A short note on Ethiopia and the African continent

Introduction

Ethiopian Prime Minister Abiy Ahmed was awarded the 2019 Nobel Peace Prize. He is the 12th winner from Africa. The Nobel Committee stated that Abiy had been awarded the Nobel for his efforts towards resolving the border conflict with Eritrea (in September 2018, Abiy and Eritrean President Isaias Afwerki signed a peace deal in Jeddah).

A border war in the years between 1998 and 2000 had resulted in the deaths of 100,000 people, and was responsible for the displacement of over one million people and the splintering of many families. The agreement has helped in reducing tensions between both countries and has led to a number of other important steps; it has paved the way for air connectivity (Ethiopian Airlines resumed its flight from Addis Abbaba to Asmara, the capital of Eritrea after two decades), resumption of communications between both countries (telephone lines had been disconnected in 1998), reduction of military hostilities, and most importantly reuniting of families.

Abiy’s reaction

While reacting to the Nobel Committee’s decision, the Ethiopian Prime Minister said that this reward was not merely for Ethiopia, but the whole of Africa, and hoped that leaders in the region would work towards peace-building.

Said the Ethiopian PM:

…It is a prize given to Africa, given to Ethiopia, and I can imagine how the rest of Africa’s leaders will take it positively to work on the peace-building process in our continent.

It would be pertinent to point out that, in recent years, the outside world has begun to take note of Ethiopia for its economic progress – in spite of numerous political challenges.

In recent years — almost a decade — the country’s economic growth has been a whopping 10% according to International Monetary Fund (IMF) estimates. In 2018, Ethiopia’s growth was estimated at well over 8% (8.5), and was the fastest growing economy in Africa. One of the key factors for Ethiopia’s impressive economic performance has been the shift from the agricultural sector to the industry & service sector and favourable demographics.

Reforms introduced by Abiy Ahmed: Political Sphere

Abiy’s election has generated immense hope, as he has seemed genuine in his commitment to political and economic reforms. During his tenure, a number of political prisoners have been released. There is also a reasonable amount of press freedom. There have been no arrests of journalists ever since he has taken over (2018 was the first year since 2004 when not a single journalist was arrested).

Abiy’s reforms – both political and economic – are significant because in many countries which have made economic progress, leaders have exhibited authoritarian tendencies. In many countries with economic promise, leaders have also failed to bite the bullet, as far as big bang economic reforms are concerned. Abiy, on the other hand, has reiterated his commitment to reforms.

Reforms introduced by Abiy Ahmed: Economic Sphere

In September 2019, Abiy unveiled his vision for economic reform titled ‘Home-Grown Economic Reform,’ which focuses on drawing greater public sector participation, reducing debts, and enhancing foreign exchange reserves. While speaking on the occasion of the launch of the roll out of his government’s agenda, Abiy emphasized on the fact that this approach is holistic: pro-job, pro-growth, and pro-inclusivity.

Privatization of a number of state run enterprises, such as Ethiopian Airlines, Ethiopian Electric Power Corporation, and the sole telecom provider, EthioTelecom, has also been high on the agenda of Abiy ever since he has taken over.

Challenges

This is not to say that all is well in Ethiopia. In June 2019, Ethiopia faced two attacks, one in the Amhara regional capital of Bahir Dar and the other in the federal capital of Addis Ababa. While Abiy has made efforts towards reducing acrimony in the country’s polity, there are still numerous ethnic divisions, and a large number of political players are seeking to cash in on these schisms.

Expectations from Abiy are sky high, and the country faces numerous debts. While his agenda for reforms is well-intentioned, and does represent a significant break from the past, it is rather ambitious and it remains to be seen whether stakeholders involved in the implementation will be in sync with the PM.

Africa no longer the Dark Continent

For very long, many Western commentators have consistently adopted a patronizing approach towards Africa. The Nobel Award to the Ethiopian PM comes at an interesting time. At a time when the whole world is becoming insular, 54 African countries have signed the AfCTA (African Continental Free Trade Area) agreement. AfCTA. This is the world’s largest free trade agreement since the World Trade Organisation).

