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: Let me first say that when comparing industrialization and development strategies across countries, initial conditions matter. Ethiopia is a lot poorer than Iraq, which is classed as a middle-income country, and it has no oil-revenues. 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, but of a different kind than you would need in economies with more resources.
I am not part of the camp that promotes liberalisation and believes that markets will do all the work for you. I am a historian by training and if you look back into the 19th and 20th centuries, you will find a great many examples showing that sustained economic growth, which is needed for job creation, economic diversification and poverty reduction, particularly in the developing world, is only brought about when central or national states get their act together.
State policy is crucial because poor economies are poor for a reason. There is a need for central coordination because a lot of conditions have to be simultaneously fulfilled for sustained growth. You can think of minimum quality standards in public supplies of schooling, health and infrastructure, as well as the facilities to adopt and adapt to technologies imported from elsewhere. Access to financial services, including banking and insurance, and guaranteeing protection and fair trade in property rights is another important condition. As poor countries will have to catch-up with wealthier and often more competitive economies, the capacity of governments to administer and coordinate economic development is also crucial if you want to develop export industries that are not based on some sort of resource-monopoly, such as oil.
Catching-up does not mean reaching welfare levels of the industrialized West. One first has to think about catching-up with more developed developing countries, which countries like Ethiopia are competing with in world markets. This may very well involve a phase of protectionist policies, or so-called import-substitution industrialization. The East Asian miracle was 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, in which the state had a heavy hand on the economy.
The liberalization period in Africa during the Washington Consensus and the structural adjustment programs in the 80s and 90s were a mixed blessing. They eventually made sure that the debt crisis was relieved in Africa. But they did not help to improve many other conditions needed for sustained growth. In fact, external debt positions have been on the rise in the past decade, leading to increasing worries that a similar crisis may depress African economies in the 2020s. Ethiopia seems to be one of the few exceptions, recording sustained rates of growth over the past two decades which are not based on volatile primary commodity export revenues. But politically, the country still faces a lot of instability.
What do you think of the commonly agreed principle that development efforts should be “locally owned” rather than driven by central government departments?
EF: If ‘local’ means developed and coordinated by ‘national’ governments, instead of imposed by foreign institutes, I would definitely agree. But if ‘local’ refers to development as a grassroots phenomenon, starting at the community level, I disagree. I would never argue that money spent on community based programs is necessarily wasted, I do think such small scale initiatives can help to combat various forms of poverty, but for sustained growth coordination at national, or even supra-national levels is more important. Job creation is a macroeconomic process. You don’t create a lot of jobs by setting up programs at the village level or even by providing microcredit: if all people are going to open up the same shops with the money, it creates a race to the bottom. Job creation based on economic diversification requires a long-term centrally coordinated investment policies in education, infrastructure, and specialized services which can facilitate infant industries to grow into a maturity. This is a long-term process and requires perspiration, consistency in policy and politicians who can lower expectations of short-term gains and get people to believe in long-term transitions.
The East Asian miracle shows you need to combine your efforts on a local level with a very centralized vision of where you want to steer the economy. Their agricultural and industrial policies were nationwide. There were also clear ideas of coordinating rural-urban migration, price interventions and related welfare consequences for different socio-economic groups in society. And very important as well, a lot of the early surpluses generated by economic growth were saved and reinvested, rather than consumed on luxury import commodities that would not reproduce income and jobs.
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: This is a difficult issue, as you would have to look at these projects case by case. In general, such mega-projects come at the cost of democratic rights. For it to work the state will often have to intervene in local property rights (land in particular), forced migration of rural populations and so forth. Many Ethiopians I have spoken to in recent years have problems with the way the government alienates land from farmers and uproots local communities. In this disrespect for individual property and basic human freedoms, the Ethiopian policies do have something in common with Chinese development policies. Such strategies may actually enhance economic growth, but the better to ask is whether they are a necessary condition, and I don’t think this is the case.
That said, there is absolutely 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. 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 to make projects work. So in that sense, China is a good partner for Ethiopia. At the same time, they are bringing in a lot of human resources to fill in jobs which may be filled in by Ethiopians 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. Another question is: do Chinese companies transfer knowledge and technology in transparent and non-exclusionary ways, or are they building up a relationship of permanent dependency, also in financial terms?
Most of the labour that you need to develop large infrastructural projects can be provided by the local population. 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.
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 solar energy supplies does make people very optimistic. It really improves the quality of life for many people and is instrumental in alleviating the side-effects of poverty: i.e. social isolation, lack of access to information and basic electric equipment. If you go back to 1990, only 30 years ago, only 2% of Africans had a telephone connection, they were unable to communicate with family members at a distance, and small businesses, including farms, were coping with chronic lack of information about local prices, customer demands, weather forecast, transport of supplies and so on and so forth.
Today, even the most remote communities are connected, often at very low cost. The economic potential of being so much better connected and having access to basic forms of information and knowledge via the internet, is 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. In this respect, new technology is making a huge difference in the lives of many Africans.
But all of this is not enough. It doesn’t automatically creates the jobs needed to absorb rapidly expanding youthly populations. 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 supports authoritarian or pseudo-democratic regimes and, in return for their support, controls a substantial percentage of economic activity. Nobel-prize laureate Douglas North and colleagues have pointed out that close ties between the army, the government and corporate world (i.e. real estate, mining and construction companies, trade companies) can lend stability to the system for a long time, but this stability comes with costs of structural social inequalities in access to economic markets and political participation. Such systems are based on personal connections, not on meritocratic values. The logic of the political economy in such societies is not good for a long-term development strategy: it excludes the dynamics of free entrepreneurship and competition for ideas and creativity.
As long as your economic policy is dictated by such a ‘limited access order’, where political elites need the army to stay in power, and the army needs economic resources to buy loyalty of those who control access to violence, it won’t deliver optimal returns. Imagine that if half of public revenues are spent on security forces and those who support the regime are exempted from taxes, this will always eat into the investment capacity of societies in public education, health care, and vital infrastructures such as electricity, sewerage, drinking water and so forth. Job creation ultimately requires an open access environment.
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.
This is the third article published as part of IEI’s initiative “Towards Sustainable Job Creation in Iraq”. Learn more information on this initiative and our contribution guidelines by clicking here.