Saturday, October 15

Economic Absurdities

This post will take a look at a number of economic issues. They reveal an ever more disturbing image of the Ethiopian economy whose only growth sector is foreign aid and foreign remittances. First some background ...

According to the World Bank in 2003 FDI (Foreign Direct Investment) for all of SSA (Sub-Saharan Africa), with a total of 705 million souls, was $10.1 billion. That same year FDI for Ethiopia, with a population of 69 million souls, was $60 million. So FDI works out to $14 per capita for Sub Saharan Africa and $0.87 per capita from Ethiopia. The trend for Ethiopia’s FDI figure is actually on the way down while that for SSA in general is on the way up.

The piece below is a jumble of irrelevant good news / factoids / unsupported statements that leave the unquestioning reader with the impression that this government is doing something right economically. Let us take a look at it, originally from the government ENA via the Sudan Tribune. “UN say foreign investment increases in Ethiopia”
The United Nations Conference on Trade and Development (UNCTAD) said that Foreign Direct Investment (FDI) flow to Ethiopia has shown an increase.
See above, was the increase $1 billion or $1 million? It could be $0.01 and still meet the standards of this article.
This year’s International investment report was released on Monday at the United Nations Conference Center (UNCC).
Sounds really important and official doesn’t it? We suspect that even the UN does a better job of organizing information than this article would have us believe.
Speaking at the occasion Director of the United Nations Economic Commission for Africa (UNECA), Augustin Fosu said Ethiopia, which is among promising African countries for FDI during the current European year, stands 12 in its FDI share from other African countries.
Ethiopia with a population of about 70 million is second in size of population only to Nigeria in SSA and third in line after Nigeria and Egypt. Is Egypt included in this ranking? Even if we are to believe that Ethiopia is #12 what could that possibly mean when so many far smaller countries are so far ahead? The article doesn’t want you to think about such things.
Some 233 billion USD FDI flow was registered since 2000 E.C, the report indicated, adding some 36 percent of the stated amount was [the]share of developing countries.
Now we see more playing fast and loose with the numbers. The $233 bn over 5 years sounds good but only a bit of that is for developing countries - so why mention it at all - and Ethiopia with less than $300 mn over that time represents so little of that total this figure is useless besides its ability to cloud some men’s minds.
On the contrary, the report said, FDI flow to developed countries has fallen by some 14 percent during the reported period.
FDI to developed countries is down? We don’t believe this at all, increased oil prices alone have probably meant far more petrodollars were sent on to investments in North America and Europe not to mention steady European investment in the US and vice versa. Actually the $233 bn figure for all FDI is ridiculously small over a five year period worldwide. This article is just plain silly.
The report further said Africa has obtained the biggest share of FDI flow and infrastructure development, while South Africa stands first among African nations.
This is also nonsense. We are to believe of all FDI that Africa got most of it? Does ‘infrastructure development’ count as FDI? In that case every development program in Ethiopia should add hundreds of millions to Ethiopia’s FDI because almost all is paid for by donors from the imperialist camp (what the government calls foreign aid donors).
The activities being carried out in the sector by developing countries would enable them forge coordination in attracting FDI, it was indicated.
Why should they forge coordination? They are in competition for FDI. File this one under absurd. In the next sentence more confusion. What does the fate of the developed economies below have to do with anything above? Over what period is it? Does it really make sense to discuss Ethiopia‘s FDI along with the countries below?
Britain, Singapore and Korea have registered increase in FDI, while China, India and Singapore have taken over half of research and study activities during the stated period, the report said.
This article is characteristic of a combination of ashattir (trickery) and sloppiness on this subject. Just throwing around a bunch of numbers from a real source with no context or background is not silly reporting - it is lazy propaganda.


Here is another article, this time from People’s Daily Online. The Chinese government's news agencies seem to be offering the Ethiopian government at least one deceptively positive news item every week in exchange for the endorsement of the invasion of Taiwan by Ethiopia’s government.

