False accounting & the great ‘poverty reduction’ lie

Exposing the great ‘poverty reduction’ lie

Jason Hickel* @ Aljazeera Opinion

 

The UN claims that its Millennium Development Campaign has reduced poverty globally, an assertion that is far from true.

 

 

The received wisdom comes to us from all directions: Poverty rates are declining and extreme poverty will soon be eradicated. The World Bank, the governments of wealthy countries, and – most importantly – the United Nations Millennium Campaign all agree on this narrative. Relax, they tell us. The world is getting better, thanks to the spread of free market capitalism and western aid. Development is working, and soon, one day in the very near future, poverty will be no more.

It is a comforting story, but unfortunately it is just not true. Poverty is not disappearing as quickly as they say. In fact, according to some measures, poverty has been getting significantly worse. If we are to be serious about eradicating poverty, we need to cut through the sugarcoating and face up to some hard facts.

False accounting

The most powerful expression of the poverty reduction narrative comes from the UN’s Millennium Campaign. Building on the Millennium Declaration of 2000, the Campaign’s main goal has been to reduce global poverty by half by 2015 – an objective that it proudly claims to have achieved ahead of schedule. But if we look beyond the celebratory rhetoric, it becomes clear that this assertion is deeply misleading.

The world’s governments first pledged to end extreme poverty during the World Food Summit in Rome in 1996. They committed to reducing the number of undernourished people by half before 2015, which, given the population at the time, meant slashing the poverty headcount by 836 million. Many critics claimed that this goal was inadequate given that, with the right redistributive policies, extreme poverty could be ended much more quickly.

But instead of making the goals more robust, global leaders surreptitiously diluted it. Yale professor and development watchdog Thomas Pogge points out that when the Millennium Declaration was signed, the goal was rewritten as “Millennium Developmental Goal 1″ (MDG-1) and was altered to halve the proportion (as opposed to the absolute number) of the world’s people living on less than a dollar a day. By shifting the focus to income levels and switching from absolute numbers to proportional ones, the target became much easier to achieve. Given the rate of population growth, the new goal was effectively reduced by 167 million. And that was just the beginning.

After the UN General Assembly adopted MDG-1, the goal was diluted two more times. First, they changed it from halving the proportion of impoverished people in the world to halving the proportion of impoverished people in developing countries, thus taking advantage of an even faster-growing demographic denominator. Second, they moved the baseline of analysis from 2000 back to 1990, thus retroactively including all poverty reduction accomplished by China throughout the 1990s, due in no part whatsoever to the Millennium Campaign.

This statistical sleight-of-hand narrowed the target by a further 324 million. So what started as a goal to reduce the poverty headcount by 836 million has magically become only 345 million – less than half the original number. Having dramatically redefined the goal, the Millennium Campaign can claim that poverty has been halved when in fact it has not. The triumphalist narrative hailing the death of poverty rests on an illusion of deceitful accounting.

Poor numbers

But there’s more. Not only have the goalposts been moved, the definition of poverty itself has been massaged in a way that serves the poverty reduction narrative. What is considered the threshold for poverty – the “poverty line” – is normally calculated by each nation for itself, and is supposed to reflect what an average human adult needs to subsist. In 1990, Martin Ravallion, an Australian economist at the World Bank, noticed that the poverty lines of a group of the world’s poorest countries clustered around $1 per day. On Ravallion’s recommendation, the World Bank adopted this as the first-ever International Poverty Line (IPL).

But the IPL proved to be somewhat troublesome. Using this threshold, the World Bank announced in its 2000 annual report that “the absolute number of those living on $1 per day or less continues to increase. The worldwide total rose from 1.2 billion in 1987 to 1.5 billion today and, if recent trends persist, will reach 1.9 billion by 2015.” This was alarming news, especially because it suggested that the free-market reforms imposed by the World Bank and the IMF on Global South countries during the 1980s and 1990s in the name of “development” were actually making things worse.

This amounted to a PR nightmare for the World Bank. Not long after the report was released, however, their story changed dramatically and they announced the exact opposite news: While poverty had been increasing steadily for some two centuries, they said, the introduction of free-market policies had actually reduced the number of impoverished people by 400 million between 1981 and 2001.

This new story was possible because the Bank shifted the IPL from the original $1.02 (at 1985 PPP) to $1.08 (at 1993 PPP), which, given inflation, was lower in real terms. With this tiny change – a flick of an economist’s wrist – the world was magically getting better, and the Bank’s PR problem was instantly averted. This new IPL is the one that the Millennium Campaign chose to adopt.

The IPL was changed a second time in 2008, to $1.25 (at 2005 PPP). And once again the story improved overnight. The $1.08 IPL made it seem as though the poverty headcount had been reduced by 316 million people between 1990 and 2005. But the new IPL – even lower than the last, in real terms – inflated the number to 437 million, creating the illusion that an additional 121 million souls had been “saved” from the jaws of debilitating poverty. Not surprisingly, the Millennium Campaign adopted the new IPL, which allowed it to claim yet further chimerical gains.

