ETHIOPIA : TRADE - new policy directions...

Addis Ababa city view.

According to the economic reform and adjustment programs undergoing in the country, structural and organizational changes, significant both in magnitude and depth are taking place in all the social and economic sectorsof the country. To this effect similar re-organiztion schemes are taking place in the trade sector of the economy. For istance, production wholesale and retail trade activities which were prviously in the hands of the public sector are now being privatized. The following interview was kindly accorded to our magazine by officials of the Ministry of Trade on the present features of the Ethiopian Trade in general and the future policy directions in particular.

Question: What are the long standing problems of domestic and foreign trade?

ANSWER: Ethiopia is among the least developed countries where the economy is primarily agriculture based and quite backward. The rudimentary stage of industrial growth combined with the traditional style of farming force the people to depend on the gifts of nature for their livelihood.

As a result , drought, famine and malnutrition have remained rampant in the country for so long owing to weather and environmental disorders. Furthermore, governement policies have also persistently aggravated the whole economic situation until finally the people were left stranded and helpless.

As in everywhere else, the impact of this national economic disorder has manifested itself in the trade sector also.

With regards to foreign trade, the past regime's economic policy of socialization has brought production, whoesale distribution and retail trade activities under the grip of the bureaucratic control of the government. On the other hand participation of the private sector in the economic activities was highly discouraged and hampered by the government. As a result of this, repeated sharp falls in total output in general and supplies of exportable products in particular were experienced year after year.

Apart from this, lack of technical know how, shortage of agricultural inputs such as fertilizers and improved seed, very poor or no infrastructure on farm sites and natural calamities have contributed a great deal in the decrease of agricultural supplies.

There was also a problem of lack of competitiveness because of poor quality in packaging, design, presentation, etc. and quality of the product itself because of poor technology which arose from the production capacity of the machine in the industrial sector. The root cause of the failure to produce quality products on the other hand is lack of forein currency which should have been obtained from the sale of exportable products both agricultural and industrial which in turn could have been used for the purchase of new machines or for the maintenance and rehabilitation of old ones.

Coffee being the major export, any fall in the international price gives a real shock to the national economy since the bulk of the country's foreign exchange earning comes from it. On top of this the forceful seizure of peasants' exportable out-put by state marketing corporations at very low prices pushed the products underground. These products were either sold at higher domestic prices or smuggled into neigboring countries searching for better prices. This of course had been the real situation which made the problem worse and forced the national economy to stagger heavily.

Finally, facilites like transportation systems and services by institutions like banks, customs office, maritime, standard authority and shipping lines have had significant roles to play either negatively or positively in the foreign trade activity. For all delays and red tapes in any one of these institutions the country has paid so huge a sacrifice in its limited foreign exchange earnings.

Similarly, the sector of domestic trade has encountered many problems mainly arising from inappropriate policy measures.

As ws the case with the foreign trade, the major problem here has also been shortage of consumer goods. The problem of this acute shortage of consumer goods and service was aggravated by the endless war which directly consumed a great portion of it and forcefully detached young and productive peasants and workers form their farm lands and the factories.

Economic mismanagement was another major problem. State monopoly over the wholesale and retail trade corporations led to resource misallocation of both human and material, exhibiting inefficiencies at all levels. This inefficient management proved to be a bottleneck for the proper distribution of goods and services to the people concerned. Not only this, it also gave way to nepotism, bribery, embezzelment and corruption, which spread like a prairie fire in the whole of the nation. The sole beneficiaries of this system were often higher government officials and illegal merchants.

The price policy adopted by the past regime has further exacerbated the problems of the sector. Almost all locally produced consumer good including grain as well as a package of different imported items were price controlled. The past price policy created chronic shortage of goods, parallel markets, higher prices and illegal traders. Since prices given to pesants by the state owned Agricultural MArketing Corporation was very low, production was discouraged and productivity in the agricultural sector was highly reduced.