Here is the title “Impoverished Ethiopia stands first in Africa in cost effectiveness for FDI” It is hard to figure out where the news came from - the Ethiopian Investment Commission or the magazine, "Foreign Direct Investment," published by the British-based Financial Times Business Ltd.
In its 2005-2006 evaluation, the magazine said Ethiopia is favorable for foreign direct investment with its "cheaper labor" and "suitable infrastructural development," among others.

Meanwhile, the commission said Ethiopia has licensed foreign investment projects with an aggregate capital of 1.1 billion US dollars since last year. The liberalizing direction taken by the Ethiopia government over the past 12 years, beginning with the economic reform program launched in 1992, has resulted in improvements in the areas of trade policy, foreign investment and government intervention, it said.
The news is mixed up so no one thinks about what it says too much and all just goes away with a pleasant buzz about the actaully tanking Ethiopian economy. Ethiopian labor is cheap because it is the poorest nation on earth - because the economy is horribly managed, it is shrinking and there is staggering unemployment.

An enterprising, well managed government plan could turn those factors to advantage by welcoming investment whose profits and taxes could be converted into capital, human and physical, for development. However, the Ethiopian government views economic development and the enfranchisment that brings as a threat to its hold on power.

The revolutionary feudal aristocracy has made a choice to keep Ethiopia a permanent beggar nation to maximize their own control and to short-circuit accountability with foreign governments and intellectuals controlling aid placed in the loop to bypass Ethiopians. The wretchedness that is a natural product of that policy is seen as an acceptable price for the massess to pay.

Infrastructure development as we have said is initiated and paid for entirely by the imperialist camp of aid donors while the government has essentially abdicated responsibility for that development beyond accepting projects and money while making sure government / party / crony owned businesses get the lion’s share of domestic contracts.

Beyond the fact that the government / party / business control or outright monopolize most of the economy at all levels there is no private ownership of land - a prerequisite of development everywhere at every time in human history. Now, while the World Bank says that annual FDI is in the $60 mn range we are expected to believe that $1.1 bn in ‘licensed foreign investment projects’ has been forthcoming in the past year.

The IMF says that “"contributions of industry and the private services sector remained essentially unchanged, and Ethiopia’s growth potential remained largely untapped.” Indeed economic activity and growth in limited urban sectors is based solely on foreign aid and remittances from Ethiopians who live abroad.

Aside from those limited urban sectors of which the government / part / crony machine is dominant future projections show increasing urban and rural poverty ahead. The government has neither the policies or the inclination to change them to actually attract FDI and to develop.

Instead it relies on dreams of massive aid in the form of the Millenial Development Goals and bits of propaganda like these two articles to convince us otherwise. After all who is really going to invest in a country that prattles on about revolutionary democracy anyway?

There is an open working assumption in the world today that keeping Ethiopians alive and caring for their future is a job for ferenjis and not their rulers. We have seen this kind of nonsense before when economic growth was trumpeted but was actually dependent on rain, diaspora remittances and foreign aid alone.

See these posts for an assortment of government lies and truths: 'Zenawinomics' and the Aztec gods' about high 2003-4 'growth' and On Borrowed Time about historical 2004-5 'growth'. See Ethnicity , Poverty and War and Malthus, Hobbes and the Red Queen to see that things are going to get worse in all economic sectors in the future if current policies continue.

let the ferenjis feed 'em ... again looks at how agricultural figures were lied about by the government in the run-up to the election which then got into aggressive begging mode to get food aid by making the imperialist camp look bad for not giving aid earlier.


What is the true state of affairs regarding FDI? This Daily Monitor article, 'Ethiopia's FDI Inflows Decline' on September 30, 2004 (no link available) lays it all out in much better form.
Foreign Direct Investment (FDI) flows to Ethiopia in 2003 has declined compared to the level attained in 2000, revealed 2004 World Investment Report launched by UN Conference on Trade and Development, UNCTAD.

According to the report, the percentage of the country's Gross Fixed Capital Formation was 5.4 percent in 2003, the increment deemed low by any standard. The report shows that the FDI to Gross Fixed Capital Formation for Africa in same year was 13.9 percent while it stood at 10 percent for developing countries.