A more honest view of poverty

We need to seriously rethink these poverty metrics. The dollar-a-day IPL is based on the national poverty lines of the 15 poorest countries, but these lines provide a poor foundation given that many are set by bureaucrats with very little data. More importantly, they tell us nothing about what poverty is like in wealthier countries. A 1990 survey in Sri Lanka found that 35 percent of the population fell under the national poverty line. But the World Bank, using the IPL, reported only 4 percent in the same year. In other words, the IPL makes poverty seem much less serious than it actually is.

The present IPL theoretically reflects what $1.25 could buy in the United States in 2005. But people who live in the US know it is impossible to survive on this amount. The prospect is laughable. In fact, the US government itself calculatedthat in 2005 the average person needed at least $4.50 per day simply to meet minimum nutritional requirements. The same story can be told in many other countries, where a dollar a day is inadequate for human existence. In India, for example, children living just above the IPL still have a 60 percent chance of being malnourished.

According to Peter Edwards of Newcastle University, if people are to achieve normal life expectancy, they need roughly double the current IPL, or a minimum of $2.50 per day. But adopting this higher standard would seriously undermine the poverty reduction narrative. An IPL of $2.50 shows a poverty headcount of around 3.1 billion, almost triple what the World Bank and the Millennium Campaign would have us believe. It also shows that poverty is getting worse, not better, with nearly 353 million more people impoverished today than in 1981. With China taken out of the equation, that number shoots up to 852 million.

Some economists go further and advocate for an IPL of $5 or even $10 – the upper boundary suggested by the World Bank. At this standard, we see that some 5.1 billion people – nearly 80 percent of the world’s population – are living in poverty today. And the number is rising.

These more accurate parameters suggest that the story of global poverty is much worse than the spin doctored versions we are accustomed to hearing. The $1.25 threshold is absurdly low, but it remains in favour because it is the only baseline that shows any progress in the fight against poverty, and therefore justifies the present economic order. Every other line tells the opposite story. In fact, even the $1.25 line shows that, without factoring China, the poverty headcount is worsening, with 108 million people added to the ranks of the poor since 1981. All of this calls the triumphalist narrative into question.

A call for change

This is a pressing concern; the UN is currently negotiating the new Sustainable Development Goals that will replace the Millennium Campaign in 2015, and they are set to use the same dishonest poverty metrics as before. They will leverage the “poverty reduction” story to argue for business as usual: stick with the status quo and things will keep getting better. We need to demand more. If the Sustainable Development Goals are to have any real value, they need to begin with a more honest poverty line – at least $2.50 per day – and instate rules to preclude the kind of deceit that the World Bank and the Millennium Campaign have practised to date.

Eradicating poverty in this more meaningful sense will require more than just using aid to tinker around the edges of the problem. It will require changing the rules of the global economy to make it fairer for the world’s majority. Rich country governments will resist such changes with all their might. But epic problems require courageous solutions, and, with 2015 fast approaching, the moment to act is now. Read more @original source http://www.aljazeera.com/indepth/opinion/2014/08/exposing-great-poverty-reductio-201481211590729809.html

*Dr Jason Hickel lectures at the London School of Economics and serves as an adviser to /The Rules. 

Africa’s Jobless Growth: Economic success just for a few cannot be a replacement for human rights or participation, or democracy August

Africa is Rising! At Least Its 1% Is

 Zainab Usman*

Africa’s economy may be booming, but this will do little to help unemployment and poverty if growth is jobless and its spoils are limited to the few.

“What we need in Africa is balanced development. Economic success cannot be a replacement for human rights or participation, or democracy … it doesn’t work…it worries us a lot when we don’t see the trickle-through factor, when gain goes to the top 1% or 2%, leaving the rest behind.” – Mo Ibrahim October 15, 2012

It did not come as a surprise to many when, on October 15, the Mo Ibrahim Foundation announced that there was no winner for its annual $5 million African leadership award – for the third time since its inception in 2006. What was surprising, however, was that the foundation’s chair, British-Sudanese billionaire Mo Ibrahim, alsoadmonished the much-celebrated recent economic ‘success’ of the African continent for largely failing to translate into better human rights and social development, and for essentially creating a few elitist winners at the top whilst the rest were left struggling at the very bottom.

Recent reports, forecasts and editorials of influential financial magazines are incredibly optimisticabout Africa – its booming economic growth, its investment opportunities and its growing middle-class. Sub-Saharan African countries are reportedly among the fastest growing in the world with six out of ten world’s fastest growing economies, and recording growth rates averaging 4.9%, higher than the developing country average and much higher than the developed country average.

