Ethiopia: Five-year dev't plan bears questionable forecast

Ethiopia: Five-year dev't plan bears questionable forecast

By Tesfaye Kidane | August 19, 2010

Source: nazret.com

The government of Ethiopia once again disclosed the draft of its macroeconomic plans and growth projections, dubbed Growth and Transformation Plan, for the coming five years, to start implementation in 2010/11.

In line with its image of the country as a “developmental state,” the government’s plan seems to have been developed with a heavy state hand where the targets are as ambitious as they could ever get. The grandiosity of the plan is perplexing, necessitating critical appraisal on the realism of the planned targets.

The plan envisages, among other things, a minimum gross domestic product (GDP) growth rate of 11pc, doubling agricultural output, fulfillment of all the millennium development goals (MDGs) by 2015, massive infrastructural development, and significant growth in textile exports.

The question is, are these targets achievable?

The track record of this administration in realising its target of the previous five years, set under the Plan for Accelerated and Sustained Development to End Poverty (PASDEP), which came to a close this year, applies.

The conclusion is that the administration failed in achieving its targets significantly as the actual gains were way below their targets. The cereal yield target for 2009/10 was 34.8 quintals per hectare while the actual yield was only 16.8, an achievement rate of 48pc, less than half of the target. The same is true for revenues from taxes, public expenditure, export revenues, gross domestic savings, and inflation targets.

It is important to note that forecast errors (missed targets) are not anomalies in the forecasting world. However, the systematic nature of forecast errors, where the targets are always above the actual, indicate some fundamental flaws in the forecasting framework and the related assumptions.

The systematic forecast errors may be due to three factors: The targets are not realistic; the government does not have the capacity to execute its plans; and the combination of the two. Given the government’s dismal track record in achieving its planned targets, and unless the fundamental sources of the errors are addressed, the targets in the new plan will remain farfetched promises.

Realistic forecasts are mostly the result of empirical macroeconomic models that are estimated based on reasonably accurate data to fairly characterise the structure, interaction, and institutional details of an economy. Forecasts from such models are augmented by expert opinions to account for factors that are not captured in the macroeconomic model.

Realistic forecasts require the necessary tools - macroeconomic model, reasonably accurate data, and qualified experts capable of operating them. Unfortunately, the Ministry of Finance and Economic Development (MoFED), responsible for drafting the plan, does not seem to have qualified experts nor the necessary tools to produce realistic forecasts. It is thus highly probable, if not certain, that the forecasted targets are quite unrealistic.
Performance of some of the goals of the government's five-year plan. In all cases, the actual performance came in shorter than the targeted amount.

The accuracy of the existing data on different economic variables, such as agricultural productivity, is questionable. The long quotation below from Dercon, Hill and Zeitin’s study, “In Search of a Strategy: Rethinking Agriculture-led Growth in Ethiopia,” published in 2009, illustrates the data problem very well:

“The figures on recent agricultural performance are impressive: doubling of cereal output in the last 10 years, 44pc more land cultivated with cereals, and 40pc higher yield in the same period,” write the analysts. “The last five years [saw] 12pc more cereal production per year, yield growth of six per cent per year, and area growth of five per cent per year. The same data sources show no evidence of intensification of agriculture: no increase in fertiliser use per farmer or per hectare, no significantly more irrigation, and expanding but still relatively small areas under extension programmes.”

“Ethiopian yields have grown faster than recorded elsewhere, even compared to the green revolution in India, China, or Vietnam,” they said. “If the data are correct, this is the fastest green revolution in history, and its mechanisms should be analysed. If any of the data, such as the area expansion data, are not correct, this has huge implications for policy, as it would suggest that food production is considerably lower than reported.”

Poor data quality is a common feature in most of the developing world. A recent study by Morten Jerven showed that, in the case of Africa, “estimates of an annual growth rate of three per cent may be consistent with a reality between zero and six per cent growth” due to the poor quality of data.

This has serious adverse implications for the reliability of any economic plan as it is based on an inaccurate assessment of the initial conditions and facts.

Assuming that the forecasts are based on the appropriate estimated model using accurate data and are therefore as realistic as possible, the appropriate question would be whether the government has the capacity to execute its plans.

The plan is in line with the government’s “developmental state” ideology. It is widely documented in the literature that skilled manpower and efficient government bureaucracy are the main components for the success of a developmental state agenda. The case of Japan is a very illustrative example.

The success of the Japanese developmental model is mainly due to their attraction of the best and the brightest minds to the civil service; being a civil servant is prestigious and also pays higher than most of the alternatives. The highly skilled and well compensated civil servants led to the creation and maintenance of efficient government bureaucracy that facilitates the effective implementation of the developmental state agenda.

In contrast, Ethiopia’s civil service is neither a place of excellence and prestige, nor does it pay a competitive salary. Rather than attracting the best and the brightest, it attracts largely the mediocre.

The current civil service incentive structure is a perfect recipe to build inefficient government bureaucracy and breed corrupt civil servants. The developmental state agenda would exacerbate this situation further as more public money is to be exposed to corruption following the financing of huge public investment projects. The overall evidence indicates the lack of efficient bureaucracy in Ethiopia, which in turn implies the government’s lack of capacity to implement its plan.

The targets are unrealistic and the government has limited implementation capacity, a scenario that most reasonably characterises the Ethiopian case. Under such conditions, a plan is no more than a well crafted wish list. “Dreaming while wide awake” describes this plan quite well.

Implementing such a plan would have dire consequences as it may result in many macroeconomic imbalances that could cause runaway inflation, rising public debt, and high future taxes. This is a déjà vu scenario as it is similar to what happened during the PASDEP period in which the country faced runaway inflation that led to the restriction of credit to the private sector and its undesirable impact on investment and employment.

Going along with the implementation of this unrealistic plan under conditions where the government’s bureaucratic capacity is limited, would simply be repeating the mistakes that led to the economic malaise in the PASDEP period while wishing everything to work out as desired. As the saying goes, “We are locked into a cycle of repeating the same thing over and over again, expecting different results.” This is commonly known as the definition of insanity.

It is not too late to address these hurdles and come up with a sound plan. However, it requires the government to retool its planning machinery, reassess the accuracy of data at hand, and strengthen its implementation capacity in terms of the efficiency of its bureaucracy.

An optimist would hope that these issues are addressed during the consultative meetings with the public and donors. It is also hoped that the government would deal with the fundamental flaws of the plan in good faith, for failing to do so would result in dire consequences that Ethiopian society cannot afford to bear.