In our current series on job creation strategies – titled “Towards Sustainable Job Creation in Iraq“, we have been particularly keen to speak with economists and development experts who are not focused on Iraq, to gain a wider insight into historic development successes and failures.
For the third instalment, we were delighted to hear the views of World Economic Forum contributor and scholar of economic history Professor Ewout Frankema. In recent years, Frankema has focused strongly on African development, so we were keen to discuss Ethiopia, a country now in the spotlight due to the government’s industrialization strategy, which explicitly focuses on job creation.
Frankema has studied History, Economics and Philosophy at the University of Groningen, where he obtained his PhD in Economics in 2008. He has taught a broad range of courses in history, economics and development studies at the University of Groningen, Utrecht University, Wageningen University, and offered guest lectures at universities in Uruguay, Uganda, Benin, Spain, Sweden and the UK.
How important is the role of the state as a driver for economic development?
EF: When we look at the government’s role in economic development, particularly in poor countries such as Ethiopia, I very much believe in state intervention. We must not forget when comparing industrialization and development strategies, as a country comparison, Ethiopia is a lot poorer than Iraq, which is classed as a middle-income country.
So, I am not part of the camp that says liberalise everything and economic development will naturally follow. Historically (and I am a historian by training) there are a great many examples that show us time and again, sustained economic growth needed for job creation, economic diversification and poverty reduction, particularly in the developing world, is only brought about when the state gets its act together.
So state economic policy is extremely important. It is key, I think. I do not know of any country, except perhaps a small city-state, which has said: “let’s make sure the markets work and the rest will follow.” It does not work this way. And the reason for this is that most countries who aspire to economic growth need to catch up in terms of technology and administrative capacity, with wealthier parts of the world.
This does not mean just catching up with the industrialized West. We also have to think about more developed developing countries in which countries like Ethiopia are competing with in the world market. So if you want to close that gap, state intervention at various levels in society is crucial. The East Asian miracle is entirely predicated on that idea. In terms of the government’s role, most of the growth in Latin America during the 20th century was also during a phase of import substitution industrialization which represented a very heavy hand on the economy.
Furthermore, the implications of the liberalization period in Africa during the Washington Consensus and the structural adjustment programs in the 80s and 90s have not done much except for making sure the debt crisis was relieved in Africa. But this was not a model to sustain growth in the long run, and we are seeing this in most African countries. Ethiopia seems to be an exception on that path, but is still extremely vulnerable to world market shocks, so they have not yet arrived at a position of stability.
What do you think of the commonly agreed principle that development efforts should be “locally owned” rather than driven by central government departments?
EF: We are overshooting with this whole idea that development is a grassroots phenomenon. I would never argue that the money spent on local level programs is a waste of money. I do think that it can help to combat the worst forms of poverty, and it can also help at the local level to improve administrative capacity. But ultimately, job creation is a macroeconomic process.
You don’t create a lot of jobs by intervening in villages or even providing microcredit. These have to be programmed at the national level. Again, the East Asian miracle is showing us you need to combine your efforts on a local level with a very centralized vision of where you want to steer the economy. It is an industrial policy that is nationwide. That promotes a number of sectors that you want to make leading in your economy. And that is where real diversification and job creation comes from, not at the micro-level. You can do other things there that can be very good for schooling or for social welfare programs which need to be at the local level, but to achieve sustained economic growth, which will ultimately lead to sustained poverty reduction, you need a macro approach.
How do you view the growing interest in megaprojects as drivers of job creation in developing countries, particularly the Chinese “belt and road” projects – has China developed a reproducible model here?
EF: It may be not so sound from a democratic point of view because it leads the state to intervene in certain property rights and relations, which many Ethiopians on the ground have problems with. But if you want to enforce growth in such a poor country, then often these strategies work best.