The Economist’s December 2011 print issue was boldly titled ‘Africa Rises’ and in August 2012, it again boldly proclaimed that ‘A Continent Goes Shopping’, underscoring the voracious purchasing power of the African middle-class to buy consumer and even luxury goods. The current received wisdom in these sleek reports, glossy magazine pages and glass-panelled conference rooms is that sub-Saharan Africa really is the place to be and to invest in, with all its abundant opportunities.

Jobless growth

This much-trumpeted economic success is mostly true, until one looks at the other side. Then questions arise over to what extent growth is spread across sectors of the economy, and whether such economic growth is translating into corresponding improvements in human and social development.

It is common knowledge that this new dawn of booming economic growth is largely the consequence of the recent rise in the global commodity prices of natural resources, chiefly oil, while the vibrancy of other sectors of the economy such as banking, telecommunications and construction trail behind in terms of growth. Many African countries primarily depend on the exportation of natural resources – and industry which is highly capital- (and technology-) intensive, providing few jobs. Only five of Africa’s fifty-four countries are currently not “either producing or looking for oil”.

It is therefore no surprise that many African countries, especially the economic powerhouses of the continent, are bedevilled by high unemployment, particularly amongst young people – hovering at25% in Egypt, 48% in South Africa and 42% in Nigeria. Thus, growth in capital-intensive sectors – such as resource exports, banking, and telecommunications – is barely trickling down to create jobs and economic opportunities for the vast majority of the people – a phenomenon commonly known as ‘jobless growth’.

Many sub-Saharan African countries experiencing record-level economic growth still have low rankings in human development indices, despite marginalimprovements in education enrolment and, with countrywide variations, maternal health. This contradiction is further reinforced by the growing inequality that characterises many of such African ‘powerhouses’. Luanda in Angola (thanks to flowing petro-dollars) and N’Djamena in Chad were, respectively, the second and eighth most expensive cities to live as an expatriate in 2012 – ahead of Sydney, London and New York according to Mercer’s Cost of Living Survey. Juba in the newly independent South Sudan is also gaining notoriety for its high cost of living, while the price of select real estate in Abuja and Lagos in Nigeria reportedly rivals that of some Western cities. These expensive cities are in countries grouped within the ‘Low Human Development’ category of the United Nation’s Human Development Indexbased on indicators such as health, income and education.

A tale of two cities

There has certainly been some improvement – for one, there is now an identifiable middle-class in Africa with money to splash around in the cinemas of Abuja and pricey hotels of Accra, the malls and retail outlets of Johannesburg and the exclusive residential estates of Lagos and Nairobi. However, once you step out of these glitzy inner cities and look to the outskirts, the glaring contrast between the shiny modernity and the urban deprivation in the slums hits you like the searing tropical sun.

 

The task thus remains for governments to devise sustainable development strategies that are tailored specifically to suit the African context. Such strategies must sustain the momentum of economic growth while ensuring that growth spreads to and strengthens sectors such as mechanised agriculture, light manufacturing and small-scale enterprises, which have a direct impact on the lives and incomes of citizens.

Such transformational policies should ensure that revenue windfalls are utilised wisely towards social and welfare policies, which will empower millions of Africans out of poverty, thereby creating a robust middle-class rather than just enriching an already existing sliver. It also means that such funds can be saved to help with later needs, as with the Sovereign Wealth Fund embarked on by countries such as Angola and the new oil-producer Ghana.

Importantly, the African youth bulge needs to be transformed into a demographic dividend by providing employment and economic opportunities to an increasingly educated African youth and by providing critically needed infrastructure so that abundant innovative ideas, which are capable of transforming lives and societies, can materialise into reality.

Ultimately, these are still governance challenges that Africa has a long way go to overcome, but the marginal improvements in some aspects of governance, especially women’s rights, as the Mo Ibrahim Foundation’s Index has shown, gives room for some cautious optimism. Mo Ibrahim’s admonishment could not have come at a better time.

Read @ it original source:http://thinkafricapress.com/development/mo-ibrahim-issues-timely-caution-afro-optimists?utm_content=buffer46624&utm_medium=social&utm_source=twitter.com&utm_campaign=buffer

 

*Zainab Usman is a Nigerian freelance writer. She is currently a DPhil candidate at the University of Oxford in Governance and Political Economy of Economic Diversification in Sub-Saharan Africa. She has a BSc in International Studies from Ahmadu Bello University Zaria and a Masters in International Political Economy and Development from the University of Birmingham. Zainab is an advocate of good governance, poverty reduction and women and youth empowerment. She regularly blogs atzainabusman.wordpress.com.

Africa: Illicit Financial Flows Drain US$55.6bn Annually from the Continent

Illicit Financial Flows Drain US$55.6bn Annually from African Continent

Only Ethiopia has lost $11.7 billion to illicit fund outflows in the last decade.  

