I wonder how the pessimists will react to such news...
02-20-07
World Bank
Modestly Satisfied
Ishac Diwan, World Bank’s country director to Ethiopia and Sudan, arrived in Addis Abeba only two years after Ethiopia came out of its bloody conflict with Eritrea. Not only was the loss horrendous in terms of human life, Ethiopia’s economy was devastated because of the war and a huge loss of international development assistance and the subsequent famine of 2003 that put the lives of 14 million people at risk.
The priority then was to rehabilitate the economy through institutional capacity building and help the country climb out of the poverty trap. That needed the design and implementation of the Bank’s Country Assistance Strategy (CAS) programme to Ethiopia, which ended in 2005.
Then came another trying time for Ethiopia, centered around internal political stresses that plagued the nation following electoral disputes that led to the death of 193 people, and arrests of opposition leaders, journalists and civil society workers as well as their subsequent charges of treason and genocide. It also led the Bank to question the government’s record on governance and introduced an interim programme – Protection of Basic Services – until such time that it is satisfied with improvements made in good governance.
Mr. Diwan says that the World Bank is now satisfied with the progress made in openness, transparency and the quality of governance the Ethiopian government has achieved in the past year. It is due to this modest satisfaction that the World Bank has begun developing the second country assistance strategy programme under Mr. Diwan’s watch, who has only five months before he leaves the country for another assignment. He said the focus of the new programme will be growth and the improvement of the quality of governance. The following is an excerpt from an exclusive interview he had with Tamrat G. Giorgis, Fortune Managing Editor.
Fortune: When you arrived in 2002, there was Ethiopia’s Country Assistance Strategy (CAS) developed by the World Bank. I am aware that you are developing a new one now. In between, there was a kind of gap as a result of what happened after the May 2005 national election . . .
Mr. Diwan: When I arrived, I developed one and then we developed a second and transitional programme for 18 months. This one will be for three years.
Tell me what the different aspects of developing the country strategy are when you first arrived and the one you are doing now?
In 2002, the country had come out from the war with Eritrea; during the war, we had scaled down our activities to some extent. Our main effort then was to help stabilize the economy, as well as rehabilitate the parts of the country and the population that were affected by the war.
The first strategy that I worked on was part of a post-rehabilitation which focused mostly on institution development, capacity building, decentralization and push on infrastructure. Since then we have focused on two other broad topics: food security - putting together programmes on productive safety nets - and a major effort focusing on growth. What would it take to get growth going? We came up with new products and lots of analytical works focusing on growth.
Of course, during the election and since then we began to focus on good governance where we found many important empty points that were a wake up call that we were not working enough in that area.
We were also working on the capacity of the financial management; we started working more on empowerment of citizens and the accountability of civil servants through much more transparency in information. All our projects and those outside our projects are made public, thus creating room for the voices of civil society and their efforts to hold government accountable. It is just to say that the next country strategy for us would be very much focused on growth and good governance.
Prime Minister Meles Zenawi made a statement two weeks ago that it is not possible for the West to buy good governance in Africa.
I agree with the Prime Minister that you cannot buy good policies. We all agree with this, although we have not always agreed on this because it took us a while to understand that this was perhaps the main part of Western attitude. But I think the Prime Minister was referring to the earlier period of the Structural Adjustment Programme (SAP) in Africa as opposed to referring to the World Bank in Ethiopia today. What we are doing is not trying to buy good governance; we are rather offering our services to the government to help it accomplish its own good governance goals.
Last time I interviewed you (right after the May 2005 crisis) you had made a statement that there could be a new country assistance strategy programme provided that the Bank is satisfied with the good governance measures the Ethiopian government was about to take. The other alternative was to extend the provisional programme of Protection of Basic Services. You are now working on the third country assistance strategy programme. Does it mean that the Bank is satisfied with the measures the Ethiopian government has taken on good governance areas?
We usually operate with two or three years strategy programmes and it is very abnormal for us not to do that. It requires a very bad situation to happen. We have been satisfied that there are improvements and indeed we have made the decision to do a three-year strategy.
Can you mention some of the improvements?
Our main involvement after the crisis has been the protection of basic services which has been an instrument through which the government could demonstrate progress on good governance. In particular, there were three elements which we have been monitoring very closely.