Ethiopia's FDI stocks have however improved significantly the last five years, the report noted. "As a percentage of GDP, the country's FDI stocks have increased from 1.8 percent in 1990 to 16.5 percent in 2003." The registered FDI stocks in Africa's GDP same year is 25.3 percent while it was 31.4 percent for developing countries.

Despite its meagre share of the world FDI, 2.7 percent, Africa has reversed the downward trend in its FDI and reported an increase from 12 billion US dollars in 2002 to 15 billion US dollars in 2003.

According to the report Morocco was the largest FDI inflow in 2003 in the continent, followed by Angola, Equatorial Guinea, Nigeria, Sudan and South Africa.

The report indicates that for a third year in a row, global flows of FDI continued their downward trend in 2003, reaching 560 billion US dollars-the lowest level since 1998, and a far cry from 1.39 trillion registered in 2000.

According to the report, Africa's outlook for FDI in 2004 and beyond is promising.
Wasn't that a whole lot more easy to make sense of than the other pieces? Basically, FDI in 1990 was so unbelievably, rock bottom low that it is now, in still bad circumstances, higher. However, it is far behind the rest of Africa and even as most of Africa experiences increases in FDI, Ethiopia continues to experience decreases.

Global FDI flows in the very high hundreds of billions of dollars make more sense too don't they? Ethiopia's FDI since the fall of the Dergue has been affected most by one investor, the Midroc Group. Indeed, Ethiopia's FDI is so small that the Sheraton Hotel alone represents over five years worth of ALL foreign investment in the country.


Here is another subject that has escaped attention of late - that of taxation. Here is the first article from the Addis Tribune 'Parliament to Approve Controvential Value Added Tax Proclamation'

Uncritical observers figure the word 'Parliament' by itself has some actual meaning by necessity. However, right off the mark this is rather silly because Parliament is not a serious institution - it does what the party bosses want it to do and only exists as a fig leaf over despotism.

How did the VAT do? From Nazaret.Com (we have no link to the original article source) 'Ethiopia champions unpopular VAT for developing African nations'
Ethiopia said Wednesday that a highly unpopular value added tax (VAT) put in place two years ago is now responsible for 43 percent of its tax revenue and urged other developing African nations to adopt the scheme.

Earnings from the 15-percent VAT now amount to 43 percent of the money taken in by Ethiopia's Federal Inland Revenue Authority (FIRA) in 2004-2005, said the head of the agency, Woldegebriel Naizgi, said.

Officials said FIRA had collected the equivalent of 390.4 million dollars (319.2 million euros) in taxes in 2004-2005, of which VAT and related tariffs accounted for the largest single chunk.
First of all, is this a substitute tax or a new tax? Second, for a country with a GNP less than $7 billion this represents a massive tax increase under any circumstances. The tax applies to nearly all consumer goods and services excluding medicine, fuel, transport, milk and bread.

No rational government just takes over 6% of GNP all of a sudden in new taxes, even if tax collection was poor before. The economic affects are definitely very destructive. This is like the US government collection of an extra $720 billion one year than it did the year before.
"As VAT requires strict use of invoices, the sales and consequently, the profits of many companies have gone up resulting in a higher intake of tax," Woldegebriel said, stressing the benefits of adopting the system.
How utterly ridiculous.Taking money away from a business and forcing it to make customers pay more for everything is really DOING THEM A FAVOR!
"We know VAT is an uphill task not just in Ethiopia but in the rest of Africa too but it is worth it to fight," he said. "VAT should be appreciated not only from revenue perspective but also as an important tool in promoting trade discipline and transparency."
Transparency is a polite word for corruption and as we have seen Ethiopia is more corrupt today than ever before and is rated by Transparency International to be one of the most corrupt states in the world.

The corruption is structural meaning that it is built into the system of inseperable party / government / party-government owned businesses. How much do you want to bet that the government party businesses aren't paying their fare share of this massive tax increase or that they pay any taxes at all?

In fact, the party's own Revolutionary Democratic Manual for control under the guise of free markets and democracy holds that taxation is a weapon
the state's fiscal instruments would be used to "destroy those that are not in line with the goals of Revolutionary Democracy." For example, the power to tax could be used as the power to destroy.