The past regime generally restricted individuals not to have more than one trade license. Not only this, issuing license in many other trade categories were totally curtailed on the pretext of shortage of supply.

Capital restrictions that hampered the development of private entrepreneurship were also imposed. In addition traders were not allowed to open branches in other areas and movement of license from one place to another was also restricted. These and many other restrictions generally discouraged private investors not to engage themselves in productive business activities.

QUESTION: How did past regimes attempt to solve these problems?

ANSWER: Forced by the wave of revolutionary and Marxist theme of young intellectual groups who rallied for the establishment of people's government, the military junta put itself in power forcefully and claimed to be socialist government.

In the name of socialism, the Dergue regime took the following economic measures as a remedy to all economic and social evils that were perpetrated by the past feudo-bourgeois governemtn. The measures were:

• The land reform adopted in 1976
• The nationalization and socialization of private properties
• Expansion of state and collective farms
• The intensive resettlement programme
• Intensification of the policy of the command economy
• The subsidy scheme

However all of the above proved to be futile and resulted in:

• No private paricipation
• An overwhemlming increase in cost of production
• Shortage of spare parts, accessories, raw materials, etc.
• Shortage of exportable products and thus of foreign exchange earnings.

Although the problem of shortage could have been tackled by increasing production and by importing from abroad, the past regime tried to solve the problem by introducing strict quota and rationing system. To make this practical, the government tried to have full control of wholesale and retail outlets of the scarce goods and services which instead gave way to corruption and embezzlement.

In order to streamline domestic trade activities along with socialist principles, the past regime strngthened its hold of the economic activity through price control. As a result all locally produced goods including grain imported petroleum and petroleum products, spare parts, pharmaceuticals, grocery items etc. were kept under price control.

QUESTION: Could you explain to us by citing specific examples the failure of the Dergue regime in applying the policies of diversification, import substitution, price stability, quality control etc.

ANSWER: Diversification is a process by which a country introduces new products which may or may not be related to the present product. The introduction of this new product could either be to an already existing market or to a new one. With this regard, nothing has been done by the government of the Dergue regime. The command economy neither had a clear cut trade policy to this effect nor was it conducive for the private business communicty to diversify their products.

Import substitution is the protection and stimulus of domestic industries to replace imported manufactured goods in the local market.

No significant performance has been displayed with regard to this particular strategy. This can be attributed to defferent reasons. In the first place since private investment was discouraged there were no foreign investors who usually undertake such ventures for possible tariff protection. Secondly subsidies for the importation of capital goods could be expected from the government whose national economy on the other hand was war torn.

• PRICE STABILITY: - Although whether they served their purpose or not stand to question, AMC, EDDC, ERTC and ETHOF were established as price stabilizers. The scarce goods were assumed to be distributed fairly to different regions by these institutions through the kebele shops and peasant consumer cooperatives. However, the distribution mechanisms did not allow to fulfill the basic objectives of these corporations. Instead dthe goods were passed into the hands of illegal merchants where they sold at exorbitant prices.

  On the other hand price stabilization through price control also proved to be fake. In effect, black market activities by hoarding scarce goods flourished to a great extent. Peasants also avoided selling their agricultural produces to government organizations like AMC and ECMC since they get better offers for their products elsewhere.

• QUALITY CONTROL : - As a matter of ptinciple quality control for marketable commodities is a prerequisite so that the products could meeet the required local or international standards. However, in a centrally planned economy where production targets and quotas were ambitiously set by people who resided far from the production sites and who thus were ignorant of production capacities of organizations, it would be difficult to talk about quality. This happened to be so because the primary concern of the people in the production sites was rather to meet the required quota reagrdless of the quality of the product since their evaluation by the authorities depended on the quantity and not on the quality of the product.