One of them was that all financial transactions and transfers to the regions would not be affected by political motives. Indeed, we have been checking on this every quarter; the latest check conducted in October 2006 has revealed that this is developing in all the cases. The second test is that the government will increasingly be more open and transparent on its budget management which it has committed to under its own capacity building programmes. Again, we have been verifying that federal, regional and wereda budgets are becoming available to the public, allowing citizens to know exactly what is happening and therefore ensure that money is reaching where it is supposed to.
The third, which I would say is more transformational for Ethiopia, is government’s commitment to actually work with the civil society. There has been progress on this agenda, although it has not yet totally converged. Part of that operation, however, is to finance civil society organizations working on what we call social accountability mechanisms such as report cards or working with communities on participatory budgeting. We have hired a management agent to manage those funds and created a steering committee comprising members from the government, civil society and donors in order to make decisions; this committee has held several meetings and completed a study on what would be useful social accountability mechanisms for Ethiopia.
If I recall correctly, the interim programme of the Protection of Basic Services was approved by your Board in May 2006. You had put the first installment of 90 million dollars a few months ago; now you are trying to put the second installment. Having your experience limited to basically one quarter, is it not too early to claim satisfaction with the governance measures this government is taking?
All we are saying now is that the situation has improved and is continuing to improve. This is a continuous process; now good governance comes into our financing decision, thus the amount of funds we provide to a country depends on the quality of policies that we measure every year. Part of this measurement focuses on the aspects of governance: Ethiopia is a bit above the average in Africa on the index of good policy, which has a rating of one to five. The average for Africa is about three points, and Ethiopia is at about 3.5.
On many aspects, Ethiopia reaches much above other countries. For instance, on the pro-poor orientation of its policies, which is very important for us, it reaches on the top because spending as the share of GDP going to pro-poor sectors is number one in Africa. It also is quite well on macro-stability as well as on fiscal discipline. We are satisfied so far. If it was not, however, for lower than average rating on good governance, Ethiopia’s rating would be steadier and its [funding] allocation would have been much larger.
While we measure governance pretty carefully and we also see some improvements, there obviously is a long way to go.
Why the World Bank had to come up with an interim programme was due to what happened after May 2005, which had a lot to do with the elections. Despite promises by the government that opposition leaders, journalists and civil society members now in jail would have open and speedy trial, they are still on trial a year after their arrests. Their case being one of the reasons why the Bank had to do “the abnormal” in the aftermath of the election, and a huge number of their supporters in Addis Abeba and elsewhere have issues yet to be resolved, how would you say that you are satisfied with progress made by the government on the governance front?
Governance has many aspects. We, at the World Bank, mostly focus on issues of economic governance which have to do with adaptability of government officials with the local justice system, and making sure that money is not stolen but used for what was intended. We focus less on the politics although we live in this world where we also focus on the politics rather to some extent.
Clearly, what we all hope is that Ethiopia would be able to grow at 10pc for the next 20 years and the services will continue to improve as they have in the past few years. This is going to take social stability, thus the politics is very important; one cannot ignore that. The problem with the politics is the fact that this trial is still going on and that the whole issue of the election has not yet been totally resolved, although it has been to some extent resolved with Parliament becoming more dynamic and having better rules.
Is it a part of the discussions at the Bank and with the government?
It is part of the conversation, of course. But, the trials are in the judicial system.
The judicial system is a big part of a governance issue.
Yes, the performance of the judicial system is an issue. And why is the trial dragging is as much an issue but it is one of the issues.
Coming back to the Country Assistance Strategy programme, you said earlier that you will be focusing on growth. When do you think Ethiopia will be graduating from the International Development Assistance (IDA)?
I don’t know, a long time. Just do some quick arithmetic; the GDP per capita [of Ethiopia] is about 130 to 135 dollars now. It was 100 dollars a few years ago when I first arrived here. Graduating from IDA requires a country to reach at least at 600 or 700 dollars GDP per capita. You need four to five fold increases in income. If the GDP was to grow at 10pc, how long would that take, 30 to 40 years?
When you first arrived, the economy was in such poor shape that people were talking a lot about a poverty trap. Indeed, there were not the big investments that we are seeing now; neither were there shortages of supplies of important commodities. Everything seems to be exploding now. How come neither the Bank nor the government were able to prepare for this? How is it possible that a country wherein almost every economist was talking about poverty trap turned out to be in a growth mode in only three years?