A climate of corruption, Ethiopian edition

Working Group Must Address Trade Misinvoicing and Role of U.S. Business and Government in Facilitating Illicit Finance to Be Truly Effective, Warns GFI

Illicit Financial Flows Drain US$55.6bn Annually from African Continent, Sapping GDP, Undermining Development, and Fueling Crime, Corruption, and Tax Evasion

August 7, 2014, WASHINGTON, DC (GFI) – Global Financial Integrity (GFI) welcomed the announcement from the White House and African leaders today regarding the establishment of a bilateral U.S.-Africa Partnership to Combat Illicit Finance, but the Washington-DC based research and advocacy organization cautioned that any effective partnership must be sure to address deficiencies in both the U.S. and in Africa that facilitate the hemorrhage of illicit capital from Africa.

“We welcome the move by President Obama and certain African leaders to form this partnership on curbing illicit financial flows from African economies,” said GFI President Raymond Baker, who also serves on the UN High Level Panel on Illicit Financial Flows from Africa. “Illicit financial flows are by far the most damaging economic problem facing Africa. By announcing the creation of the U.S.-Africa Partnership to Combat Illicit Finance, President Obama and African leaders have taken the first step towards tackling the most pernicious global development challenge of our time.”

GFI research estimates that illicit financial outflows cost African (both North and Sub-Saharan African) economies US$55.6 billion per year from 2002-2011 (the most recent decade for which comprehensive data is available), fueling crime, corruption, and tax evasion. Indeed, GFI’s latest global analysis found that these illicit outflows sapped 5.7 percent of GDP from Sub-Saharan Africa over the last decade, more than any other region in the developing world. Perhaps most alarmingly, outflows from Sub-Saharan Africa were found to be growing at an average inflation-adjusted rate of more than 20 percent per year, underscoring the urgency with which policymakers should address illicit financial flows.

The problem with illicit outflows from Africa is so severe that a May 2013 joint report from GFI and the African Development Bank found that, after adjusting all recorded flows of money to and from the continent (e.g. debt, investment, exports, imports, foreign aid, remittances, etc.) for illicit financial outflows, between 1980 and 2009, Africa was a net creditor to the rest of the world by up to US$1.4 trillion.

Trade Misinvoicing at the Heart of Illicit Outflows

According to GFI’s research, most of the illicit outflows from Africa—US$35.4 billion of the US$55.6 billion leaving the continent each year—occur through the fraudulent over- and under-invoicing of trade transactions, a trade-based money laundering technique known as “trade misinvoicing.” As GFI noted in a May 2014 study, trade misinvoicing is undermining billions of dollars of investment and domestic resource mobilization in at least a number of African countries. The organization emphasized the importance of ensuring that the new U.S.-Africa partnership prioritizes the curtailment of trade misinvoicing.

“The misinvoicing of ordinary trade transactions is the most widely used method for transferring dirty money across international borders, and it accounts for the vast majority of illicit financial flows from Africa,” said Heather Lowe, GFI’s legal counsel and director of government affairs. “While it is easy to place the blame for this on corrupt officials or transnational crime networks, the truth of the matter is that the bulk of these fraudulent trade transactions are conducted by normal companies, many of them major U.S. and European companies.”

Ms. Lowe continued: “Just yesterday, President Obama announced the Doing Business in Africa Campaign, a U.S. government initiative focused on boosting trade between U.S. and African companies, without a signal mention of the elephant in the room: trade misinvoicing. Increasing trade is important to boosting economic growth across Africa, but only if the trade is done honestly and at fair market values. The single most important step that wealthy nations like the U.S. can take to help African economies curtail illicit flows is to trade legitimately and honestly with Africa. While this topic was not addressed at the U.S.-Africa Business Forum yesterday, it must be on the table as the U.S.-Africa Partnership to Combat Illicit Finance commences its work.”

U.S. Must Clean Up Its Own Backyard

GFI further emphasized the need to address the role of the U.S. financial system as a major facilitator of such outflows.
“For every country losing money illicitly, there is another country absorbing it. Illicit financial outflows are facilitated by financial opacity in tax havens and in major economies like the United States,” said GFI Policy Counsel Joshua Simmons. “Indeed, the United States is the second easiest country in the world—after Kenya—for a criminal, kleptocrat, or terrorist to incorporate an anonymous company to launder their ill-gotten-gains with impunity.

“While governance remains an issue for many African countries, structural deficiencies in the U.S. financial system are just as responsible for driving the outflow of illicit capital. This initiative cannot place the onus entirely on the shoulders of African governments. The burden for curtailing these illicit flows must be shared equally by policymakers in the U.S. and in Africa for this partnership to be effective,” added Mr. Simmons.

http://ayyaantuu.com/africa/illicit-financial-flows-drain-us55-6bn-annually-from-african-continent/

http://globalvoicesonline.org/2012/01/25/ethiopia-reflecting-on-corruption-in-ethiopia/

Africa’s Slide Toward Disaster

Africa’s Slide Toward Disaster

By HELEN EPSTEIN, The New York Times, Opinion page,       AUG. 1, 2014

A specter is haunting Africa — the specter of impunity. Many countries the United States considers allies are in the grip of corrupt, repressive tyrants; others are mired in endless conflict. As Washington prepares to host the first-ever U.S.-Africa Leaders Summit next week, American policy makers must acknowledge their contributions to this dismal situation. By lavishing billions of dollars in military and development aid on African states while failing to promote justice, democracy and the rule of law, American policies have fostered a culture of abuse and rebellion. This must change before the continent is so steeped in blood that there’s no way back.

