Bereket Gebru 12-19-16
The World Bank and IMF are two of the biggest international monetary institutions in the world. These monetary institutions established at Bretton Woods, New Hampshire, USA in 1944 are run by the riches countries in the world. With the current international system favoring developed countries in trade and other relations, these two institutions are used by the rich as controlling tools.
Despite the changing landscape of economic relations between states, these institutions are known for recommending the same things for all states throughout their existence. Different problems in different states are treated with the same remedy by these institutions. The Bretton Woods Project website states: “the World Bank and the IMF often attach loan conditionalities based on what is termed the ‘Washington Consensus’, focusing on liberalization—of trade, investment and the financial sector—, deregulation and privatization of nationalized industries. Often the conditionalities are attached without due regard for the borrower countries’ individual circumstances and the prescriptive recommendations by the World Bank and IMF fail to resolve the economic problems within the countries.” Another one of these recommendations is the devaluation of currency for non-export based developing countries.
A couple of months ago, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Ethiopia. In that report, the international monetary institution recommended opening up markets for foreign investors, export promotion, privatization and devaluation of currency to further strengthen Ethiopia’s economic growth. Everybody who knows a few things about the IMF could see those recommendations coming.
Recently the World Bank came up with the 5th Ethiopia Economic Update “Why so idle? Wages and employment in a crowded labor market.” Despite the focus on the labor market in the report title, it covered various aspects of the economy. Most notably, the economic update states that strong economic growth continued in 2014/15, but the drought slowed down Ethiopia’s growth to 8 percent in 2015/16. The report uploads Ethiopia’s sustained strong economic growth in the face of the worst drought in fifty years.
A decade of remarkable double digit growth rates helped the economy to cope well with the most recent challenges encountered in 2015/16. In fact, the ability to keep growth positive is a remarkable achievement for the Government. In similar occasions in the past, for instance in 1997/98 and 2002/03 the country has experienced negative GDP growth. In 1998 growth dropped to -3.5 percent from 3 percent in the previous year. Similarly, in 2003 it dropped to -2.2 percent from 1.5 percent previous year. Medium-term economic growth can be unaffected from the drought since the rains set in normally again in 2016/17.
The report focused on investment, promotion of exports and adjusting the overvalued birr as important measures to make the labor market more effective. Although the customary call for more foreign investment is snubbed in this report, the general emphasis on the need for investment is overwhelming. Four of the five policy recommendations put forward by the bank to enhance urban labor markets deal with investment. The four policy recommendations of encouraging firm creation and growth, investing further in job training, investing in skills of low-skilled employees and enhancing the use of ICT are all associated with investment.
The report states that goods exports were disappointing again in 2014/15 on account of both volume and price effects while volume increase in 2015/16 did not help lower export earnings. Exports thereby continue their downward trend seen over the last three years. Exports have had their worst performance in the last decade and the current account balance remained large. The chronic current account deficit (including official transfers) continued to deteriorate in 2015/16. The deficit reached 10.4 percent of GDP in 2015/16 improved slightly from 11.5 percent in 2014/15. This was caused by the large imbalance in import and export of goods and services, which has reached to 19.8 percent of GDP. Goods exports were disappointing due to both volume and price effects in 2014/15 – but a slight pickup in volumes again in 2015/16 – and an appreciating real (effective) exchange rate. The downward trend in exports now continues over the last four years. Export of goods dropped by 3.7 percent in 2015/16.
The decrease in exports over the past three years has been considered as a negative development by the Ethiopian government as well. The shift from export of raw materials to semi-processed goods could have a positive effect in breaking this negative trend and help balance the balance of trade.
The part that deals with devaluating currency has also used some different expressions this time around despite the message staying the same. Accordingly, the report states that the overvalued real effective exchange rate contributes to the weak export performance. “The real effective exchange rate (REER) has appreciated in cumulative terms by 84 percent since the nominal devaluation in October 2010. However, the speed of appreciation has slowed down over the past 6 months. While the appreciation between July and August 2015 was 24 percent (y/y), this has slowed to 8 percent in June 2016 (i.e. slowdown in the rate of appreciation). This is primarily the work of two factors: first, a relative decline in the rate of domestic inflation, and second, the depreciation of the U.S. dollar relative to other currencies since January 2016. Since the Birr is pegged against the U.S. dollar the Birr also remained appreciated against other currencies. Still, the Birr remains overvalued, which is hurting international competitiveness. An overvalued currency does not help to improve export competitiveness and is a concern for the economy, especially with exports falling for three consecutive years.”
Despite the insistence of the World Bank that currency devaluation would help the Ethiopian economy become more competitive in the international system, Ethiopian economics scholars have repeatedly stated that the results would rather have an adverse effect. Considering the social and economic impacts of policies recommended by the World Bank have been detrimental in some cases, sticking to our own experts sounds like a better idea. After all, the World Bank and the IMF have the interests of their rich backers at heart. With these policy recommendations becoming clichés over time, states need to collectively challenge the World Bank and IMF to change their approaches from now on.