Enormous efforts were made for several years to pull this economy out of a trap. It is very good now that we are focusing on a different kind of problem, which has to do with growth, and scarcities of cement. Nevertheless, you are right. Why Ethiopia’s growth is happening now is a mystery.
In retrospect, there are several possible explanations. The war with Eritrea stopped the process which was peaking up in 1997/98; it also hurt the private sector whose assets were reduced. The banking sector increased the size of its nonperforming loans (NPL), which took several years to clean and rebuild the asset base.
Another explanation is that your investments in infrastructure would not give you a return at the beginning when you start with such a lower base. It takes a little while to get a return. This is a thesis we are developing in a recent report on growth that we are putting out in a few weeks.
The third important reason I would say is the rose factor. I think the roses have played a very important role.
They are only generating a quarter of a million dollars a year. Why are they such a big deal?
It is not the money; it is the psychology. Before the roses, members of the private sector were pessimist and would tell you that you cannot do anything in this country. Distances are too far, you cannot export, there is no internal market, and the chains do not exist. Nothing works.
The roses demonstrated that it can be done; actually you have an external market and you are not that far from the coast, while for high value goods you use Bole International Airport. It demonstrated that anything can be done and it changed the psychology of local investors after all these foreign investors coming here telling them that they are much better than the neighboring countries.
How come nobody was able to project this and advice the government what to do before it was totally caught by surprise, not even being able to provide cement. Wasn’t it the job of your economists to advice?
It is hard to foresee the future; you do not know when it happens. It is also important to be agile and resolve problems as they arise. However, I visited one of these rose farms very early on and before the boom. I had urged the government to go check it out, convinced that if one is working out there is not reason why there should not be thousands. The response from the leadership was fast on this one and they organized the sector, offered land, tax holidays, and fixed the cargo issue.
Now let us think of cement where supply response was not quick enough and it was blocking the whole economy: it should have been possible to import faster. Nevertheless, I hear now that cement is being imported, prices are stabilizing, and there are many investors that have started investing.
The downside of this growth is inflationary pressure on the economy. There has been quite a debate about the source of inflation in Ethiopia. I would like to pick your brain on this: What do you think is the source of Ethiopia’s inflation that has been in double-digits for almost a year now?
Oil is a good part of it. Growth is the other reason; whether it is cement or other goods that are becoming scarce. But then there is another form of inflation which we are trying to understand more: food inflation. Prices on food have increased fast in spite of faster increases in supply; agricultural products have increased by about 15pc a year for the past three years. There seem to be several reasons and we are trying to study them to see which ones have won off and which ones would continue so that one could find ways to reduce those pressures. Part of it is on the supply side, the reduction in food aid, and the increase in food exports. Even though it is not serious, farmers have moved to produce cash crops such as sesame and other things and buy their cereals.
How do you attribute inflation to food at a time when government is claiming to have perhaps the largest agricultural productivity ever?
It is a mystery because food prices are rising while supply is rising too. It must be that demand is rising even faster and at the same time the other elements of supply of food, such as food aid, is coming down where a lot of it is now done through the safety net.
The World Bank is one of the donors that are providing hundreds of millions of dollars in “cash for work” programmes. Economists have attributed this cash inflow into the economy boasting farmers’ ability to buy a lot more stuff than they would have otherwise. Would you agree with this view?
We are looking into it. This is only one of the reasons because safety net still provides humanitarian assistance half in cash and half in food.
Who do you think is the most affected by this inflation?
The urban poor, definitely! In rural areas, their income is rising and we are going to have a supply response with these higher prices; there is going to be more food growing. But it is very important now to figure out how to bring the urban poor into this economic boom. What is happening to the saving of the farmers, they should be buying more of consumer goods produced in towns. This is now a very important area to focus on to bring the urban poor in to this boom.
Who cares about 15pc of the entire population; is it too small to worry the powers that be?
I think 6,000 small towns in 600 weredas are centers of growth. Without them, I do not think we can sustain growth because they are the ones that offer the services, the secondary education, and the small hospitals. They are the ones where you have the market for inputs for agricultural output; it is where the agricultural output has to be transformed with added value. Clearly, after years of neglects, perhaps because of political and ideological backgrounds, we are seeing intensified investments in towns not so much for political as it is for economic reasons. I also heard that the EPRDF is trying to expand its membership base in towns.