The summit seeks to highlight Africa’s development successes and promote trade and investment on a continent rich in oil and natural resources. Justice and the rule of law aren’t on the agenda. But they should be, unless American C.E.O.s want to see their investments evaporate.

Read interesting comments @ http://ayyaantuu.com/africa/africas-slide-toward-disaster/#respond

Read more @http://www.nytimes.com/2014/08/02/opinion/africas-slide-toward-disaster.html?partner=rssnyt&emc=rss&_r=0

Dictators lie about economic growth

BY HENRY FARRELL

(Washington Post, 26th June 2014), There’s a lot of recent scholarship suggesting that non-democratic regimes grow faster than democratic regimes. This has led some people not only to admire the Chinese model of growth focused authoritarianism, but to suggest that it may be a better economic model for developing countries than democracy. However, this research tends to assume that both democracies and non-democracies are telling the truth about their growth rates, when they report them to multilateral organizations such as the World Bank. Is this assumption safe? The answer is no, according to aforthcoming article (temporarily ungated) by Christopher S. P. Magee and John A. Doces in International Studies Quarterly.

The problem that Magee and Doces tackle is that it’s hard to figure out when regimes are being honest or dishonest about their rates of economic growth, since it’s the regimes themselves that are compiling the statistics. It’s hard to measure how honest or dishonest they are, if all you have to go on are their own numbers. This means that researchers need to find some kind of independent indicator of economic growth, which governments will either be less inclined or unable to manipulate. Magee and Doces argue that one such indicator is satellite images of nighttime lights. As the economy grows, you may expect to see more lights at night (e.g. as cities expand etc). And indeed, research suggests that there’s a very strong correlation between economic growth and nighttime lights, meaning that the latter is a good indicator of the former. Furthermore, it’s an indicator that is unlikely to be manipulated by governments.

Magee and Doces look at the relationship between reported growth and nights at light and find a very clear pattern. The graph below shows this relationship for different countries – autocracies are the big red dots. Most of the dots are above the regression line, which means that most autocracies report higher growth levels to the World Bank than you’d expect given the intensity of lights at night. This suggests that they’re exaggerating their growth numbers.

 

The two countries with the biggest difference between their reported growth and their actual growth (as best as you can tell from the intensity of nighttime lights) are China (although the discrepancy was considerably larger in the mid-1990s than now) and Myanmar. More broadly:

If democracies report their GDP growth rates truthfully, then dictatorships overstate their yearly growth rate by about 1.5 percentage points on average. If democracies also overstate their true growth rates, then dictatorships exaggerate their yearly growth statistics by about 1.5 percentage points more than do democracies.

The authors conclude:

the existing literature on economic growth overestimates the impact of dictatorships because it relies on statistics that are reported to international organizations, and as we show, dictatorships tend to exaggerate their growth. Accounting for the fact that authoritarian regimes overstate growth slightly diminishes the effect of these regimes on long-run economic growth. In light of this point, much of the evidence showing growth benefits associated with authoritarian regimes is less compelling and the case for democracy looks better than before. See more @ http://www.washingtonpost.com/blogs/monkey-cage/wp/2014/06/26/dictators-lie-about-economic-growth?Post+generic=%3Ftid%3Dsm_twitter_washingtonpost

 

Related Article:

What if everything we know about poor countries’ economies is totally wrong?

Read @ http://www.vox.com/2014/7/10/5885145/what-if-everything-we-know-about-poor-countries-economies-is-totally?utm_medium=social&utm_source=facebook&utm_name=share-button&utm_campaign=vox&utm_content=article-share-top

 

 

(OPride) – Over the last decade, Ethiopia has been hailed as the fastest growing non-oil economies in Africa, maintaining a double-digit annual economic growth rate. The Ethiopian government says the country will join the middle-income bracketby 2025.

Despite this, however, as indicated by a recent Oxford University report, some 90 percent of Ethiopians still live in poverty, second only after Niger from 104 countries measured by the Oxford Multidimensional Poverty Index. The most recent data shows an estimated 71.1 percent of Ethiopia’s population lives in severe poverty.

This is baffling: how can such conflicting claims be made about the same country?  The main source of this inconsistent story is the existence of crony businesses and the government’s inflated growth figures. While several multinational corporations are now eyeing Ethiopia’s cheap labor market, two main crony conglomerates dominate the country’s economy.

