5:16 pm - Thursday May 24, 2407

Don’t Privatize Ethiopian Airlines [By Worku Aberra (PhD)]

Don’t Privatize Ethiopian Airlines

(Part I)

[By Worku Aberra (PhD)]

In a stunning announcement, Dr. Abiy Ahmed disclosed on June 5 that the Executive of the EPRDF has decided to privatize some of the largest state-owned enterprises (SOE) in Ethiopia. The SOEs targeted for partial privatization include the Ethiopian Airlines (EAL), the Ethiopian Electric Power Corporation (EEPC), the Ethiopian Shipping & Logistics Service Enterprise, the Railway Corporation, and Ethio Telecom. Domestic and foreign investors will become minority share holders in these firms, although how much they will own has not yet been determined. In the past, foreigners were prohibited from investing in the transportation, aviation, telecommunication, and electricity sectors. The decision is a dramatic reversal of that policy.

I support most of what Dr. Abiy has done so far. In just three months, he has achieved a great deal in promoting national unity, creating the conditions for democratic transition, and addressing some of the injustices committed over the last 27 years. His achievements in such short time are truly remarkable, but I disagree with the decision to privatize these firms. I will present my arguments in three parts.

The decision to privatize the SOEs is wrong on two levels: in form and in substance. Procedurally, a major decision such as this should be made after consulting the public. The Executive of the EPRDF should not decide crucial issues on behalf of Ethiopians without any public consultation. The Prime Minister has stated on many occasions that he is committed to democracy, and I have no reason to doubt his sincerity. The hallmark of democracy, however, is public consultation on important issues. A handful of individuals making critical decisions that will affect Ethiopia’s economy for generations to come is certainly undemocratic. At least the issue should have been debated in parliament, which has become more assertive these days. The decision is autocratic.

Dr. Abiy says that the decision was made on the basis of a study that recommended privatization, but since the study has not been released to the public, the public is unaware of its findings. Who conducted the study?  What assumptions did the study make? Which data were used in the study? Any economic research worthy of its name, always assesses the costs and benefits of its recommendations. What are the economic, social, and political costs and benefits of privatization that the study has identified? We don’t know. Researchers recommending policy changes are not always disinterested analysts. They usually have an axe to grind.

The Prime Minister is asking Ethiopians to accept the EPRDF’s decision to privatize at face value. Given the EPRDF’s past transgressions, wrongdoings, blunders (signing the Algiers Agreement), Ethiopians have every reason to be skeptical of this decision.

The economic arguments for privatizing these firms are either weak or non-existent. Part of the problem with the arguments supporting privatization is that they lump all of the SOEs together, without any distinction; for example, the big, efficient, and profitable EAL is up for sale along with the small, inefficient, money-losing, corruption-ridden sugar plants.

Not all SOEs have identical characteristics. There are significant differences in the efficiency, profitability, international status, the capacity to generate foreign exchange, contribution to economic growth, and the social objectives of the SOEs slated for privatization. The EPRDF’s decision is a blanket decision, most probably in response to pressure from domestic and Western interests.  

The IMF, the World Bank, and some Western governments have been pressuring the Ethiopian government for many years to introduce market-friendly policies, known as structural adjustment policies (SAP) that have been prescribed to all developing countries. The one-size-fits-all SAP includes trade liberalization, devaluation of currencies, removal of subsidies, privatization of SOEs, and tight macroeconomic policies. Critics point out that countries which have faithfully implemented SAP have not enjoyed the benefits that SAP were supposed to deliver. In fact, in some cases, SAP have had disastrous consequences, for example, the privatization of water in Bolivia in the late 1990s.  

In his announcement, the Prime Minister explicitly and implicitly outlined the following broad economic reasons in support of privatization: creating jobs, generating revenue, transferring technology, reducing foreign currency shortages, promoting economic efficiency, decreasing the drag on economic growth, and signalling Ethiopia’s openness to a free market.   None of these arguments, when examined closely, are persuasive. Let’s examine each of these claims.

Selling shares in existing firms, equity ownership, does not create employment. On the contrary, privatization often results in unemployment because profitability overcrowds social and national objectives. Socially, there are circumstances in which creating employment is more important than the bottom line, for example employing individuals with physical or mental disabilities.  Under privatization, to attract investors, firms have to raise profitability by reducing costs. The most important cost of production for any firm is labour costs, wages. Therefore, the privatized SOEs will most likely lay off workers in the short run. In the long run, whether employment by these firms increases or not has nothing to do with privatization; it all depends on the market conditions facing the firm, including the macroeconomic conditions in Ethiopia.

Worku Aberra (PhD) is a professor of economics, in Montreal, Canada.

Filed in: Articles & Opinions