Do you see the government being keen to have programmes on the ground to salvage the urban poor from the burden of life?
I see a lot of efforts being made and delivered to the urban poor. The government is asking us to put much more effort into urban areas; a 100 million dollars grant will go to our Board in few months for labor intensive works on water and sanitation in all the major cities.
Speaking of weredas, I suppose that you have traveled extensively in Ethiopia in the past five years. what are the towns that strike you most?
Take Assela, for example. Few years ago nothing was happening there. It is another town now; you have buildings and it is like a construction site. In small towns, you used to find the only private activity a few years ago limited to mills; even the mills were all using a generator. Now you have mills for half the price on cheap electricity and you have cafés and hotels, photo and photocopy shops and all kinds of consumer goods and bank offices. You have private hospitals, training centers for computers and internet cafes. There is a view of transformation happening.
This is attributed largely to major infrastructural works – such as roads and hydroelectric projects - financed by the public sector. Another area where the government lately is spending huge amounts of money is in constructing mega dams which the World Bank has for years been staunchly against. There appears now a change in policy, that it may be alright for the Ethiopian government to finance these mega dams. Why a change of heart?
It is partly because successful economies such as Uganda, Tanzania and Ghana are suffering dearly from scarcity of energy as they grow. That is one of the first big constraints. And part of it, I think, is because the World Bank had ignored the sector for the past 20 years, first by thinking that it is environmentally too touchy.
I think we have exaggerated in being sensitive to those small NGOs, although environmental and social norms are still very important. However, one can also build good dams that do not harm the environment. And we realize for example that all those countries in the west that have been so much against it, actually have grown through it, although they do not need it anymore. It is too easy to be against it now. Nonetheless, Ethiopia has perfect conditions for a few large dams.
Does it mean that the World Bank has dropped its reluctance to finance dam projects in Ethiopia? For instance, I know that you are very passionate about the Nile Basin project. Four or five years ago, it would have been unthinkable for a World Bank representative in Ethiopia to be passionate about such a very sensitive area that has a lot to do with geopolitics of the region.
There are constraints to these projects, which you have to deal with. There are other populations enjoying the same water that you have to make deals with. Obviously, the Nile Basin has been a tremendous forum for this; there is already an agreement on what is called the first fast-track projects which we are working on. This includes small hydro-irrigation and flood control projects as part of these agreements.
The second constraint is financial, which still exists. A big dam needs several billion dollars that are not on the table yet. Where is the money coming from? You need financial muscle because donors are not going to give it. You need the private sector, bank financing, and collateralize the exports of electricity. Ethiopia is not up to these tricky financial transactions yet. You need to start first with the smaller ones - the pilots - in order to get your name known in international financial circles, which is going to take some time.
Finally, we have our environmental and social standards which we hope would be enforced here. All the signs are that this government cares about these standards and would like to apply them even when we are not financing the projects. For example, we are working on an irrigation scheme around Lake Tana where the government will build five small reservoirs in order to collect more water and put them into the Lake during the dry seasons to generate more electricity and have the waterfall.
They are applying our standards for these reservoirs which we are not financing. And they are using our model as a capacity building to learn how to use those standards. I think there is simply recognition that whatever you do, you want it to be sustainable that you do not want it to lead the environment into disaster in the future.
As a Bank, do you have any programme for the peripheral states, for instance in Somali, Afar, Benishangul and Gembella regional states? We do not seem to hear quite a lot about these regions.
I think you are right. We just realized, for example, that we have only a couple of our programmes running in the Somali Regional State; they are not running very well.
Is it due to security reason or incompetence by regional authorities?
These emerging regions have governance difficulties and lower capacity compared to other regions. If you take Somali and Afar, you have the pastoralist modes which are very different frame of minds and require different services all together. I agree with you that not enough efforts have been put in these regions and it seems to me that now is a good time to focus more efforts in the coming years; we have been talking with the [federal] government and other donors in particular about the Somali region.