AfCTA is a crucial step towards strengthening intra-regional trade linkages and overall connectivity. AfCTA has the potential of connecting over 1 billion people, creating a bloc worth over an estimated $3 billion and pushing intra-Africa trade by up to 15-25% by 2040 (as of 2018, intra-regional trade was less than 20%).

It would be pertinent to point out that the Ethiopian PM has on repeated occasions reiterated his commitment to Pan-Africanism, and has been one of the most fervent backers of AfCTA.

Africa is also being viewed as the world’s next manufacturing hub (China has already moved in a big way, though of course many countries are looking to other alternatives). Political stability and investor-friendly policies of course are imperative.

Conclusion

One hopes that other leaders in Africa follow Abiy’s footsteps in focusing on economic and political changes which could pave the way for sustainable growth and prosperity.

For long the world’s attention has been driven by a Western narrative, but in recent years Africa along with Asia has begun to draw attention due to high economic growth rates. If Africa can get its act together, and growth in countries like Bangladesh and Vietnam is sustained, we could witness the rise of new Non-Western groupings (consisting of developing countries from different regions). Such groupings will not be driven by geopolitical compulsions, geographic proximity, or sheer size, but by economic consideration and could play a pivotal role in shaping a new narrative, while promoting globalization, connectivity and free trade.

Nightcap

  1. Jack Schwartz on the weaknesses of the Mathematical Mind David Glasner, Uneasy Money
  2. Did the Thirty Glorious Years actually exist? Vincent Geloso, NOL
  3. A hidden cost of the War on Drugs Vincent Geloso, NOL
  4. Star Trek did more for the cultural advancement of women than government policies Vincent Geloso, NOL

Institutions, Machines, and Complex Orders (Part 1): Introduction

Countries can change their course, they can turn from stagnation towards growth, as it is the case of South Korea in the last fifty years. They can also decline after a boom period. Together with other examples of successes and failures, these are indications that economic performance does not depend on geography, culture, or the education of ruling elites. Following the line expressed by other authors such as Douglass C. North (Institutions, Institutional Change and Economic Performance, 1990), William Easterly (The Elusive Quest for Growth, 2001) and Daron Acemoglu and James A. Robinson (Why Nations Fail, 2012), it is appropriate to maintain that the economic performance of nations, expressed in their growth, depends on the incentives provided to individuals by institutional frameworks. The incentive systems -that is, the institutions- evolve, and with them the fate of the countries. But to achieve such evolution, there must first be a change in the level of commonly accepted notions about what is right and what is wrong for governments to put into practice. That is, what are the principles that should inform the legislative policy that puts into effect such institutional frameworks to order the expectations of society.

[Editor’s note: This is the first part of a new series. You can find the full essay here.]

Not all GDP measurement errors are greater than zero!

Bryan Caplan is an optimist. He thinks that economists do many errors in estimating GDP (overall well-being). He is right in the sense that we are missing many dimensions of welfare improvements in the last half-century (see here, here and here). These errors in measurements lead us to hold incorrectly pessimistic views (such as those of Robert Gordon). However, Prof. Caplan seems to argue (I may be wrong) that all measurements problems and errors are greater than zero. In other words, they all cut in favor of omitting things. There are no reasons to believe this. Many measurement problems with GDP  data cut the other way – in favor of adding too much (so that the true figures are lower than the reported ones).

Here are two errors of importance (which are in no way exhaustive): household output and adjustments for household size.

Household Output

From the 1910s to the 1940s, married women began to enter moderately the workforce. This trickle became a deluge thereafter. National GDP statistics are really good at capturing the extra output they were hired to produce. However, national GDP statistics cannot net out the production that was foregone: household output.

A married woman in 1940 did produce something: child-rearing, house chores, cooking, allowing the husband to specialize in his work. That output had a value. Once offered the chance to work, married women thought the utility generated from producing “home outputs” was inferior to the utility generated from “market work”. However, the output that is measured is only related to market work. Women entered the labor force and everything they produced was considered a net addition to GDP. In reality, any economist worth his salt is aware that the true improvement in well-being is equal to the increased market output minus the forsaken house output. Thus, in a transition from a “male-labor force” to a “mixed labor force”, you are bound to overestimate output increases.

