construction of hydro-power dams, roads, railway and telecom service.
The GTP II document also stated that, the distribution of domestic private investment across sectors during GTP I show that “well above 50 per cent of domestic private investment projects that commenced production and service delivery (both in terms of invested capital and number of projects) are engaged in the service sectors. This indicates domestic private investment has been lopsided more towards the service sectors such as renting of machinery, real estate, trade and other service sub-sectors.”
Further, “the concentration of domestic private investment in the service sectors appears to be mainly driven by short – term profit maximization through taking advantage of market failures and government incentive schemes rather than through enhancing their productivity, quality and competitiveness. This stands against the country’s long – run development and transformation agenda,” the GTP II document noted.
On the other hand, the government was pushing for privatization programme that saw the transferring of state-owned garment and textile as well as beverage industries to the private sector. The investment code was also revised to encourage further private sector investment.
In GTP II, due emphasis is being given to the promotion of domestic private sector development, particularly in the manufacturing industry. It requires attitudinal change from the side of domestic private investors to improve the participation of the private sector in the economy. It is compulsory for the domestic private sectors to emerge out of workshops with hard work, creativity and innovation. Ethiopia does not need domestic investors who become millionaires over night through rent seeking, exploiting market failures and loopholes and accumulating capital without adding any value to the economy. Rather what the country needs is model productive entrepreneurs like Bethlehem Tilahun, founder and executive director of soleRebels, Africa’s fastest growing footwear company that began out of a workshop and has flourished, with distribution to over thirty countries worldwide.
During GTP II, the government is pursuing the strategy of promoting existing small manufacturing enterprises to grow and transform into medium and large – scale manufacturing industries. If executed properly, entrepreneurship and business management capabilities are nurtured and technology transfer made accessible, this is the right policy to go for and create domestic private sector in the manufacturing sector that grow out of workshops. Industrial parks development is a state initiative which opens the door for the domestic private sector to take part.
The private sector role is not only essential for the growth of industry and service sectors. It is expected to play a key role in transforming agriculture itself. Private investment in the agriculture sector has been low. The contribution of investors who receive land to engage in commercial farming has been low, both in terms of production, productivity and technology transfer.
Ethiopia has set ambitious goals for the transformation of the agriculture sector, with private sector partners expected to play an increasing role in the Transformation Agenda. The private sector’s contribution will particularly be decisive in the effort to transform the subsistence farming to market-oriented modern agriculture.
According to the Agricultural Transformation Agency private sector investment in agribusiness helps to form demand markets for smallholder farmers. Enhanced capacity at private organizations – such as rural SMEs, cooperatives, agribusinesses, and value addition partners – will be crucial to the growth of industries that create the demand for agricultural raw materials produced by smallholder farmers.
Having a transformational plan, and several initiatives to improve the participation of the private sector at hand, what is needed is open discussion and consultation between the government and the private sector about the vision of the country and what is expected of them. If the government also listens to the demands of the private sector and get rid of the challenges with commitment, this will create a podium where developmental, productive domestic private sectors that add value to the economy flourish. As to the AACCSA commissioned study inefficient government bureaucracy, foreign currency regulations, access to finance, corruption and lack of basic infrastructure (particularly electricity) are the major challenges hindering the growth of domestic private sector.
As the public sector and investment have significantly been high, Ethiopia has also a huge opportunity to improve participation of the private sector in infrastructural development such as roads, railway, energy, telecommunications and transport, to mention a few, through effective Public-Private Partnership.