Afar is perhaps a different and an interesting case because a couple of years ago we started getting more involved, talking to the government there, and working with them on regional plan. There is obviously a lot of potential such as in agriculture; it is also close to Djibouti. One could even think of an industrial zone.
http://www.addisfortune.com/INTERVIEW-World%20Bank%20%20Modestly%20Satisfied.htm
World Bank
Modestly Satisfied
Ishac Diwan, World Bank’s country director to Ethiopia and Sudan, arrived in Addis Abeba only two years after Ethiopia came out of its bloody conflict with Eritrea. Not only was the loss horrendous in terms of human life, Ethiopia’s economy was devastated because of the war and a huge loss of international development assistance and the subsequent famine of 2003 that put the lives of 14 million people at risk.
The priority then was to rehabilitate the economy through institutional capacity building and help the country climb out of the poverty trap. That needed the design and implementation of the Bank’s Country Assistance Strategy (CAS) programme to Ethiopia, which ended in 2005.
Then came another trying time for Ethiopia, centered around internal political stresses that plagued the nation following electoral disputes that led to the death of 193 people, and arrests of opposition leaders, journalists and civil society workers as well as their subsequent charges of treason and genocide. It also led the Bank to question the government’s record on governance and introduced an interim programme – Protection of Basic Services – until such time that it is satisfied with improvements made in good governance.
Mr. Diwan says that the World Bank is now satisfied with the progress made in openness, transparency and the quality of governance the Ethiopian government has achieved in the past year. It is due to this modest satisfaction that the World Bank has begun developing the second country assistance strategy programme under Mr. Diwan’s watch, who has only five months before he leaves the country for another assignment. He said the focus of the new programme will be growth and the improvement of the quality of governance. The following is an excerpt from an exclusive interview he had with Tamrat G. Giorgis, Fortune Managing Editor.
Fortune: When you arrived in 2002, there was Ethiopia’s Country Assistance Strategy (CAS) developed by the World Bank. I am aware that you are developing a new one now. In between, there was a kind of gap as a result of what happened after the May 2005 national election . . .
Mr. Diwan: When I arrived, I developed one and then we developed a second and transitional programme for 18 months. This one will be for three years.
Tell me what the different aspects of developing the country strategy are when you first arrived and the one you are doing now?
In 2002, the country had come out from the war with Eritrea; during the war, we had scaled down our activities to some extent. Our main effort then was to help stabilize the economy, as well as rehabilitate the parts of the country and the population that were affected by the war.
The first strategy that I worked on was part of a post-rehabilitation which focused mostly on institution development, capacity building, decentralization and push on infrastructure. Since then we have focused on two other broad topics: food security - putting together programmes on productive safety nets - and a major effort focusing on growth. What would it take to get growth going? We came up with new products and lots of analytical works focusing on growth.
Of course, during the election and since then we began to focus on good governance where we found many important empty points that were a wake up call that we were not working enough in that area.
We were also working on the capacity of the financial management; we started working more on empowerment of citizens and the accountability of civil servants through much more transparency in information. All our projects and those outside our projects are made public, thus creating room for the voices of civil society and their efforts to hold government accountable. It is just to say that the next country strategy for us would be very much focused on growth and good governance.
Prime Minister Meles Zenawi made a statement two weeks ago that it is not possible for the West to buy good governance in Africa.
I agree with the Prime Minister that you cannot buy good policies. We all agree with this, although we have not always agreed on this because it took us a while to understand that this was perhaps the main part of Western attitude. But I think the Prime Minister was referring to the earlier period of the Structural Adjustment Programme (SAP) in Africa as opposed to referring to the World Bank in Ethiopia today. What we are doing is not trying to buy good governance; we are rather offering our services to the government to help it accomplish its own good governance goals.
Last time I interviewed you (right after the May 2005 crisis) you had made a statement that there could be a new country assistance strategy programme provided that the Bank is satisfied with the good governance measures the Ethiopian government was about to take. The other alternative was to extend the provisional programme of Protection of Basic Services. You are now working on the third country assistance strategy programme. Does it mean that the Bank is satisfied with the measures the Ethiopian government has taken on good governance areas?
We usually operate with two or three years strategy programmes and it is very abnormal for us not to do that. It requires a very bad situation to happen. We have been satisfied that there are improvements and indeed we have made the decision to do a three-year strategy.
Can you mention some of the improvements?
Our main involvement after the crisis has been the protection of basic services which has been an instrument through which the government could demonstrate progress on good governance. In particular, there were three elements which we have been monitoring very closely.