Meet EFFORT, TPLF’s business empire

The seeds of Ethiopia’s economic mismanagement were sown at the very outset. We are familiar with rich people organizing themselves, entering politics and protecting their group interests. But something that defies our knowledge of interactions between politics and business happened in 1991 when the current regime took power.

Ethiopia’s ruling party, the EPRDF, came to power by ousting the communist regime in a dramatic coup. A handful of extremely poor people organized themselves exceptionally well that they quickly took control of the country’s entire political and military machinery.

In a way, this is analogous to a gang of thieves becoming brutally efficient at organizing themselves to the extent of forming a government. Once in power, the ruling Tigrean elites expropriated properties from other businesses, looted national assets and began creating wealth exclusively for themselves.

This plan first manifested itself in the form of party affiliated business conglomerate known as the Endowment Fund for Rehabilitation of Tigray (EFFORT). EFFORT has its origin in the relief and rehabilitation arm of the Tigrean People Liberation Front (TPLF) and the country’s infamous 1984 famine.

As reported by BBC’s Martin Plaut and others, the TPLF financed its guerilla warfare against the Dergue in part by converting aid money into weapons and cash. That was not all. On their way to Addis Ababa from their bases in Tigray, the TPLF confiscated any liquid or easily moveable assetsthey could lay their hands on. For instance, a substantial amount of cash was amassed by breaking into safe deposits of banks all over Ethiopia. Those funds were kept in EFFORT’s bank accounts. TPLF leaders vowed to use the loot to rehabilitate and reconstruct Tigray, which they insisted was disproportionately affected by the struggle to “free Ethiopia.”

Intoxicated by its military victory, the TPLF then turned to building a business empire. EFFORT epitomizes that unholy marriage between business and politics in a way not seen before in Ethiopian history. According to a research by Sarah Vaughan and Mesfin Gebremichael, EFFORT, which is led by senior TPLF officials, currently owns 16 companies across various sectors of the economy.

This figure grossly understates the number of EPRDF affiliated companies. For example, the above list does not include the real money-spinners that EFFORT owns: Wegagen Bank, Africa Insurance, Mega Publishing, Walta Information Center and the Fana Broadcasting Corporate. The number of companies under EFFORT is estimated to be more than 66 business entities. Suffice to say, EFFORT controls the commanding heights of the Ethiopian economy.

While it is no secret that EFFORT is owned by and run exclusively to benefit ethnic Tigrean elites, it is a misnomer to still retain the phrase “rehabilitation of Tigray.” Perhaps it should instead be renamed as the Endowment Fund for Rendering Tigrean Supremacy (EFFORTS).

MIDROC Ethiopia, EPRDF’s joker card

In Ethiopia’s weak domestic private environment, EFFORT is an exception to the rule. Similarly, while Ethiopia suffers from lack of foreign direct investment, MIDROC Ethiopia enjoys unparalleled access to Ethiopia’s key economic sectors. Owned by Ethiopian-born Saudi business tycoon, Sheik Mohammed Al Amoudi, MIDROC has been used by the EPRDF as a joker card in a mutually advantageous ways. The Sheik was given a privilege no less than the status of a domestic private investor but the EPRDF can also count it as a foreign investor. For instance, the United Nations Conference on Trade and Development reported that about 60 per cent of the overall FDI approved in Ethiopia was related to MIDROC.

MIDROC stands for Mohammed International DevelopmentResearch and Organization Companies. Despite reference to development and research in its name, however, there is no real relationship between what the crony business says and what it actually does. Ironically, as with EFFORT, MIDROC Ethiopia also owns 16 companies. But this too is a gross underestimation given the vast sphere of influence and wealth MIDROC commands in that country.

Like EFFORT, Al-Amoudi’s future was also sealed long before the TPLF took power. He literally entered Addis Ababa with the EPRDF army, fixing his eyes firmly on Oromia’s natural resources. Shortly after the TPLF took the capital, Al-Amoudi allegedly donated a huge sum of money to the Oromo People’s Democratic Organization.

Why the rush?

The calculative Sheik sensed an eminent threat to his business interests from the Oromo Liberation Front (OLF), a groups that was also a partner in the transitional government at the time. In return for its “donation,” MIDROC acquired massive lands in Oromia – gold mines, extensive state farms and other agricultural lands. In a recent article entitled, “The man who stole the Nile,” journalist Frederick Kaufman aptly described Al Amoudi’s role in the ongoing land grab in Ethiopia as follows:

In this precarious world-historic moment, food has become the most valuable asset of them all — and a billionaire from Ethiopia named Mohammed Hussein Al Amoudi is getting his hands on as much of it as possible, flying it over the heads of his starving countrymen, and selling the treasure to Saudi Arabia. Last year, Al Amoudi, whom most Ethiopians call the Sheikh, exported a million tons of rice, about seventy pounds for every Saudi citizen. The scene of the great grain robbery was Gambella, a bog the size of Belgium in Ethiopia’s southwest whose rivers feed the Nile.