As the strategy document indicates, the government "will reduce or write off for some years the taxes due from those forces or economic spheres" which the Front supports and "pile up the tax burden" of those the EPRDF does not support.


As we discussed in this post, Cognitive Dissonance, the whole concept of FDI and economic growth in Ethiopia is not taken seriously by the government. One official in charge of FDI drops this bit of unbelievable wisdom
He sees these investors as interested in financial gain rather than the good of Ethiopia.
We'll leave it to you dear reader to dissect that one.

One flower growing company moved to Ethiopia from Kenya recently and we saw big headlines but the fact that Kenya, with all of its problems and a far smaller population, gets more FDI every year after year is not news.

There are also occasional articles about an alleged 'brain gain' whose interviewed participants are certainly very optimistic and sincere but who by no means represent a larger economic trend of any kind. The flight of tens of thousands of other mobile professionals, businessman and folk from every walk of life along with the talent and actual cash they carry with them is overwhelmingly massive by comparison - but conveniently glossed over.

When it comes to economic news from the Ethiopian government or based on news or statistics from that government the best advice is to realize that money does not like revolutionary democracies and that the economy is doing worse every year - and that the poorest country on earth is growing poorer every year.

Why believe numbers from the government at all? If all the inflated economic growth figures snce 1991 where in any conceivable way related to earthly realtiy then why has Ethiopia gone from being one of the poorest countries on earth to the poorest one on the planet?

If the government had been tellin the truth all along Ethiopia's economy would have been many times bigger now rather than continually shrinking.

Indeed, the economy is a national Cargo Cult, meaning a series of rituals and rhetoric that only mimics the practices of developed and developing nations but not their reality. Development, either political or economic, are in fact inseperable and based on INSTITUTIONS - not billions in aid or empty talk.

The Adam Smith Institute Blog looked at the Economic Freedom of the World: 2004 Report and noted that economic freedom is the best predictor of foreign investment and of
Prosperity is as possible in Asia and Africa as it is anywhere else in the world. It is not related to natural resources or to climate or to population density but only to better or worse governance.
Crispus in 'How Regulation Fuels African Poverty' quotes the Economist about the World Bank Report 'Doing Business in 2005' - "To register [a business] in Ethiopia, a would-be entrepreneur must deposit the equivalent of 18 years’ average income in a bank account, which is then frozen."

The Heritage Foundation Index of Economic Freedom 2004 places Ethiopia in the 'mostly unfree' category and says that
Ethiopia’s cumbersome bureaucracy deters investment. Much of the economy remains under state control, and the evidence suggests that businesses also must contend with political favoritism.
Ethiomedia reports from a U.N. Economic Commission for Africa Report that that 'Ethiopia one four countries ranked last for good governance' adding of Kenya, Ethiopia, Chad, Zimbabwe and Malawi that "there are doubts about the commitment of government agencies to respect and implement the rule of law."

IRIN reports that Ethiopia receives $1.9 billion a year in foreign aid. That is for a GNP of about $7.0 billion. Remittances from socities abroad where citizens are actually allowed to earn and create wealth account for hundreds of millions of more dollars.

The $90 per capita GNP today represents less than one quarter of the same figure from 1975. It has continued to drop even since the fall of the Dergue.

The way to plenty is no secret but Ethiopia's revolutionary feudal aristocracy is doing all the wrong things to avoid national success in the interests of their will to power. This post, The Birth of Plenty, describes how some countries have managed it and categorizes the errors of contemporary governance.

This post, Luck and the Idea Trap takes a look at why bad decisions are made and is not optimistic about the options under the current government.

Basically, next time you read something about the economy, read critically and Don't Believe the Hype! Actually, don't believe ethiopundit either. Even though we are almost always right, you should suspect every thing you come across and think for yourself above all.

For example consider this; is it a coincidence that all countries in human history that cackle on about absurdities like revolutionary democracy, that limit private ownership of land and that are corrupt - are also not free and are poor?

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