One of them was that all financial transactions and transfers to the regions would not be affected by political motives. Indeed, we have been checking on this every quarter; the latest check conducted in October 2006 has revealed that this is developing in all the cases. The second test is that the government will increasingly be more open and transparent on its budget management which it has committed to under its own capacity building programmes. Again, we have been verifying that federal, regional and wereda budgets are becoming available to the public, allowing citizens to know exactly what is happening and therefore ensure that money is reaching where it is supposed to.
The third, which I would say is more transformational for Ethiopia, is government’s commitment to actually work with the civil society. There has been progress on this agenda, although it has not yet totally converged. Part of that operation, however, is to finance civil society organizations working on what we call social accountability mechanisms such as report cards or working with communities on participatory budgeting. We have hired a management agent to manage those funds and created a steering committee comprising members from the government, civil society and donors in order to make decisions; this committee has held several meetings and completed a study on what would be useful social accountability mechanisms for Ethiopia.
If I recall correctly, the interim programme of the Protection of Basic Services was approved by your Board in May 2006. You had put the first installment of 90 million dollars a few months ago; now you are trying to put the second installment. Having your experience limited to basically one quarter, is it not too early to claim satisfaction with the governance measures this government is taking?
All we are saying now is that the situation has improved and is continuing to improve. This is a continuous process; now good governance comes into our financing decision, thus the amount of funds we provide to a country depends on the quality of policies that we measure every year. Part of this measurement focuses on the aspects of governance: Ethiopia is a bit above the average in Africa on the index of good policy, which has a rating of one to five. The average for Africa is about three points, and Ethiopia is at about 3.5.
On many aspects, Ethiopia reaches much above other countries. For instance, on the pro-poor orientation of its policies, which is very important for us, it reaches on the top because spending as the share of GDP going to pro-poor sectors is number one in Africa. It also is quite well on macro-stability as well as on fiscal discipline. We are satisfied so far. If it was not, however, for lower than average rating on good governance, Ethiopia’s rating would be steadier and its [funding] allocation would have been much larger.
While we measure governance pretty carefully and we also see some improvements, there obviously is a long way to go.
Why the World Bank had to come up with an interim programme was due to what happened after May 2005, which had a lot to do with the elections. Despite promises by the government that opposition leaders, journalists and civil society members now in jail would have open and speedy trial, they are still on trial a year after their arrests. Their case being one of the reasons why the Bank had to do “the abnormal” in the aftermath of the election, and a huge number of their supporters in Addis Abeba and elsewhere have issues yet to be resolved, how would you say that you are satisfied with progress made by the government on the governance front?
Governance has many aspects. We, at the World Bank, mostly focus on issues of economic governance which have to do with adaptability of government officials with the local justice system, and making sure that money is not stolen but used for what was intended. We focus less on the politics although we live in this world where we also focus on the politics rather to some extent.
Clearly, what we all hope is that Ethiopia would be able to grow at 10pc for the next 20 years and the services will continue to improve as they have in the past few years. This is going to take social stability, thus the politics is very important; one cannot ignore that. The problem with the politics is the fact that this trial is still going on and that the whole issue of the election has not yet been totally resolved, although it has been to some extent resolved with Parliament becoming more dynamic and having better rules.
Is it a part of the discussions at the Bank and with the government?
It is part of the conversation, of course. But, the trials are in the judicial system.
The judicial system is a big part of a governance issue.
Yes, the performance of the judicial system is an issue. And why is the trial dragging is as much an issue but it is one of the issues.
Coming back to the Country Assistance Strategy programme, you said earlier that you will be focusing on growth. When do you think Ethiopia will be graduating from the International Development Assistance (IDA)?
I don’t know, a long time. Just do some quick arithmetic; the GDP per capita [of Ethiopia] is about 130 to 135 dollars now. It was 100 dollars a few years ago when I first arrived here. Graduating from IDA requires a country to reach at least at 600 or 700 dollars GDP per capita. You need four to five fold increases in income. If the GDP was to grow at 10pc, how long would that take, 30 to 40 years?
When you first arrived, the economy was in such poor shape that people were talking a lot about a poverty trap. Indeed, there were not the big investments that we are seeing now; neither were there shortages of supplies of important commodities. Everything seems to be exploding now. How come neither the Bank nor the government were able to prepare for this? How is it possible that a country wherein almost every economist was talking about poverty trap turned out to be in a growth mode in only three years?