It is little wonder then that Al-Amoudi said, “I lost my right hand,” when Ethiopia’s strongman of two decades Meles Zenawi died in 2012. If EFFORT is a curse to the Ethiopian economy, MIRDOC is EPRDF’s poisoned drink given to the Ethiopian people.

Mutual Distrust

The marriage between politics and business has had damaging effects on the country’s economy. One of its most far-reaching consequences is the total breakdown of trust between the EPRDF and the Ethiopian people. In economic policy, trust between private investors and the government is paramount. The deficit of trust is one of the hallmarks of Ethiopia’s much-touted development.

After all youth unemployment hovers around 50 percent. Every year, hundreds of young Ethiopians risk their lives trying to reach Europe or the Middle East, often walking across the Sahara desert or paying smugglers to cross the Red Sea or Indian Ocean aboard crowded boats. The desperation is a result of the lack of confidence in the government’s ability to provide them with the kind of future they were promised.

Ironically, aside from their crony businesses, the EPRDF does not have any confidence in Ethiopian entrepreneurs either. It is this mutual distrust that culminated in the prevalence of an extremely hostile environment for domestic private investment.

This is not a speculative claim but a well-documented fact. The World Bank’s annual survey, which measures the ease with which private investors can do business, ranks Ethiopia near the bottom. In the 2014 survey, Ethiopia came in 166th out of 189 countries in terms of difficulties in starting new business or trading across borders. Moreover, year on year comparison shows that the investment climate in Ethiopia is actually getting worse, sliding down the ranking both in the ease of doing business and trading across borders.

Farms but no firms

The TPLF cronies do not engage in competitive business according to market rules but act as predators bent on killing existing and emerging businesses owned by non-Tigrean nationals. However, the ruling party, which largely maintains its grip on power using bilateral and multilateral aid, is required to report its economic progress to donors (the regime does not care about accountability to the people). In this regard, the lack of foreign direct investment (FDI) has been a thorn in the throat of the EPRDF. Donors have repeatedly questioned and pressured the EPRDF to attract more FDI. The inflow of FDI is often seen as a good indicator of the confidence in countries stability and sound governance. Despite widespread belief in the West, the EPRDF regime cannot deliver on these two fronts.

To cover up these blind spots, the regime has persuaded a handful of foreigners to invest in Ethiopia, but until recently few investors considered any serious manufacturing venture in the country. Besides, considered “cash cows” for the government, banks, the Ethiopian Airlines, telecommunication and energy sectors remain under exclusive monopoly of the state. They provide almost free service to the crony businesses. Any firm looking to invest in manufacturing and financial sectors have to overcome insurmountable bureaucratic red tape and other barriers.

One sector that stands as exception to this rule is agriculture. Since the 2008 financial crisis and the rise in the global price of food, the regime opened the door widely for foreigners who wanted to acquire large-scale farms. These farms do not hurt their crony businesses but they do harm poor subsistence farmers. Vast tracts of lands have been sold to foreigners at ridiculously cheap prices, often displacing locals and their way of life.

Contrary to the government rhetoric, the motivation for opening up the agricultural sector has nothing to do with economic growth but everything to do with politics – to silence critics, particularly in the donor community who persistently question EPRDF’s credibility in attracting FDI. In essence, hundreds of thousands of poor farmers were evicted to make way for flower growers and shore up the government’s image abroad. This tactic seems to be working so far. Earlier this year, Ethiopia received its first credit rating from Moody’s Investors Service. In the last few years, in part due to rising labor costs in China and East Asia, several manufacturers have relocated to Ethiopia.

Addis’ construction boom as a smokescreen

Crony businesses and flower growers may have created some heat but certainly no light in Ethiopian economy. EFFORT and MIDROC were in action for much of the 1990s and early 2000s but GDP growth was not satisfactory during that time. In fact, since other private businesses were in dismal conditions (and hence domestic market size is very limited), even the crony businesses encountered challenges in getting new business deals.

The setbacks in political front during the 2005 election shifted EPRDF’s strategies to economic front to urgently register some noticeable growth.  This partly explains the motives behind the ongoing construction rush in and around Addis Ababa. In several rounds of interviews on ESAT TV, former Minister d’etat of Communications Affairs, Ermias Legesse, provided interesting accounts of cronyism surrounding Addis’ explosive growth and its tragic consequences for Oromo farmers.

It is important to understand the types of construction that is taking place around or near Addis. First, private property developments by crony estate agents mushroomed overnight. A lion’s share of land expropriated from Oromo farmers were allocated to these regime affiliates through dishonest bids. Luxury houses are built on such sites and sold at prices no average Ethiopian could afford, except maybe those in the diaspora. The latter group is being targeted lately due to shortages of hard currencies.

