Dealing wisely with the incumbment

Whether a ruler (the incumbent) gives up power peacefully depends on what awaits him after he retires (among other factors). If the ruler is insecure about potential reprisals when he loses power (say due to prosecution for what he has done as a ruler), he will be reluctant to transfer power peacefully. He will fight and cling to power fearing such threats. And political economists suggest that offering a secure retirement to rulers who give up power peacefully may solve the problem. The Ghanaians seem to get it right!

Click here to read the BBC report on how they dealt with the outgoing president.

The flower sector as 'a self-discovery'

After his recent visit to Ethiopia, Dani Rodrik (from Harvard) reflects on the flower sector as a self-discovery.
Click here to read the article!

More innovative approach for capital flow

It is a well-known fact in the economics descipline that the engines of economic growth are technological progress and capital accumulation. High-tech activities usually need skilled labor and use of large physical capital (machineries). It is not feasible to observe economic prosperity in a society with large number of machineries but with no know-how about the machines. The same is true for a society with many skills but doesn't have the resource to buy equipments. So any country's growth policy should put a clear strategy as to how to get its population more skilled and how to get the needed physical capital.

For a poor country like Ethiopia, foreign capital flows are one source. Besides foreign aid (needed to finance public investment), the government has put a lot of focus to attract foreign investors who can come with their capital and invest in Ethiopia. Such investments are called foreign direct investment (FDI).

The other route to access foreign capital is through financial markets. In this route, domestic private investors can access credit from international sources. For example, a domestic bank at home can borrow from a U.S. bank and lend the money to home investors (at a higher rate). Since foreign banks lend hard currencies (like US dollar, Euro,etc), this route also opens more access to foreign exchange. The problem with this route arises if the foreign lenders want to withdraw their asset, leading to a sudden loss of foreign exchange reserve and potential currency crises. And it is mainly due to this fear that the government forbids foreign banks to work in Ethiopia. Though the ban helps to avoid such sudden capital flight, it also comes at a cost: a potentially important door to access capital is closed. In stead of just shutting the door to outside lenders, the National Bank needs a more innovative approach that allows access to the international capital market while at the same minimizing the risk of capital flight.

Could the inflation be responsible for the current forex shortage?

In the past two years, the Ethiopian central bank has been reported to face foreign exchange shortage. And the foreign exchange shortage is mainly driven by increased demand for import despite a significant increase in export. And the government's focus so far seems to focus on increasing the country's access to foreign exchange by increasing exports and foreign capital inflow (aid, loans, remittances, etc). A number factors may lie behind the increased demand for foreign exchange. Until recently, oil import alone used to take away whatever is earned from exports (due to high oil prices in the international market). There may also be pressure on import demand due to high inflation at home and a relatively stable exchange rate. The domestic inflation increases import demand by increasing the real price of domestic goods compared to imported goods. The mechanism is as follows. Suppose the price of goods in China is unchanged. And assume the exchange rate in Addis Ababa is also unchanged. What this implies is that, for an importer in Addis, the price of importing goods from China is unchanged. On the other hand, if home made goods are getting expensive at home (due to high domestic inflation), consumers in Addis tend to buy more of imported foreign goods and less of home-made goods. For example, if the price of orange juice produced by Mama keeps on increasing while the one imported from Dubai remains the same, then consumers will shift from using Mama juice to the relatively cheaper juice imported from Dubai. According to the Economist, the price of home goods increased roughly by at least 33% compared to imported goods during 2004-2008. Such a shift in consumer demand will then increase import demand putting more pressure on the central bank's foreign exchange reserve.