Enormous efforts were made for several years to pull this economy out of a trap. It is very good now that we are focusing on a different kind of problem, which has to do with growth, and scarcities of cement. Nevertheless, you are right. Why Ethiopia’s growth is happening now is a mystery.
In retrospect, there are several possible explanations. The war with Eritrea stopped the process which was peaking up in 1997/98; it also hurt the private sector whose assets were reduced. The banking sector increased the size of its nonperforming loans (NPL), which took several years to clean and rebuild the asset base.
Another explanation is that your investments in infrastructure would not give you a return at the beginning when you start with such a lower base. It takes a little while to get a return. This is a thesis we are developing in a recent report on growth that we are putting out in a few weeks.
The third important reason I would say is the rose factor. I think the roses have played a very important role.
They are only generating a quarter of a million dollars a year. Why are they such a big deal?
It is not the money; it is the psychology. Before the roses, members of the private sector were pessimist and would tell you that you cannot do anything in this country. Distances are too far, you cannot export, there is no internal market, and the chains do not exist. Nothing works.
The roses demonstrated that it can be done; actually you have an external market and you are not that far from the coast, while for high value goods you use Bole International Airport. It demonstrated that anything can be done and it changed the psychology of local investors after all these foreign investors coming here telling them that they are much better than the neighboring countries.
How come nobody was able to project this and advice the government what to do before it was totally caught by surprise, not even being able to provide cement. Wasn’t it the job of your economists to advice?
It is hard to foresee the future; you do not know when it happens. It is also important to be agile and resolve problems as they arise. However, I visited one of these rose farms very early on and before the boom. I had urged the government to go check it out, convinced that if one is working out there is not reason why there should not be thousands. The response from the leadership was fast on this one and they organized the sector, offered land, tax holidays, and fixed the cargo issue.
Now let us think of cement where supply response was not quick enough and it was blocking the whole economy: it should have been possible to import faster. Nevertheless, I hear now that cement is being imported, prices are stabilizing, and there are many investors that have started investing.
The downside of this growth is inflationary pressure on the economy. There has been quite a debate about the source of inflation in Ethiopia. I would like to pick your brain on this: What do you think is the source of Ethiopia’s inflation that has been in double-digits for almost a year now?
Oil is a good part of it. Growth is the other reason; whether it is cement or other goods that are becoming scarce. But then there is another form of inflation which we are trying to understand more: food inflation. Prices on food have increased fast in spite of faster increases in supply; agricultural products have increased by about 15pc a year for the past three years. There seem to be several reasons and we are trying to study them to see which ones have won off and which ones would continue so that one could find ways to reduce those pressures. Part of it is on the supply side, the reduction in food aid, and the increase in food exports. Even though it is not serious, farmers have moved to produce cash crops such as sesame and other things and buy their cereals.
How do you attribute inflation to food at a time when government is claiming to have perhaps the largest agricultural productivity ever?
It is a mystery because food prices are rising while supply is rising too. It must be that demand is rising even faster and at the same time the other elements of supply of food, such as food aid, is coming down where a lot of it is now done through the safety net.
The World Bank is one of the donors that are providing hundreds of millions of dollars in “cash for work” programmes. Economists have attributed this cash inflow into the economy boasting farmers’ ability to buy a lot more stuff than they would have otherwise. Would you agree with this view?
We are looking into it. This is only one of the reasons because safety net still provides humanitarian assistance half in cash and half in food.
Who do you think is the most affected by this inflation?
The urban poor, definitely! In rural areas, their income is rising and we are going to have a supply response with these higher prices; there is going to be more food growing. But it is very important now to figure out how to bring the urban poor into this economic boom. What is happening to the saving of the farmers, they should be buying more of consumer goods produced in towns. This is now a very important area to focus on to bring the urban poor in to this boom.
Who cares about 15pc of the entire population; is it too small to worry the powers that be?
I think 6,000 small towns in 600 weredas are centers of growth. Without them, I do not think we can sustain growth because they are the ones that offer the services, the secondary education, and the small hospitals. They are the ones where you have the market for inputs for agricultural output; it is where the agricultural output has to be transformed with added value. Clearly, after years of neglects, perhaps because of political and ideological backgrounds, we are seeing intensified investments in towns not so much for political as it is for economic reasons. I also heard that the EPRDF is trying to expand its membership base in towns.