• MARKETING : - One among many of the definitions of the term, "Marketing is the process of determining consumer demand nfor a product or service, motivating its sale and distributing it into ultimate consumption at a profit. In this strict sense of the word, the past regime has had many problems of marketing as the name implies, goods and services were not marketed, rather, they used to be distributed by government organizations like EDDC. Since there was scarcity og goods, it was thought that the demand for any commodity anywhere in the country was believed to be unquestionable and therefore making market studies was seen unnecessary. Unfortunately, however, there was a case at one time where the EDDC tried to distribute blankets in Gambela and salt in Assab from its Addis Ababa central store. This of course nwas a result of poor marketing where market research was not made.

• EXPORT PROMOTION : - Unless a country exports, it won't have the foreign currency to import necessary materials, equipment and relevant technology it needs for development and to clear its deficits in its balance of payments. To meet all these demands, export promotion which is stimulation of a country's export should be undertaken by the government. Government should allocate the necessary budget to conduct workshops, advertising activities and participate in trade fairs and other promotional activities. The past regime, however was very stringent in all these.

QUESTION : What are the new policy directions of the Transitional Government of Ethiopia?

ANSWER : As indicated in the New Economic Policy the new directions involve:

• Gradual withdrawal of the state from wholesale trade activity.
• Paving the way for domestic private capital to involve in wholesale trade, the state will limit itself to issue and enforce laws and policies to regulate private wholesale trade practices.
• The sate may engage itself in the wholesale trade of basic goods of mass consumption to stabilze prices.
• The state will pull out from the retail trade activity and create the necessary conditions for private capital and cooperatives to freely engage themselves in such activities.
• In the retail trade activity, the major concern of the state will be to issue appropriate regulation and directives and enforce them.
• The state facilitates all conditions top foster the participation of private capital both individually or through partnerships. The state may also participate in limited areas jointly with domestic or foreign investors.
• Foreign trade activities will be left to private capitalists except those which require special consideration and those areas will be studied and defined by law. In addition to this the state will regulate foreign trade by issuing foreign exchange and import-export regulations.
• Foreign trade will be promoted by providing fiscal incentives to exporters and eport oriented undertakings. Attempts will also be made to minimize bureaucratic procedures and trade information will be provided.
• The state will ensure the prudent utilization and allocation of forein exchange and help diversify exports do that foreign currency shortage will be eased.

QUESTION : Could you explain to us by citing specific examples how the basic principles of government policy in the trade sector are being into deeds?

ANSWER : - Forced purchase of agricultural products at very low fixed prices by AMC has come to an end. This act helped peasants to sell their output for the highest bidder in the free market.

• The preonderant role of ECMC is reduced through the re-establishment of the participation of private traders at the coffee auctions under the free auction system.
• It is assumed that the devaluation has enabled the realization of the realistic exchange rate of the Ethiopian Birr.
• With the view to increase the flow of imported goods and ease domestic supply situations, the franco-valuta system has been reintroduced.
• Financial incentives through tax rebates, offsetting import controls, reform of adminiostrative procedures and establishment of relevant institutions and institutional supports are some of the practical deeds.

QUESTION : What policy instruments have been adopted up to now to bring about reforms in the trade sector? What are the main areas of concern which proclamations, regulations and directives issued up to now have tried to concentrate upon?

ANSWER : The Transitional Government of Ethiopia has issued Ethiopia's economic policy for the transitional period. Among other things the policy has got a part that deals with the trade sector.

Except very few, almost all legal instruments Proclamations and regulations/which the trade sector bases its activities were issued during the past regimes. However, a new investment proclamation has been issued by the Transitional Government which made the formation of business organizations (share companies, private limited companies, etc.) possible as per the commercial code of Ethiopia - a right which was denied during the Dergue regime. Besides, there are also directives issued which lifted the restrictions on the engagement of a person in more than one trade, capital ceiling and the prohibition of some trades to be done by individuals. The requirement that a person was expected to have a experience and knowledge in foreign trade to get license, the issuance of foreign trade license by a committee, the protection of government monopoly with respect to some items in foreign trade have been similarly cancelled.

Apart from this, the transitional government has issued sales and excise tax proclamation to establish export trade duty incentive scheme to facilitate and promote the trade activities.