Second, EPRDF politicians and high ranking military officers own multi-storey office buildings, particularly aimed at renting to NGOs and residential villas for foreign diplomats who can afford to pay a few thousand dollars per month. It is a known fact that the monthly salary cap for Ethiopian civil servants is around 6000 birr (about $300). As such, that these individuals could invest in such expensive properties underscores the extent of the daylight robbery that is taking place in Ethiopia.

Third, the government was engaged in massive public housing construction but under extremely chaotic circumstances. The condominium rush in Addis is akin to the Dergue regime’s villagization schemes in rural Ethiopia. Families are uprooted from their homes without any due consideration for their social and economic well-being.

Most households that once occupied the demolished homes in Addis Ababa’s shantytowns made a living through informal home businesses such as brewing local drinks and preparing and selling food at prices affordable to the poor. It was clear that the condominiums were not suitable for them to continue doing such businesses. The construction of the public houses was financed by soft loans from various donor agencies to be sold to target households at affordable prices. However, the government often priced them at the going market rates for condos.

As a result, the poor households simply rented out the properties to those who could afford, while struggling to find affordable houses for themselves. Solving the public housing crisis was never the government’s intention in the first place, as they were only interested in creating business opportunities for their crony construction companies.

Fourth, roads and railway networks are by far the most important large-scale public sector construction projects taking place in Addis. There is no doubt that Addis Ababa’s crowded roads, equally shared by humans, animals and cars, need revamping. But, what is happening in the name of building roads and railways simply defies belief. First, the sheer scale and magnitude as well as the obsession with construction makes the whole undertaking look suspicious. Every time I travelled to Addis, I witness the same roads being constructed and then dug up to be reconstructed over and over again.

The ulterior motive behind these projects is nothing more than expanding TPLF’s business empire and benefit crony allies. Having exhausted opportunities within the existing perimeter of Addis, the so-called master plan had to be crafted to enlarge the size of “the construction site” by a factor of 20 to ensure that the cronies will stay in business in the foreseeable future.  In effect, the large-scale construction projects are being used to siphon off public funds. And there seems to be no priority or accountability in the whole process from the project inception, planning to implementation.

Lies and damn lies

The construction boom in Addis serves as a two edged sward. On the one hand, the funds generated from selling Oromo lands to private property developers adds to the ever-expanding business empire of Tigrean political and military elites. On the other hand, the appearances of several high-rise buildings and complex road networks give the impression that Ethiopia is witnessing an economic boom. The target audience for the latter scenario is foreign journalists and the diplomatic community in Addis Ababa, some of whom are so gullible that they fall in love with ERDF’s economic “miracle” from the first aerial view even before landing at the Bole airport.

The fact remains however: no such economic miracle is actually happening in Ethiopia. A pile of concrete slabs cannot transform the economy in any meaningful way. After all, buildings and roads are only intermediaries for doing other businesses. For instance, it is not enough to build highways and rural roads – a proportionate effort is required to enhance production of goods and services to move them on the newly built roads in such a way that the roads will get utilized and investments made on them get recovered. Otherwise, the roads and buildings can deteriorate without giving any service, and hence more public money would soon be required to maintain them. This is exactly what is happening in Ethiopia.

Meanwhile, the EPRDF has been engaged in a frantic effort to generate lies and damn lies to fill the gap between the rhetoric and the reality of Ethiopia’s economy. The government-controlled media has been used for extensive propaganda campaign to create a “positive image” in the eyes of ordinary citizens. They literally compel viewers or listeners to see or feel things that do not exist on the ground. The Ethiopian television zooms onto any spot of land with a colony of green grass or lush crop fields to “prove” the kinds of wonders the government is engineering.

Barring rain failures, much of Ethiopia’s lush-green countryside has a decent climate for agriculture. But the EPRDF regime tries to convince the public that anything positive that occurs in the Ethiopia is because of its economic policies. But, as evidenced in ongoing multifaceted grievances around the country, the government is fooling no one else but itself (and perhaps a few gullible individuals in the diplomatic community).

Its lies also come in the form of dubious economic statistics, which are generated in such a way that EPRDF could report double-digit economic growth year after year. The story of the double digit economic growth rate in Ethiopia has been such that a lie told hundreds of times, no matter how shambolic the numbers are, is becoming part of the western vernacular. Donors often point to the abundance of high-rise buildings and impressive road networks in Addis Ababa in regime’s defense.

In a brief conversation, it is not possible to take such casual observers through details of the kind I have attempted to narrate in the preceding paragraphs. And, unfortunately for millions of Ethiopia’s poor, in the short run the government’s lies and crony capitalism may continue to ravage the country’s economy until it begins to combust from within.

*The writer, J. Bonsa, is a researcher-based in Asia. Photo courtesy of Addis Food Not Bombs – Ethiopia.

http://www.opride.com/oromsis/news/3762-the-myth-of-ethiopia-s-crony-capitalism-and-economic-miracle