Do you see the government being keen to have programmes on the ground to salvage the urban poor from the burden of life?
I see a lot of efforts being made and delivered to the urban poor. The government is asking us to put much more effort into urban areas; a 100 million dollars grant will go to our Board in few months for labor intensive works on water and sanitation in all the major cities.
Speaking of weredas, I suppose that you have traveled extensively in Ethiopia in the past five years. what are the towns that strike you most?
Take Assela, for example. Few years ago nothing was happening there. It is another town now; you have buildings and it is like a construction site. In small towns, you used to find the only private activity a few years ago limited to mills; even the mills were all using a generator. Now you have mills for half the price on cheap electricity and you have cafés and hotels, photo and photocopy shops and all kinds of consumer goods and bank offices. You have private hospitals, training centers for computers and internet cafes. There is a view of transformation happening.
This is attributed largely to major infrastructural works – such as roads and hydroelectric projects - financed by the public sector. Another area where the government lately is spending huge amounts of money is in constructing mega dams which the World Bank has for years been staunchly against. There appears now a change in policy, that it may be alright for the Ethiopian government to finance these mega dams. Why a change of heart?
It is partly because successful economies such as Uganda, Tanzania and Ghana are suffering dearly from scarcity of energy as they grow. That is one of the first big constraints. And part of it, I think, is because the World Bank had ignored the sector for the past 20 years, first by thinking that it is environmentally too touchy.
I think we have exaggerated in being sensitive to those small NGOs, although environmental and social norms are still very important. However, one can also build good dams that do not harm the environment. And we realize for example that all those countries in the west that have been so much against it, actually have grown through it, although they do not need it anymore. It is too easy to be against it now. Nonetheless, Ethiopia has perfect conditions for a few large dams.
Does it mean that the World Bank has dropped its reluctance to finance dam projects in Ethiopia? For instance, I know that you are very passionate about the Nile Basin project. Four or five years ago, it would have been unthinkable for a World Bank representative in Ethiopia to be passionate about such a very sensitive area that has a lot to do with geopolitics of the region.
There are constraints to these projects, which you have to deal with. There are other populations enjoying the same water that you have to make deals with. Obviously, the Nile Basin has been a tremendous forum for this; there is already an agreement on what is called the first fast-track projects which we are working on. This includes small hydro-irrigation and flood control projects as part of these agreements.
The second constraint is financial, which still exists. A big dam needs several billion dollars that are not on the table yet. Where is the money coming from? You need financial muscle because donors are not going to give it. You need the private sector, bank financing, and collateralize the exports of electricity. Ethiopia is not up to these tricky financial transactions yet. You need to start first with the smaller ones - the pilots - in order to get your name known in international financial circles, which is going to take some time.
Finally, we have our environmental and social standards which we hope would be enforced here. All the signs are that this government cares about these standards and would like to apply them even when we are not financing the projects. For example, we are working on an irrigation scheme around Lake Tana where the government will build five small reservoirs in order to collect more water and put them into the Lake during the dry seasons to generate more electricity and have the waterfall.
They are applying our standards for these reservoirs which we are not financing. And they are using our model as a capacity building to learn how to use those standards. I think there is simply recognition that whatever you do, you want it to be sustainable that you do not want it to lead the environment into disaster in the future.
As a Bank, do you have any programme for the peripheral states, for instance in Somali, Afar, Benishangul and Gembella regional states? We do not seem to hear quite a lot about these regions.
I think you are right. We just realized, for example, that we have only a couple of our programmes running in the Somali Regional State; they are not running very well.
Is it due to security reason or incompetence by regional authorities?
These emerging regions have governance difficulties and lower capacity compared to other regions. If you take Somali and Afar, you have the pastoralist modes which are very different frame of minds and require different services all together. I agree with you that not enough efforts have been put in these regions and it seems to me that now is a good time to focus more efforts in the coming years; we have been talking with the [federal] government and other donors in particular about the Somali region.
Afar is perhaps a different and an interesting case because a couple of years ago we started getting more involved, talking to the government there, and working with them on regional plan. There is obviously a lot of potential such as in agriculture; it is also close to Djibouti. One could even think of an industrial zone.
http://www.addisfortune.com/INTERVIEW-World%20Bank%20%20Modestly%20Satisfied.htm
posted by Mechachal yichalal at 4:46 PM
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