QUESTION : Could you explain to us the steps that are being taken and will be taken in the future so that a transition from a command to a market-economy could be effected?

ANSWER : Currently wholesale and retail trade organizations are allowed to work autonomously on the basis of profitability. Later on the government will gradually pull out of this sort of activities giving way to private capital. To facilitate the privatization process, trade licensing is fully decentralized. as it is clearly stated in the economic policy, the government is gradually withdrawing from wholesale and retail trade activities to be gradually replaced by private capitalists. Not only this, the government is issuing proclamations and opening instituitons to facilitate and create fertile ground for the privatiozation process both in the fields of domestic and foreign trade.

Other major steps are also being taken to curb price increase and reduce inflation. However, to tackle the root cause of inflation, production should increase to such an extent where there is enough supply of goods and services in the market. This problem of shortage of supplies of goods and services will be better accomplised with the participation of private capital and cooperatives in the production process. Inflation could be overcome not only by increasing production but also by reducing cost of production through efficiency.

When shortage is overcome with the full participation of private capital in the production process, marketing in the true sense of the word will be praticed. Then, the prevailing sellers market will be changed into buyers market and as a result a competitive market economy could be attained where proper marketing skills will be exhibited.

QUESTION : What eare the prospects of economic integration within Wthiopia and outside Ethiopia (for example, the PTA)?

ANSWER : Nowadays, economic integration for African countries is not a matter of choice. Rather, it has become a matter of necessity to meet the challenges posed by the emerging world of trading blocks. To this effect, not only signing sub regional treaties and trade agreements like the PTA, biut also the creation of a Pan-African Economic Community is deemed to be paramount importance. Hence, the Abuja Treaty is adopted in 1991 by the OAU member states to create a Pan-African Economic Community which will be realized in the year 2025. If not more, the same logic applies to the prospect of economic integration within Ethiopia.

QUESTION : What are the structural changes currently underway at present in the trade sector?

ANSWER : -Most locally produced goods, grain and imported items are not subjecy to price control.

• Wholesale and retail trade organizations have become more or less autonomous to work competivtively on hte basis of profitability.
• Restrictions on wholesale and retail trade licensing are cancelled.
• Minimum prices for coffee, sesame and bean are fixed and guaranteed.
• Sales and Excise Tax Proclamation and Proclamation to Establish Export Trade Duty Incentive Scheme are issued to ease froreign trade activities.
• The Investment Decree liberalizes restrictions for private investors.

QUESTION : What is the overall picture of domestic and foreign trade in the light of changing world economic environment, i.e. rising prices of basic commodities such as oil or increasing cost of transport?

ANSWER : Being an integral part of the worl economic system, price fluctuations and other ups and downs in the supply of commodities like oil will directly or indirectly affect our national economy.

Since we export only limited range of primary products and import oil, high valued capital goods, spare parts, fertilizers, pharmaceuticals etc., our foreign exchange earning will be apped by importing these commodities. This becomes more serious since we pay more birr for our imports after the devaluation than before.

QUESTION : In what ways are problems related to transportation and port services being overcome to bring out a smooth flow for goods and services?

ANSWER : According to the new economic policy, the Transitional Governement of Ethiopia has committed itself to liberaliza the transport activity by cancelling the regulatory and operational functions of the state.

Too this effect, Proclamation No. 14/1992 has been issued and a new tariff system has also been introduced. Among other things, the proclamation entitles the private sector to join the transport industry and also guaranteee them to form associations.

Deregulating the transport industry, the Transitional Government has signed agreements with international organization like the World Bank to facilitate the transport sector. Likewise, organizations like the Ethiopian Relief and Rehabilitation Programme also help private entreneurs to acquire foreign exchange so that they can join and ease the transport service industry.

The provision of port services depends on the friendly relationship of Ethiopia with Eritrea. This on the other hand, has manifested itself in the mutual economic agreement signrd by the two countries.

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