So, there is a tension between what you will ideally do from a social, political or democratic perspective and what you would ideally do in terms of economic planning. These strategies are always risky, you never know what the outcomes will be but that is not an excuse not go ahead with it. To what extent the involvement of China is beneficial or a disadvantageous I find very hard to assess but there are at least two reflections to consider.
The first is that the Chinese have the technological and knowledge capacity to make projects work. So in that sense, China is a good partner. At the same time, they are bringing in a lot of human resources to fill in jobs which may be filled in by Ethiopians or Iraqis as well. In terms of job creation, it is not very desirable to have the Chinese do all the work for you if so many people are entering the job market. So there is a distinction between the use of technology and the knowledge you need to make this work.
The labour that you need can be provided by the local population as well. What has always struck me as strange with the deals made between China and many African regimes is that they have had no problem with tens of thousands of Chinese workers labouring in economies with vast unemployment or underemployment rates. That does not make sense to me.
We often forget that economic development is a long-run process. You do not create vibrant economies overnight. The West has risen in the timeframe of about two to three centuries. So the school example of a country where you could say that poverty reduction has occurred extremely fast, with unprecedented rates of growth is of course China.
But China may well be an exception. I don’t think there are any other countries in the world that could adopt a China type of economic ascent, for the very reason that most of these countries do not have the same state capacity and they also do not possess a population that is willing to take on so much from a very autocratic state, so to speak. In China, the state tells you that when they are planning to build a road somewhere, you have to leave your house. And while there is a lot of discontents, people with few exceptions accept their fate. If you aspire to economic growth, you will have to think in terms of many decades, not just a few years. That’s what history is showing us.
The past few years have seen huge excitement regarding the potential for new technology in development. Are you optimistic and if so, what limitations need to be considered?
EF: The rise of mobile and internet penetration, in addition to decentralized energy, is I think the most important development that can make people very optimistic, so not only telecoms but also solar energy. New technology for electrification and connecting communities is improving the lives of countless people, beyond recognition. If you go back to 1990, only 30 years ago, perhaps only 2% of Africans even had a telephone connection, they were unable to communicate with family members hundreds of kilometres apart.
Now, these communities are connected, often at very low cost. So in terms of economic potential, being so much better connected and having access to certain types of knowledge via the internet, that potential is very hard to underestimate. The same goes for solar energy and the potential to bring electricity to places where people need it so you don’t have to wait for the government to install connections, you just put the panel on your roof. So in that respect, it’s making a huge difference in the lives of many Africans.
This does not mean this will automatically become a job generator. It can facilitate all sorts of processes on the ground in terms of proto-industrial development, people starting up small manufacturing businesses which do not compete with import commodities or small services. But in the end, there are very competitive markets with a lot of players offering services that do not immediately make them rich or provide them with an income. You need more to have that compounding effect, a bigger enabling environment.
In the Middle East and Africa, security forces have often gained an overbearing influence in the political economy of a country. What economic risks arise from such power struggles?
EF: There are many examples from Africa and the Middle East where the army, particularly in undemocratic regimes, controls a substantial percentage of economic activity and needs to be aligned with the regime. Otherwise, the regime is on a very unstable footing. So that becomes the logic of the political economy in those states, the regime and the army are intrinsically connected. Of course, that is not going to help any national development strategy. In principle, an army needs to be controlled by a parliament.
For any chance to mitigate this problem, what governments can do is select a number of industries that they can put their cards on and potentially, this can come with tariff policies in order to shield domestic markets. But that always comes at a cost and you need to do that smartly. But that is what they should do, to get away from the political side of the story.
As long as your economic policy is dictated by the power struggle that regimes need to stay in power, for example making sure the security forces are satisfied to reduce the risk of a coup, as long as economic policy is dictated by the question of power, then there is not a lot that one can do. Because a lot of the public resources, particularly public revenue, will go into security expenses, at the expense of education, health, electricity, all those things that are essential for job creation in the long run.
Opinions expressed in this interview represent those of the interviewee. They do not represent the views of Iraq Energy Institute (IEI), its members, fellows, and staff.