How big of an issue is this? Well, consider this paper from 1996 in Feminist Economics. In that paper, Barnet Wagman and Nancy Folbre calculate output in both the “household” and “market” sectors. They find that even very small changes in the relative size of these sectors alter growth rates by substantial margins. Another example, which I discussed in this blog post based on articles in the Review of Income and Wealth, is that when you make the adjustment over four decades of available Canadian data, you can find that one quarter of the increase in living standards is eliminated by the proper netting out of the value of non-market output. These are sizable measurement errors that cut in the opposite direction as the one hypothesized by prof. Caplan (and in favor of people like prof. Gordon).

Household Size

Changes in household sizes also create overestimation problems. Larger households have more economies of scale to exploit than smaller households so that an income of $10,000 per capita in a household of six members is superior in purchasing power than an income of $10,000 per capita in a single-person household. If, over time, you move from large households to small households, you will overestimate economic growth. In an article in the Scottish Journal of Political Economy, I showed that making adjustments for household sizes over time yields important changes in growth rates between 1890 and 2000. Notice, in the table below, that GDP per adult equivalent (i.e. GDP per capita adjusted for household size) is massively different than GDP per capita. Indeed, the adjusted growth rates are reduced by close to two-fifths of their original values over the 1945-2000 period and by a third over the 1890 to 2000 period. This is a massive overestimation of actual improvements in well-being.

HouseholdAdjust

A large overestimation

If you assemble these two factors together, I hazard a guess that growth rates would be roughly halved (there is some overlap between the two so that we cannot simply sum them up as errors to correct for – hence my “guess”). This is not negligible. True, there are things that we are not counting as Prof. Caplan notes. We ought to find a way to account for them. However, if they simply wash out the overestimation, the sum of errors may equal zero. If so, those who are pessimistic about the future (and recent past) of economic growth have a pretty sound case. Thus, I find myself unable to share Prof. Caplan’s optimism.

It’s no longer the economy, but we are still stupid

Motivated Reasoning, Public Opinion, and Presidential Approval‘, an interesting new paper forthcoming in the journal Political Behavior (summarized here), by Kathleen M. Donovan, Paul M. Kellstedt, Ellen M. Key, Matthew J. Lebo finds that support for sitting presidents has become increasingly misaligned with national economic expectations. Rather than being a sign of voters realizing that presidents play little role determining economic performance, they attribute this to increased partisan polarization.

I think this is a compelling account. All I would add is a potential causal mechanism. My current favorite dimensions for analyzing democratic trends in the developed world is demography. Voters are ageing. When retired, they tend to have much less direct involvement with the productive economy than when they were working. On average, the elderly are quite rich and living off entitlements they have acquired during their working lives. So they are both less reliant on current economic opportunities and less knowledgeable of them. This means their personal costs of partisanship, relative to good policy, is lower than it used to be. And this is what lets all the culture-war nonsense creep into people’s decision functions.

The nature of the China-US-Vietnam economic triangle

While addressing a joint press conference in Hanoi, after his summit with North Korean Leader Kim Jong Un, US President Donald Trump spoke not just about the Summit, but also the current state of US-China relations. Trump criticised his predecessors for not doing enough to address the trade imbalance with China, while also making the point that he was all for China’s economic progress and growth, but not at the cost of the US.

If one were to look beyond the Summit in terms of the US-Vietnam economic relations, top US companies – Boeing and General Electric – sealed some important deals.

Given the focus of Trump’s visit (which was the Summit with Kim), perhaps these deals did not draw the attention they ought to have. The fact is that the US has begun to recognise Vietnam’s economic potential, as well as its geopolitical significance in Asia. This long note will give a backgrounder to Vietnam’s economic growth story in recent years, highlight some of it’s key strategic relationships, and then examine the nature of the China-US-Vietnam economic triangle.

Vietnam’s growth story: The key reasons Continue reading

Nightcap

  1. The St. Valentine’s Day massacre Evan Bleier, RealClearLife
  2. The Sons of Mars and the ancient Mediterranean Erich Anderson, History Today
  3. The two trilemmas today Branko Milanovic, globalinequality
  4. How the United States reinvented empire Patrick Iber, New Republic